Q3 2023 Encompass Health Corp Earnings Call
France will begin momentarily.
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Good morning, everyone and welcome to encompass Health's third 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 Speakers' remarks, there will be a question and answer period.
If you would like to ask a question. During this time. Please press star one on your telephone keypad.
You will be limited to one question and one follow up question.
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I will now turn the call over to Mark Miller encompass Health's Chief Investor Relations Officer. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining encompass health's third quarter 2023 earnings call before we begin if you do not already have a copy the third quarter earnings release supplemental information and related form 8-K filed with the SEC our avail.
<unk> on our website at encompass health Dot 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 included in the earnings release and relate.
Good form 8-K, the Form 10-K for the year ended December 31st 2022, and the Form 10-Q for the quarters ended March 31, 2023 June 30th 2023 and September 30th 2023, when filed we encourage you to read.
You are cautioned 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 on <unk> and discussion on this call will include certain non-GAAP financial measures for.
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 8-K filed yesterday with the FCC all of which are available on our website.
I would like to remind you 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 encompass Health's, President and Chief Executive Officer.
You Mark and good morning, everyone.
We're very pleased with our third quarter results driven by continued strong volume growth and a substantial year over year reduction in premium labor costs.
Our third quarter revenues increased 10, 8% and adjusted EBITDA increased 21, 6%.
Q3, total discharges increased seven 3% with same store discharges up four 3%.
Our strong volume growth continues to underscore our value proposition to referral sources payors and patients.
Our patient acuity continues to broaden with more normalized patient flows the health care system.
Stroke discharges were up five 8% year over year, while knee and hip replacement and fracture, although lower extremity discharges grew approximately 14% in the aggregate year over year, so off a relatively small base.
Given the strong demand for inpatient rehabilitation services, we have continued to invest in capacity additions.
We opened 140 bed de novo in the third quarter, bringing us to six to know those year to date.
We also added 26 beds to existing hospitals in the third quarter for total capacity additions of 340 beds over the first nine months of 2023.
Based on favorable weather conditions and construction efficiencies, we are accelerating the opening of our Fitchburg, Wisconsin Hospital from first quarter of 2024 to fourth quarter of 2023.
As a result, we now plan to open two de novo's in Q4, and add five beds to existing hospitals, resulting in a total of 441 beds for the year.
Three of our bed addition projects originally scheduled for 2023 have shifted to 2024 due in each case to local permitting issues.
As a result of this shift we expect to add more than 150 beds to existing hospitals in 2024.
We continue to build and maintain an active pipeline of de Novo projects, both wholly owned and JV with acute care hospitals.
We currently have announced 18 de novo's with opening dates beyond 2023.
During Q3, we again met the increasing demand for our services, while reducing contract labor and sign on and shift bonus expenditures.
Contract Labor was down approximately $6 million or 24% from Q3 of 2022, while sign on and shift bonuses decreased approximately $10 million or 41% from Q3 of 2022.
For the second consecutive quarter, our talent acquisition efforts resulted in over 200 net same store are in hires.
Please be mindful that hiring results may vary significantly from quarter to quarter based on seasonality and other factors.
Review choice demonstration or RCD began on August 20, <unk> in Alabama.
Called the under RCD every claim is reviewed for documentation and medical necessity.
We elected pre claim review as we believe it allows for a more iterative process and the potential for real time adjustments.
Our results thus far are encouraging.
The affirmation rate target set by CMS under RCD is 80% of county of claims submitted during the first six months and our affirmation rate is well above that.
Given our Q3 results and expectations for Q4, we are updating our 2023 guidance to include.
Net operating revenue of $4 77 to $4 $8 billion.
Adjusted EBITDA of $940 million to $955 million.
And adjusted earnings per share of $3 41, three up to $3 52.
The key considerations underlying our guidance can be found on page 12 of the supplemental slides.
Now with that I'll turn it over to Doug for further color.
Thanks, Mark and good morning, everyone. As Mark stated we are very pleased with our Q3 results.
We continue to see significant improvement in year over year premium labor costs.
