Encompass Health (US:EHC)2025-10-30 15:02Financial Data and Key Metrics Changes - Revenue in Q3 increased by 9.4%, and adjusted EBITDA grew by 11.4%, contributing to year-to-date revenue growth of 10.6% and adjusted EBITDA growth of 14.5% [7][11] - Q3 adjusted free cash flow decreased by 8.2% to $174.2 million, primarily due to a $55.8 million increase in working capital [15] - Free cash flow increased by 16.5% to $582.5 million, with an increased full-year adjusted free cash flow estimate of $730 to $810 million [15][16] Business Line Data and Key Metrics Changes - Q3 community discharge rate was 84.6%, discharge to acute rate was 8.6%, and discharge to SNF rate was 6%, all exceeding industry averages [7] - Total discharges increased by 5%, with a 3.3% increase in net revenue per discharge [11] - Q3 2025 adjusted EBITDA included $10.8 million of net provider tax revenue, an increase of $7.7 million from Q3 2024 [13] Market Data and Key Metrics Changes - The demand for inpatient rehabilitation services remains significantly underserved, with the Medicare beneficiary population being the fastest-growing segment in the U.S. [9] - The population aged 65 or older is expected to grow to more than 70 million by 2030, with a CAGR of approximately 3% [9] - The average age of Medicare beneficiary patients is 77 years old, with the 75+ population growing at approximately 4% [9] Company Strategy and Development Direction - The company continues to open new hospitals and add beds to existing hospitals, with an expected addition of approximately 127 beds in 2025 and 150 to 200 in both 2026 and 2027 [9][10] - The company has a pipeline of 14 announced new hospitals with 690 beds and more than 40 active projects [10] - The company aims to maintain a balance between de novo programs and increased bed expansions for future growth [22] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the market opportunity for inpatient rehabilitation services, citing a steady rise in occupancy rates [22] - The company has not seen any negative impact on referral patterns despite external challenges, maintaining proactive communication with partners [112] - Management noted that there were no surprises in the quarter, with performance aligning with expectations [38] Other Important Information - The company successfully converted its ERP system to Oracle Fusion without significant operational disruptions [10][100] - The company repurchased approximately 221,000 shares for about $25 million during Q3, totaling approximately $82 million year-to-date [15] Q&A Session Summary Question: How should we think about the accelerated bed addition plan impacting volume growth going forward? - Management indicated that the increase in bed expansions validates their business model and strategy, reflecting the unmet need for IRF services across the country [20] Question: What level of capex as a percent of revenue should we model to maintain discharge growth in the 6% to 8% range? - Management stated that growth capex this year is about $580 million, with an average cost of approximately $800,000 per bed addition [27] Question: What is the target occupancy before expanding a facility? - Management noted that hospitals typically consider bed expansion after reaching 80% sustained occupancy, with private room hospitals able to operate efficiently at mid-90% occupancy [30] Question: Did anything surprise you in the quarter versus initial expectations? - Management reported no surprises, aside from retro payments and property assessments, with overall performance in line with expectations [38] Question: How did payer mix evolve in Q3 compared to the first half? - Management indicated that growth rates for Medicare and Medicare Advantage were comparable, with managed care seeing a 9.2% increase [48] Question: What are the potential impacts from negative headlines that came out earlier in Q3? - Management confirmed no impact on referral patterns, maintaining strong communication with partners [112]