Q2 2025 Enhabit Inc Earnings Call
Hello. Good morning everyone and welcome to inhabit home and health hospice. Second quarter 2025 earnings conference. Call all lions have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw that question, again, press star 1, today's conference call is being recorded if you have any objections, you may disconnect at this time.
I will now turn the call over to Bob okuni in habits vice president of investor relations Mr. Okuni please. Go ahead.
Thank you, operator. And good morning everyone. Thank you for joining our call today. With me on the call this morning is Barb Jacobs Meyer president and chief executive officer and Ryan, Solomon Chief Financial Officer. Before we begin, if you do not already have a copy, our second quarter earnings release supplemental information and related form AK filed with the SEC are available on our website at investors.com.
On page 2 of the supplemental information, you will find the Safe Harbor statements which are also set forth on the last page of the earnings release.
During the call, we will make forward-looking statements which are subject to various risks and uncertainties, many of which I'll be on our control.
Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimate and expectations are discussed in our SEC filings, including our annual report on form 10 K, which is available on our website. We encourage you to read those documents.
We are also 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 of as of today,
We do not undertake a duty to update these board looking statements, our supplemental information and discussion on this. Call will include certain non-gaap Financial measures.
For such measures reconciliation. In the most directly comparable gaap measure is available at the end of the supplemental information and in our earnings release with that, I'd like to turn the call over to Barb Barb. Thanks Bob. Good morning and thanks for joining us. I'm excited to highlight how our teams continue to execute on 2025 strategies in the second quarter. But I'll start by addressing cms's final rule for hospice and CMS is incredibly disappointing preliminary Home Health rule.
The final hospice rule, improves the rate, adjustment effective October 1 2025 from the proposed rule of 2.4% to final rule at 2.6%.
While we appreciate the slight increase, we continue to be disappointed that the rate update does not accurately reflect the increasing cost of care.
This sentiment is intensified as we reflect on the home health proposed rule.
At a time when inflation continues to rise and demand for home-based care grows. CMS has ignored data showing how these proposed cuts are destructive of the Home Health industry, which is the lowest cost care setting and critical to managing overall health care expenditures.
The repeated Cuts over the past few years, have forced the industry to make tough decisions, including closing locations, which reduces patient access to care.
And habit has had to make these tough decisions too and the 2026 proposed Cuts exacerbate. The pressure on the industry.
It goes without saying, if CMS does not change its extreme position, something will have to give
Our size and scale coupled with our recent investments in technology and operational improvements. Put us in a position to address the challenges of this moment.
While we have used metallic to advise, a just write care plan. We have allowed individual clinicians to override those recommendations.
We will be implementing an advanced process whereby. This override will occur only after review and approval by our trained virtual team of clinicians.
Mindful of our obligations to our shareholders, our staff, and our patients, we are thoroughly evaluating these and other plausible levers to address the extreme headwind presented by the proposed cut, while striving to maintain access to the high-quality care that we have provided in years past.
in addition to the visits per episode focused, more tough decisions, could be made
We will continue to evaluate additional closures or consolidations of branches service areas in each Community potential limitations of our future investments in Technologies and our overall GNA expenses.
Evaluating these and other potential. Levers is necessary to ensure. We can maintain competitive wage rates to recruit and retain our skilled Workforce within a highly competitive, labor market.
While we work on adapting, our business practices in response to the ongoing Cuts, we've also been working non-stop alongside the the National Alliance for Care at home. The leading home health trade, Association to articulate, to CMS and members of Congress. A holistic argument against deep cuts to our industry, which provides the lowest cost care setting and saved the system money by reducing the use of higher cost alternatives.
Although we will continue those efforts and although in recent years the final rule has been less severe than the proposed rule. There are no guarantees or indications at this time where the final rule will ultimately land.
Due to the severity of the proposed Cuts. We are unable to just wait and see.
the efficiencies that we have, as a scaled company will position us better than others, as we navigate these challenges,
Now, let's move on to our quarter results.
our second quarter Home Health performance is the result of continued execution on our payer contract initiatives with the focus on a payer balance of Admissions and census,
our second quarter admissions were up, 1.3% year-over-year.