Our Q3 contract labor plus sign on and shipped bonuses of $33 3 million was comprised of approximately $18 9 million in contract labor and $14 4 million in sign on and shipped bonuses.
This compares favorably to $24 8 million in contract labor and $24 2 million in sign on a ship bonuses in Q3 last year.
Contract labor utilization declined year over year and sequentially.
Q3, 23 contract labor Ftes of 388 represented a 19% decline from Q3 dollars 22, and an 18% decline from Q2 of 'twenty three.
Contract Labor Ftes as a percent of total Ftes was one 5% a 40 basis point decline from Q3, 22, and a 30 basis point decline sequentially.
Yeah.
Agency rates declined year over year and were up modestly sequentially.
Our Q3 23 agency rate per FTE was approximately 192 7000 down from approximately $204 6000 in Q3 22.
I'll remind you that rates are impacted by the licensed level of the clinician utilized as well as by geographic specific market conditions.
Sign on and shipped bonuses decreased $9 8 million or 41% from Q3 dollars 22 and were roughly flat sequentially.
As we consider contract labor and shift bonuses for Q4, it is worth noting that holiday coverage typically requires premium pay rates.
Partially offsetting the benefit of lower premium labor cost in Q3 was an increase in our internal SW per FTE rate.
This rate, which exclude contract labor and sign on and shift bonuses increased 6% over Q3 dollars 22, similar to the level of increase we saw in Q2.
The increase was attributable to proactive market adjustments, primarily for nurses higher compensation for new hires and planned merit increases.
These actions are contributing to our success in new hiring and improvement in turnover.
Our updated guidance assumes a continuation of this trend in Q4.
Okay.
In line with expectations <unk> for the quarter was $3 four one.
An increase from $3 three nine in Q3 22 and from 338 in Q2 'twenty three.
Revenue reserves related to bad debt increased 20 basis points to two 2% as a result of write offs of older claims denied by the departmental Appeals board, which we have elected not to appeal Federal District Court.
Our de Novo Embed addition strategy continues to generate solid growth and contribute to share gains.
Our de Novo has performed exceptionally well in Q3 contributing $900000 in adjusted EBITDA.
This brings year to date, net preopening and ramp up costs to $7 6 million.
We still expect full year, preopening and ramp up costs to be $10 million to $12 million due to the opening of two hospitals in Q4 and the cost we expect to incur in Q4 for hospitals scheduled to open in the first half of 2024.
As can be seen on page 14 of the supplemental information the acceleration of our Fitchburg opening into 2023 and the progress on a number of pipeline projects scheduled for 2024, and 2025 has led to an upward revision.
Of our 2023 de Novo capital expenditures estimate to $315 million to $325 million.
Year to date adjusted free cash flow of $432 2 million represented a 47% increase from the first nine months of 2022.
As can be seen on page 13 of the supplemental information we have updated our assumptions for certain cash flow items contributing to an increase in our 2023 adjusted free cash flow estimate $445 million to $500 million.
Finally, we ended Q3 with a net leverage ratio of two eight times down from three four times at the end of 2022.
Our balance sheet and liquidity remain well positioned.
With that we'll open the lines for Q&A.
Yeah.
At this time, we will open the floor for questions.
I'd like to ask a question at this time, Please press star one on your telephone keypad.
You may remove yourself at any time by pressing star two.
We ask that you limit yourself to one question and one follow up question.
Again to ask a question please press star one.
Our first question will come from Kevin Fischbeck with Bank of America. Please go ahead.
Hey, good morning, Kevin Good morning, Kevin Good morning.
So I guess, we'd like to ask about labor and obviously a lot of progress on contract.
Contract labor expense and sign on bonuses.
But overall the wage outlook has gone up and now we've seen sequentially.
Correct Labor wage has gone up for a couple of quarters now I mean, how would you characterize the overall labor market today.
How do you think about the ability to issue you've had the benefit of a contract labor coming down how do you think about the ability to manage through.
The labor pressure into next year. Thanks.
Yeah. Kevin This is mark as you noted we've made really nice progress on on the contract labor side and the premium pay categories I would characterize it is still very tight market out there is certain markets are a little bit more challenging than others to find staff, we've done a really nice.
