Encompass Health Corporation (NYSE:EHC) Q4 2023 Earnings Call Transcript
Encompass Health Corporation (NYSE:EHC) Q4 2023 Earnings Call Transcript February 8, 2024
Encompass Health Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and welcome to Encompass Health's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I'll now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer.
Mark Miller: 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 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 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, and 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 8-K, and the Form 10-K for the year ended December 31, 2023, when filed.
We encourage you to read them. 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. On the supplemental information -- 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 8-K 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, Encompass Health's President and Chief Executive Officer.
Mark Tarr : 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% and driven by strong volume growth with total discharges up 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 expansion 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 in licensed beds.
We also continue to invest in our facility-based technology through initiatives like our Tablo on-site dialysis rollout. We now offer in-house dialysis capabilities in 83 of our hospitals and we'll continue the rollout to new locations in 2024. We complemented these investments in the growth of our business with a 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 21 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 6 de novos in 2024 as well as a 40-bed freestanding hospital licensed as a satellite location on 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 beds to 120 beds per year from 2025 through 2027.
We continue to focus on enhancing patient outcomes by investing resources and 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 improved 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.
Doug Coltharp : Thank you, Mark, and good morning, everyone. As Mark stated, Q4 was a strong finish to 2023. Revenue for the quarter increased 9.6% over the prior year, driven primarily by volume growth. Total discharges grew 8.3%, inclusive of 5.3% same-store growth. Volume strength was broad-based across geographies and patient mix and exceeded our expectations. Q4 adjusted EBITDA also increased 9.6% over the prior year as the contribution from increased volume and favorable operating expenses was partially offset by an incremental bad debt reserve. Our 2023 de novos outperformed in Q4, generating approximately $1 million in adjusted EBITDA compared to our expectation of approximately $2.5 million to $4.5 million of net preopening and ramp-up costs.
The favorable performance relative to our expectations was driven primarily by the joint venture de novos. For the full year of 2023, our de novo net preopening and ramp-up costs were $6.6 million. Within our 2024 guidance considerations, we are anticipating $15 million to $18 million of de novo net preopening and ramp-up costs. The year-over-year difference is largely attributable to the timing of new hospital openings and the balance between joint venture and wholly owned de novos. We continue to see improvement in year-over-year premium labor costs. Q4 contract labor plus sign-on and ship bonuses totaled $30.6 million compared to $35.4 million last year. Within premium labor costs, Q4 contract labor was $17.7 million and sign-on and shift bonuses were $12.9 million as compared to $19.7 million and $15.7 million in Q4 of 2022.
On a sequential basis, premium labor decreased by $2.7 million. Our Q4 adjusted EBITDA included approximately $6.8 million in favorable reserve adjustments for workers' comp and general professional liability insurance. On a full-year basis, 2023 included approximately $11.2 million in favorable reserve adjustments for these self-insured programs. These reserve adjustments are out of period as they relate to claims prior to 2023. Our Q4 adjusted EBITDA also benefited from favorable trends in group medical claims under our self-insured program. Q4 revenue reserves related to bad debt as a percent of revenue increased 170 basis points to 4.1%, and as a result of an approximately $22 million reserve related to appeals pending before the Departmental Appeals Board in various federal district courts.
These appeals relate to claims denied primarily prior to 2018 and under review programs that are different from TPE and RCD. We now have a full year of experience at the departmental Appeals Board and have updated our reserve assumptions given our experience to date. After giving effect to minority interest, the Q4 adjusted EBITDA impact of this incremental bad debt reserve was approximately $16 million. Adjusted free cash flow for the quarter increased 103.3% to $93.5 million due to higher adjusted EBITDA, lower maintenance CapEx and favorable changes in working capital. Moving on to guidance. Our 2024 guidance includes net operating revenue of $5.2 billion to $5.3 billion, adjusted EBITDA of $1.015 billion to $1.055 billion, and adjusted earnings per share of $3.77 to $4.06.
The key considerations underlying our guidance can be found on Page 13 of the supplemental slides. With that, we'll open the line for Q&A.
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