For the closed branches, this growth is 2%.
Fee for service, Medicare census is stabilizing.
With steady progress from our low entry point to the New Year. Our census has grown 2.1% sequentially and now up 0.5% year-over-year.
With 5.2% year-over-year mainly within our payer Innovation contracts.
We had disruption at the end of the second quarter in both Admissions and senses from the impact of renegotiations, with a national payer.
However, we were successful in achieving a low double-digit increase in our per visit rate effective, August, 15th, 2025.
Our scale drives meaningful access to payer members and that access coupled with our high quality outcomes positions us well for continued progress within our payer strategy.
Moving on to our hospice segments, the impact of our investments and our strategies continue to drive outstanding results.
We have now experienced 6, great quarters of sequential census growth.
Total admissions grew 8.7% year-over-year with same store up 5.7%.
Normalized for clothes branches. Admissions were up. 10%.
Census grew 12.3% with 10.7% same store growth.
The census growth continues to create leverage on the 6 cost, we added in 2023, evident in the minimal cost per day. Increase year-over-year of 1%.
To complement our organic growth strategy. Our denovo, strategy is positively impacting total growth,
In quarter 2. We opened 1 home health and 2 hospice locations.
Combined, with the 1 hospitals.
turning now to our cost strategy update, 11 branches were closed or Consolidated by the end of quarter 2 2025,
An additional home health and hospice, Ranch will be Consolidated by the end of quarter 3, as we continue to evaluate our cost structure.
At the start of the call, I mentioned Advanced visit per episode management. As 1 of our levers to mitigate the impact of the 2026 proposed rate cut.
This Advanced visit prep episode management will be initiated with a pilot in 11 branches next week and I look forward to sharing details of the results and future calls as well as additional insight into the other potential levers.
Quarter 2.
Thank you Barb before recapping our strong performance in Q2 which demonstrates consistent execution on key aspects of our strategy. I wanted to build on Barb's comments on the CMS preliminary. Home Health rule,
The CMS proposed 2026 Medicare home health. Rule, including continued permanent behavioral adjustments, as well as a first-time proposed, temporary adjustment in 2026, meant to claw, back perceived over, reimbursement, to the industry from prior years presents. A clear and intensifying headwind for the entire industry.
The company has significant concerns with the methodology CMS has used to justify behavioral rate, adjustments, post implementing pdgm.
Which in our view leads to Home Health.
Rates that are fundamentally.
Inconsistent.
Every mandate.
Under the bipartisan budget Act of 2018.
The cumulative permanent and temporary rate Cuts, since pdgm, implementation now total over 20% with the recent proposed rules all at a time where it costs of care for home. Health providers has rapidly increased
We believe the consequence of these flawed rate Cuts continues to risk compromising access to home health care services for Medicare beneficiaries. And pressuring provider sustainability, especially in Rural and underserved areas,
But we do not agree with the CMS 2026 proposed rule, we believe in habit has the right team and right strategy in place. While also being uniquely positioned to outperform many of our subscale competitors in this challenging environment.
Our scalable operating model, proprietary clinical pathways, disciplined cost structure, and improved leverage give us distinct advantages relative to others in this environment.
As Barb touched on previously, we proactively invested in technology that will allow ongoing evaluation of our ability to balance quality while optimizing our visit utilization Staffing models and pair of professional mix all in a clinically appropriate manner, that should provide meaningful potential offsets to the 2026 proposed. Medicare home health rate cuts,
in addition to the unique scale,
Optimization that Barb and I have touched on growth, will also continue to be a key lever as well.
The combination of our continued, outsized hospice growth and a maturing payer Innovation strategy that has positioned us as a full service provider to our referral Partners will enable us to continue to stabilize Medicare fee for service volumes while also providing us with an increased opportunity to selectively gain, share in core and adjacent markets as smaller or less capitalized providers, likely struggle, under reimbursement, constraints.