Job in terms of our recruitment of our ends which is the most challenging segment.
Of our staffing base at this point, but I think we put a put systems in place and has the initiatives that our hospitals are.
To be successful going into next year, and competing very strong and this really tight market yes.
Yeah, just to add a couple of things to that Kevin first of all I think what youre seeing in terms of the sequential increase in rates as more to do with the fact that as we reduce our reliance on contract labor.
What we're seeing is more of a concentration at higher license levels and in those geographies that are more expensive and works a little bit tighter.
Some of that is kind of self fulfilling.
As we look to 2024 from a premium labor perspective, we think that it's either going to be stable or improving further we've been successful in getting the contract labors ftes down to one 5% that's not where we were pre pandemic, which was just under 1% do.
Do we think that there is an opportunity for further progress, yes, but at a minimum we don't see that ticking back up.
Above that.
Then we also think that with regard to the 6% increase in SW per FTE that we've been running this year evidenced the fact that we've been able to hire 404 or 402.
Net new or ends in each of the last two quarters.
We believe that we've hit the right level excuse me that was over the last two quarters cumulative we believe that we've hit the right level in terms of being able to procure that new talent and our turnover has been reduced as well and as a result of those factors. We don't think that we're going to have to anniversary.
6% on top of the 6%. This year, we would expect labor inflation to moderate considerably next year.
Okay. That's that's helpful.
And then I guess as far as volumes go there.
Theres been a lot of talk about seasonality.
Normal seasonality I guess, where do you think that.
You are in the industry is as far as <unk>.
If volumes are we back to kind of.
Normal in normal ish growth from here is there any pent up demand how are you thinking about this is it.
As a base for future growth, but also seasonality. Thanks.
Okay. We've commented.
In past quarters, and I think that holds true now as debt.
The pandemic gave us a real chance to show the difference in post acute settings, and I believe that we have continued to take market share from skilled nursing facilities or other areas that otherwise may have.
You too to referral sources and the payers.
Think about our discharge growth for the second half of this year of course Q3, we just reported recall that we are up against more challenging comps from last year in the back half of last year total discharge growth was running north of 7% with more than 4% of that coming from same store and so we really felt like the seasonal patterns started to.
Reestablish themselves in the second half of this year.
And it feels like that is continuing this year with regard to pent up demand. There is no doubt that we are seeing an increased flow of some of those lower acuity nip.
Our hip and knee replacements that Mark described what's offsetting some of that is the reduction in COVID-19 patients and so the the demand that we're seeing in those categories is actually probably a little bit higher than might otherwise show through into the total discharges, but generally speaking it feels like we're kind of back into our traditional seasonal flows.
<unk>.
Great. Thanks.
Okay. Thank you. Our next question will come from AJ Rice with UBS.
Hello, a J.
Hey, how are you how are you guys.
First question was more technical.
You're highlighting this $3 5 million write off of the de Novo project I don't know if theres any background on that it's sort of unusual for you not to move forward with one.
Main point on that is you've updated the guidance.
It looks like youre, including that so that the actual underlying increase in operating.
Results is a little more than on the.
Surface might include but I wanted to just confirm that.
No.
Hey, I'm, sorry, we didn't make that more clear in our materials that write off is below the adjusted EBITDA line.
And you're right.
It's less unusual in terms of the fact that we're deciding not to press forward with a de Novo project and more unusual in terms of its scope.
We're managing an active pipeline of approximately 50 projects and then what you don't necessarily see it there are about 20 behind that that are in what we and eloquently described as exploratory mode.
We will from time to time and we have in the past have a project that for various reasons, sometimes it's getting hung up in the Seo and process will elect not to move forward with.
In almost all instances.
Those items are less than $1 million, we had one that was approximately $1 million it was actually <unk>.
Included in Q3.
What was unusual about this project is that we had gotten further along the project in the Midwest. It was with an existing joint venture partner, we had acquired some land we were actually doing some of the site work and Unfortunately every time, we refined our estimate for the cost to build this facility.
