Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's fourth quarter 2023 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, please press star 1 on your telephone keypad. You will be limited to one question and one follow-up question. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. And I'll turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's fourth quarter 2023 earnings call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information, and related Form 8K filed with the SEC are available on our website at EncompassHealth.com. On page two of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt, and labor cost trends, that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8K and the Form 10K for the year ended December 31, 2023, when filed. We encourage you to read them. Your caution not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release, and as part of the form 8K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr, and Compass Health's President and Chief Executive Officer.

Thank you, Mark, and good morning, everyone. The fourth quarter was a strong finish to a great 2023 for our company. I'll discuss key highlights for the year, and then Doug will provide details about our Q4 results and 2024 guidance. Our 2023 revenue increased 10.4% driven by strong volume growth with total discharges of 8.7%, inclusive of same-store growth of 4.8%. Our strong volume growth continues to provide evidence that our value proposition is resonating with referral sources, payers, and patients. Our 2023 adjusted EBITDA increased 18.5% driven by revenue growth and prudent expense management. Persistent vigilance on premium labor utilization facilitated a 32.9% decrease in contract labor plus sign-on and shift bonuses. On a dollar basis, these premium labor expenses decreased 67.3 million from 204.3 million in 2022 to 137 million in 2023. We reduced contract labor FTEs from an average of 547 in 2022 to 425 in 2023, and contract labor FTEs as a percent of total FTEs from an average of 2.2 to 1.6% over the same period. Other operating expenses as a percent of revenue declined by 50 basis points from 15.3 to 14.8%, owing in part to scale efficiencies. The strong growth in adjusted EBITDA facilitated an adjusted free cash flow increase of 54.6% to $525.7 million. We continue to invest in capacity expansions to meet the needs of a significantly underserved and growing market for inpatient rehabilitation services. In 2023, we invested more than $350 million in growth CapEx, opening eight de novos with a total of 395 beds and adding 46 beds to existing hospitals, a net 4.1% increase and licensed beds. We also continue to invest in our facility-based technology through initiatives like our Tableau on-site dialysis rollout. We now offer in-house dialysis capabilities in 83 of our hospitals and will continue the rollout to new locations in 2024. We complemented these investments in the growth of our business with the return of approximately $60 million to our shareholders through cash dividends on our common stock. Our strong free cash flow generation allowed us to fund these investments and shareholder distributions with internally generated funds, all while reducing our net leverage to 2.7 times at year-end 2023 from 3.4 times at the end of 2022. Review Choice Demonstration, or RCD, began on August 21st in Alabama. Our company was well prepared to address the administrative requirements of this program. Recall that under RCD, every Medicare claim is reviewed for documentation and medical necessity. The affirmation rate target set by CMS under RCD is 80% of claims submitted during the first six months of our affirmation rate remains above that level. Turning to objectives for 2024, we continue to build and maintain an active pipeline of de novo projects, both wholly owned and joint ventures with acute care hospitals. We expect to open six de novos in 2024, as well as a 40-bed freestanding hospital licensed as a satellite location of an existing hospital that will be accounted for as a bed addition. To date, we've announced an additional 11 de novos with opening dates beyond 2024. We anticipate adding approximately 150 beds to existing hospitals in 2024, including the aforementioned satellite, and 80 to 120 beds per year from 2025 through 2027. We continue to focus on enhancing patient outcomes by investing resources in clinical innovations. One such innovation is our fall prevention model, which combines predictive modeling with our core clinical practice protocols. Our fall prevention model was initiated in 2021, and we have since seen our fall rates per 1,000 patient days improve 24%. We have an array of additional clinical innovations and enhancements underway, which are intended to advance our ability to consistently produce quality outcomes for medically complex, high acuity patients in need of inpatient rehabilitation care. Now I'll turn it over to Doug.