While we continue to explore all options to combat, the CMS proposed rate Cuts, we remain committed to driving, high-quality cost-effective care, while protecting long-term, shareholder value.
Now shifting to our strong Q2 2025 financial performance, we're consistent execution on our strategy, delivered revenue and adjusted Eve. It's a growth to Prior year and sequentially while continuing to de-lever our balance sheet.
Before reviewing Consolidated and segment detailed performance.
If you look at Q2 highlights, they demonstrate clear execution on our strategy, which includes the following:
Order of year-over-year, Consolidated, Revenue, growth, post, Spin, and the third consecutive quarter of sequential growth.
revenue and adjusted Evita while continuing to stabilize, Medicare ADC
hospice.
During year-over-year segment, adjusted evidence.
On both double-digit volume growth and margin expansion to the prior year.
We continue to focus on de-levering, our balance sheet, with the fifth straight quarter of debt, prepayments dating back to Q2 2024 totaling 45 million of prepayments through Q2 of 2025.
In addition to the prepayments made through Q2, we made an additional 5 million prepayment in Late July that increases the total prepayments to 50 million through Q3 of 2025.
The combination of these prepayments standard amortization and improved pricing as we have exited, the Covenant relief restrictions under our agreement have reduced our cash interest expense by 10 million annually,
now shifting to a Q2 Consolidated result details,
1 million.
Or 2.4%.
with growth to the prior year of 5.5 million or 2.1%
Growth in home, health and hospice segments. As we were able to grow ADC sequentially in both businesses.
Consolidated Revenue growth in the quarter translated to improved profitability, both to the prior year and sequentially.
With Consolidated adjusted. Ebit dub, 26.9 million in the quarter.
Increase sequentially.
3 million or 0.7%.
Here by 1.7 million or 6.7%.
With overall adjusted, EBA margin as a percentage of Revenue expanding to 10.1% an increase of 40 basis points to the prior year.
Now shifting to Home Health performance, Revenue was 205.9, Million reflecting, sequential growth of 5.3 million, or 2.6% while lower than prior year by 4.3 million, or 2.0%.
Volumes were up both versus prior year and sequentially by 0.5% and 2.1% respectively. The growth in ADC to Prior year, allowed us to hold units.
Measured in cost per patient day flat to Prior year as we were able to use volume to improve clinical staff productivity helping to offset cost of Merit and inflation.
Home Health adjusted, Eva total 39.3 million in, Q2 reflecting, the sequential increase of 1.0 million or 2.6%.
3.1 million related to volume, offset by 1.5 million in yield and 0.6 million of increased expense in sales and operations back office G&A costs to support growth.
Q2 Home, Health adjusted Viva margin, as a percent of Revenue was 19.1%.
flat sequentially and lower 190 basis points to the prior year, on lower unit, revenues, primarily related to continued unfavorable mix shift
2 key items to highlight in home health outside of broader revenue and adjusted Eva performance include the following.
Our continued success in slowing. The rate of decline in our Medicare patient volumes a key 2025 priority to maintain a healthy payer mix.
is reflected in our Q2 Medicare ADC being lower by 3.4% in the quarter versus prior year compared to a
31% year-over-year decline in the corresponding 2024, period.
2, we saw.
Improvement in visits for episodes both sequentially and versus prior year coming in at 13.7.
Earlier we see visits.
Maximized, while back.
balancing quality to meaningfully offset, rate, reimbursement, headwinds from CMS 2026, proposed Home Health rule,
Now shifting to a hospice.
Continues to perform at a really high level with Revenue totaling, 60.2 million.
collecting sequential growth of
million or 19.4%.
Revenue growth was supported by continued strong momentum on volumes in the quarter with improvements of 3.7% sequentially in, 12.3 year-over-year with ADC for the quarter totaling 3,950.
Million in Q2.
And or 53.8% on a double digit volume increase combined with margin expansion as adjusted even margin as a percent of Revenue, improved 520 basis points prior year and totaling 23.3%, as our operational leaders continue to create operating, leverage on the increased volumes.