It was getting worse and worse in a way that.
We weren't able to use some of the other offsets we've effectively used on other projects. In addition to that this was a particular market where the labor market conditions, we're moving in an adverse direction as well so we had some.
Some difficult talks with our joint venture partner, but ultimately we concluded together that it did not make sense to press forward at this time and so we took the write off I really view that as an anomaly given its size because it's unusual for us to get that far down the path before we make that kind of decision I don't think it speaks to.
Any.
The lack of enthusiasm with regard to our continuing development pipeline I do think it highlights. The fact that we are disciplined in our approach.
Okay, Alright, and maybe just a follow up I'll take a stab at this one.
I know youre not going to give formal 24 guidance until you report fourth quarter or at least around the first of the year, but you've talked about labor inflation moderating.
Some of the things around volume and de Novo's, what in your mind are the.
The puts and takes we should keep in mind is we're trying to.
Developed forecast in any areas of particular.
Variability as you said right now and think about next year.
Well I think you've hit on the keys, which is one we look at volume growth heading into next year, obviously, we'll be up against challenging comps.
Given the good discharge growth we've had this year, but we're going to benefit from the continued maturation.
Of 25 de Novo's that were added from 'twenty one through the end of 'twenty three and the addition of 150 beds to existing hospitals, and we do anticipate that moderating labor inflation.
Will occur as we anniversary the 6% increase in SWM FTE were anticipating for 'twenty three those are going to be the primary drivers.
Okay. Thanks, a lot.
Thank you we'll take our next question from Brian <unk> with Jefferies.
Brian Good morning, Brian Hey, good morning, guys congrats on the quarter.
I guess my first question is I think about your revised guidance for the year and what you've reported so far the first three quarters. The Q4 guide is a little different from the typical seasonality in terms of contribution to the year. So just curious is there anything we should be thinking about in terms of what that sequential.
Sequential decline or flattening that's implied in the guide for Q4.
Normalized seasonal flows we would expect discharges from Q3 to Q4 to be kind of relatively flat in that range. So youre not getting a pick up there sequentially.
You are consuming a pretty good chunk of the pricing increase with the merit increase which was a little over 3%.
And then we're also anticipating that you will see somewhat of an increase which is not atypical it was a little bit of an anomaly in Q4 last year and the length of stay and then just kind of some regular way increases in supplies and O E. Some of which is attributable to seasonality.
<unk>.
Not a lot to call out there.
And again, it's that you had you had a very strong Q3, so it's not surprising that we're kind of calling the ball here for Q4.
Okay that makes sense and then mark maybe as I think about your comments.
The release on or in the slide deck by the pricing on the commercial side, how should we be thinking about commercial price trend.
Managed care price strategy as we look at 2024.
We continue to work on payers as we've.
Done in past quarters with the Contra.
Contract negotiations, we've had as we move more.
Contracts towards CMG as you're starting to see less of the differential between the fee for service Medicare and at MA plans I think it was down to three or 4% differential in this last quarter. So we continue to make progress there.
And I think you expect to see that going forward.
Brian the other thing I would call out as you think about the movement from Q to Q3 to Q4 is the impact of the 2023 de novo's.
As we discussed in our comments earlier, we had a really strong quarter in.
In Q3 were those actually contributed $900000 in EBITDA, but we're still anticipating that the preopening and ramp up costs for the full year will be in that $10 million to $12 million range, which implies a three 5% to $5 $5 million.
The other way in Q4.
Got it alright, thank you guys.
Yes.
Thank you as a reminder, if you would like to ask a question. Please press star one.
Our next question comes from Peter Chickering with Deutsche Bank.
Hey, good morning, Peter.
Hey, there guys, you've got a cure and Ryan on for Peter Thanks for taking the questions.
Thank you you mentioned that the.
Hip and knee.
Patients continue presented at a pretty good rate in <unk> and I know you called out some strong auto demand in second quarter. So I guess just could you just comment on if that if that strength and also continued into <unk>.
If there's any other specialties you'd want to call out whether that's narrow stroke or anything like that.
We continue to see.