If you key items to highlight in hospice outside of broader revenue and adjusted e but that performance include the following.
We saw exceptionally strong performance across
conversion regions.
Delivering, double-digit year-over-year, Revenue growth demonstrating. Our operating model is fully deployed with strong leaders in place. That gives us confidence that our current momentum should be sustainable.
In addition to ADC growth, we were able to lower discharged average length of stay year-over-year which continues to lower overall capability risk.
Shifting briefly to our home office, general and administrative expenses for the quarter totaled $26.4 million, or 9.9% of revenues in Q2, compared to 10.8% in the prior year.
Delivering an improvement of 1.6.
Million or 6% year-over-year.
To targeted cost savings initiatives. Somewhat offset by Merit and other inflationary increases year-over-year.
To the balance sheet and cash flow.
Adjusted free cash flow year-to-date totals $27.8 million, a 51.
29% free cash flow conversion rate.
During the quarter, we reduced over.
Including amortization and prepayments.
We ended the quarter with approximately 37 million in cash and available liquidity, improving sequentially to 113.5 million.
Improved profitability coupled with continued balance sheet, improvements results in a net debt to adjusted debt, leverage ratio, of 4.3 times compared to Q2 of the prior year of 5.1 times.
Remaining committed to.
For balance sheet and improving profitability. Let's conclude with briefly discussing updated guidance.
Based on a Consolidated, first half, 2025 results and the momentum in the business, we remain confident in our strategy and for your outlook.
We have updated our full year guidance as follows. We now expect 4 year Revenue to be in a range of 1.060 billion and 1.073 billion with full year adjusted debit uh, to be in a range of 104 million to 108 million.
We also now expect full-year adjusted free cash flow to be in a range of $47 million to $57 million.
Thank you for your time today.
Your questions.
Before opening the call for Q&A. Let me touch briefly on the news last evening that I intend to step down for my role, as president and CEO. And as a member of the board in July 2026 for upon the appointment of a successor, I will be working with the board on a smooth transition.
Timing is optimal for a new CEO. I am proud of the accomplishments achieved over the past 4 years.
Our team has collectively focused on stabilizing the company and creating a stronger foundation for the future.
We have reached that point and now it is the right time for a new leader to elevate and habits the next level, my successor will join and have it alongside an experienced board and a strong leadership team. And I have no doubt that with our sound operational foundation and the trajectory to achieve and have its long-range potential. The future is incredibly bright.
I will continue to dedicate my time and energy to support the team through the transition.
Please remember that, the purpose of this call is to discuss the operational performance of the quarter.
Operator. We can now open the lines for questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw that question, again, press star 1, we also ask that you limit yourself to 1. Question in 1, follow up your first question comes from the line of Brian 10, quilet with Jeffrey, please go ahead.
Good morning. This is Megan Holton for Bryant 10 quill. It congrats on the quarter and Barb best wishes going forward. It's been great working with you.
So we appreciate the commentary on the proposed home Nursing rule, but can you guys talk about how you're thinking about mitigating, the negative impact of it. And whether you believe there are operational, levers, you can pull on that can fully offset. If the negative 6.4% is put into place
Yeah. Uh,
Our, you know, in play here first. Uh, you know, as we think about the advanced vpe initiative, um, that's an area that that will be a primary lever. Um, when we we will be piloting several of these Concepts in the coming weeks and we'll need to see our ability to operationalize the value. We have estimated without materially impacting quality. Before we could comment definitively assuming we can execute without impacting.
Quality. We believe that the totality of the various levers potentially conveniently offset. The impact once fully ramped
Thank you. And then uh can you guys give us some color on the recent payer disruption, that you mentioned in the slide deck and how that new National payer contract coming in might impact volumes and rates going forward?
Notifying our teams that we reached an agreement, uh, and that happened on July 11th. We're now back to uh, 76% of that Peak census and admissions are now above our weekly average about 113% of our weekly average. So we feel confident, we're going to not only regain that census but grow from there especially now that this is a payer that we will actively go uh after for referrals.
Got it. Thank you very much.
Your next question comes from the line of AJ rice with UPS. Please go ahead.
Uh hi everybody. Just a um clarification to that last question. Um.
On the, um, the proposed rate update. I think there was some question about the reset if they if they take it down the 6.4%, uh, is it just the baseline from there would get the full recruitment or would there need to be follow on cuts and subsequent years? Uh, to get the full recapture that they're looking for if you got any Clarity on that.
yeah, AJ
we're reviewing it is is that, you know, effectively the proposed rule, um, you would be updated each year, but effectively this would be a bit of a clearing event in the context of, you know, we see the in your impact of the, the temporary proposed rules should that that go final. Um, and then ultimately uh, you know they've outlined
Some framework as to how they would Implement that, you know, roughly over a 7-year period, but effectively, it'd be that similar impact. Assuming that framework, where the play forward, uh, on a go forward basis. So how we're thinking about it is, you know, we're focused on, um, mitigating the impact of the, uh, proposed Rule. And then, you know, as you clear that hurdle going forward, it's really a market adjustment going forward on, uh, any sort of, uh, proposed rule on a, on a prospective basis or if that answered your question AJ.
Yeah, no, that's good. That's what I was looking for. Um,
on the, uh,
You know, there's a lot of different things going on with the uh Home Health um, metrics. I seems like um,
The fee for service business is still under pressure if I've got that right. Uh, and I just wonder, is that do you prioritizing some of these uh Edition new contracts? You're getting is, uh, is it just is the underlying, um, volume of cases and you? Well, prioritizing and therefore, you don't have it as much capacity for that or is it, uh, market share changes or is, uh, just the, uh, demand down, um, just because there's less people on the fee for service side. I'm trying to understand where we're at is on that aspect of of volumes. Sure. I would say I do this a combination. You know, certainly in some of our markets we have you know we have markets that are now over 75
% ma penetration. So in some markets it really is about that addressable fee for service markets. Um, in other markets it is about going out and, you know, redeveloping those uh, what we call books of business to make sure we're focused on referral sources that do have that blend. It is certainly not about us prioritizing any of the other payers that we have added. Uh those payers are really for us to be seen as a, a full service provider so that we can earn that healthy payer mix.
Okay, to add on to that. I mean, we are outperforming. Now we how we thought about the strategy at the beginning of the year, um, you know, as we talked about early early on was we wanted to cut that rate of client in half. Um, we've actually, you know, I think best did that now, you know, as bar touched on, it's not in any sort of of prioritization. I I do think that when we think about our premium relative to some of the market, um, you know, if you look at some of our larger, you know, uh publicly traded peers, uh, we do have a share of Premium advantage and that's actually growing. If you look at Medicare home health, uh, revenues as a percentage of total. Um, so uh, while there is some gravity within the market, um, we feel like we're executing the strategy, uh, and actually a little bit ahead of schedule in the context of, uh, how we thought about our performance and decline year over year.
Okay, great. Thanks so much.
Your next question.
Hi, good morning. Um, on hospice ADC growth. I think you previously cited monthly progression since January 2024 and now you're citing, it sort of on a quarterly basis. Can you tell us if ADC grew sort of each month through the second quarter?
Another thing that we didn't want to do is uh have any sort of positively quarterly progress in the future. Be missed. If let's say you went down 1 or 2 ADC in a certain month uh but for quarter 2, we did continue to have that monthly sequential progress.
Great. And then last thing, just good to see the deleveraging inflection on the revenue growth. Um, I guess can you remind us what your longer-term leverage targets are? And maybe kind of where you need to get to before you could pivot to M&A or making sort of heavier investments on the de novo side. Thanks.
Yeah. So as we think about, you know, deleveraging I, you know, I I think our view is we want to continue to focus on delivering the balance sheet. Um, we haven't given specific, leverage targets, um, but I think how we've uh, you know, consistently performed over the last, you know, 5 quarters would be the prospective use. So I think it's safe to assume that we would continue to take that approach going forward. We only given a specific leverage Target Target. But we do think that there's a um, you know, that that's going to remain a priority before we pivot into any sort of m&a or other activity.