Growth in our in our stroke program I think as I noted in my comments.
Around the orthopedic it will just kind of getting back to normalized.
Flow that we had seen.
Prior to the pandemic. So it's not an area that is growing off of a very large base, but we have placed a huge focus over the past several years and growing our stroke program with some nice gains on that we've seen nice gains in and other neuro and continue to focus on those categories.
Again these are some smaller categories, but brain injury was up eight 6%.
Cardiac was up two 4% so a little bit lower there are major.
Major multiple trauma up 10, 4%.
This was a quarter again and we discuss this more in Q2.
The strength of our discharge growth.
It was across patient categories and across a very broad based across geographies as well, which is encouraging to us.
Awesome. Thank you and then just quick follow up would you be able to give an update on our internal very I think you've been running at 22% year to date ask you <unk> it sounded like maybe a little bit more sequential improvement there.
Great.
Our most recent quarter.
<unk> most recent trend month basis has us at that 22, 23%.
Turnover rate continued.
We have seen progress on and we put a lot of focus on is the turnover within one year of hiring.
<unk> and that's an area that that we knew we could see improvement on we've seen an improvement on that we put a lot of focus on the orientation and onboarding of our nurses.
Which we think will help us longer term and continuing to hold or decrease that turnover rate.
It's important to note as well we tend to focus on the nursing, but our therapist turnover on a year to date basis through the end of the third quarter was less than 8%.
Thanks, so much.
Thank you. Our next question will come from Matt Larew with William Blair. Please go ahead.
Good morning, Matt.
Hey, good morning.
Yes, I'll follow up a bit on the patient next question.
Another strong quarter on the MA side as it has been really for the last several quarters in particular.
So kind of like your next question any particular patient categories or any trends to call out.
On the M&A side.
Now so if we look at it in aggregate.
For the quarter total MA discharges were up approximately 13% that takes us to just other under 18% on a year to date basis.
And importantly, when you look in the same store for for MAA. It was 11% for Q3, and just under 15% on a year to date basis.
We see very good growth in MA for stroke patients.
But one of the things that we've highlighted with regard to this overall discharge growth in MA is our value proposition now seems to be resonating with those that MA plans across a broader patient spectrum. So we're seeing seeing the broadening of the acuity there as well.
Yeah.
Okay. Thanks, and then just follow up on the hospital that you pulled forward from 2423, what really allowed you to accelerate that opening and processes related to.
Pre tax pre fabrication that you've been doing or is this more of a licensing our staffing this year right.
And depending on what it is it can you apply this to the extensive pipeline yet in place right now.
Yes, so we'll be honest with you the single biggest factor was favorable weather patterns.
But it was also then we are getting more efficient with regard to the utilization of pre fabrication. So that contributed we've been stating all along that our objective with regard to the moving to full pre fabrication was to realize a 15% cost reduction versus conventional.
Improvement of 25% in terms of speed to market. So we're not quite there yet on all of the projects in the pipeline, but we're making good headway.
We've had good luck with staffing in that marketplace. So it was all around the construction side and not about <unk>.
Staffing or just being prepared to take that first patient.
Yeah.
Alright, thank you.
Thank you. Our next question will come from Ann Hynes with Mizuho Securities.
Good morning, Hi, good morning.
So the ramp up costs of 10 to 12 million. This year is that a good number to use for 2024 moving to my first question and then secondly is there anything on the regulatory legislative side that is on your radar for 2024.
So add on the first one.
Haven't quite put pencil to it yet for 2024, but I think it's probably a pretty good proxy since we opened eight this year and we're looking to open up another eight next year.
Okay.
And we.
Continue to stay focused on the regulatory side.
You know everything from discussions around med pack with site neutral too.
We commented here on RCD in.
There are other things out there, but I would say those two things are closest to mind right now.
Thank you at this time and we have no further questions in queue I'll turn the call back to Mark Miller for any additional or closing remarks.
Thank you if anyone else has additional questions. Please call me at 205 90 705860. Thank you again for joining today's call.
This does conclude today's call. We thank you for your participation you may disconnect at anytime.
Okay.
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