Got it. Thank you.
Your next question comes from the line of Jamie purse with Goldman Sachs. Please go ahead.
Hey, thank you. Good morning. Um, I I wanted to start with the, the payer contract. You were able to renegotiate in the quarter. Um, you, you you mentioned that that rate went up, low double digit percentage, beginning August 15th, I'm sure you're sensitive to the particulars here, but any color you can give us in terms of how that contract previously compared to your other contracts. Just trying to get a sense of whether there's opportunity with other contracts as they come up for Renewal to, to see, similar type of of, of rate increases and any dates, we should have in mind for when some of your larger contracts renew.
Sure. Um, well, what I would say, uh, again, I guess gives you a little bit of color. Is this contract previously was not considered a payer Innovation contract, it will now move into that payor, Innovation contract level. Um, again, that's why I mentioned that we will actively be, you know, pursuing those referrals. Uh and so, you know that was certainly 1 that uh was that we had added before. We really started the work around payer Innovation. Um and so a lot of those contracts are you know 3 year uh contracts. So when you think of that work starting you know back in 2023 uh they'll be more work that are be coming up. Uh, next year, uh, now some of that work, we start about a year in advance because it does take a while, uh, to get those negotiations, across the finish line,
Okay, great. And then just on the, the fee for service. Um, you know, Medicare volume pressure, you know, looks like that that has begun to, to moderate. Um, you know, how much of that is just, you know, you guys have talked a lot in the past about just getting down to normal mix level, between fee for service and and non-medicare um, how much is that phenomenon impacting it versus initiatives you're you're deploying internally and to the extent, you know, some of these initiatives, uh, prioritization, uh, you know, you've talked about, you know, color coding, different different types of payers, uh, green, yellow red, sort of concept, those initiatives, kind of impacting that and then just um, you know, how should we think about that progressing in the back half? And, and into next year,
Sure, sure. I would say that the conversion rate, uh, on those continues to be very strong, um, it is kind of, like I mentioned with the AJ. It's a little bit of a mix because obviously, you have some markets that are just way more pressured, just because of the MMA, uh, conversion in those, uh, in those markets. Um, so, it's a combination I would say, is kind of settling into more normal. But also, you know, we have some markets that are doing really well in some of the strategies and, and really developing out those books of business around, you know, moving a little bit away from maybe some of the settings that have significant, you know, amount of MMA to more of the referral sources where we know, we can have that
1 of payers.
Okay, and if I could sneak in 1 more, can you just spend another minute on the pilot programs and what you'll be looking for their, uh, you, you you talked about, you know, operationalizing that and, and scaling that, uh, just a little more color on on what you'll be rolling out and again, what you'll be looking for there in terms of gauging success. Sure. Well we we have the resources.
Feel well above our large peers in the pre episode. Um, you know, as we've stated before, we're very careful, not to impact quality. That being said to mitigate these kind of severe proposed Cuts, we know we have to be more aggressive in the approach. Um, kind of let Ryan maybe talk on kind of the value of that if you will. Yes.
Yeah. And and we estimate for every 0.5 uh vpe reduction value could be in the approximately 5 to 8 million with flecks in, uh, in the range mainly due to the percentage of the additional capacity that we can affectively reallocate and the mix of incremental patient load. So where that unit Revenue comes in
And we carry additional patient load or volume is is obviously quite material to that assumption. Um, you know, obviously there's a, if we're still very early. So, you know, we'll provide some some early observations from the pilot, uh, as we as we update on future earnings calls, but um, you know, we do view it as a meaningful lever. It's 2 phased, we first we we need a free up the capacity and then ultimately we need to make sure that that capacity is directed to additional patient or case load on overall volumes um and so that's where we're really focused as Mark touched on with some of the pilots and fine-tuning those the potential value there.
Okay, great. Thank you.
Thank you.
And ladies and gentlemen, that does conclude our question and answer session. And that does conclude today's conference call. Thank you for your participation and you may now disconnect