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][13] - 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 million to $810 million [15] 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] - Q3 total discharges increased by 5%, with a 3.3% increase in net revenue per discharge [11] - Annualized RN turnover was 20.2%, and annualized therapist turnover was 7.8%, consistent with favorable trends from the previous year [7] Market Data and Key Metrics Changes - The demand for inpatient rehabilitation services remains underserved, with the Medicare beneficiary population being the fastest-growing segment in the U.S. [9] - The population aged 65 or older is projected to grow at a CAGR of approximately 3%, with the average age of Medicare beneficiary patients being 77 years old [9] - The company expects to add approximately 127 beds to existing hospitals in 2025 and 150-200 beds in both 2026 and 2027 [9][13] Company Strategy and Development Direction - The company continues to invest in clinical staff and has opened three new hospitals in Q3, with plans for additional openings in Q4 [8][9] - The company has increased its expected bed addition growth, responding to the unmet need for inpatient rehabilitation services [9][13] - The company has a pipeline of 14 announced new hospitals with 690 beds and more than 40 active projects [10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the market for inpatient rehabilitation services, citing a steady rise in occupancy rates and the need for additional capacity [21] - Management noted no surprises in Q3 results, with strong labor management and low bad debt levels [40] - The company remains active in Washington despite regulatory challenges and anticipates no significant concerns in the near term [42] Other Important Information - The company completed an ERP system conversion to Oracle Fusion without significant operational disruptions [10][101] - The company repurchased approximately 221,000 shares for about $25 million in Q3, bringing the year-to-date total to approximately $82 million [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 the business model and reflects the unmet need for IRF services [20] Question: What level of capex as a percent of revenue should be modeled to maintain discharge growth? - Management stated that growth CapEx this year is about $580 million, with an average cost of $800,000 per bed addition [29] Question: What is the target occupancy before expanding a facility? - Management noted that hospitals typically consider bed expansion after reaching 80% sustained occupancy [33] Question: Did anything surprise you in the quarter versus initial expectations? - Management reported no surprises, aside from retroactive payments and property assessments, with overall performance in line with expectations [40] Question: How has the payer mix evolved in Q3 compared to the first half? - Management reported balanced growth across payers, with Medicare and Medicare Advantage both showing increases [50] Question: What are the implications of changes in the Medicare landscape? - Management indicated that a slowdown in Medicare Advantage growth could present opportunities within fee-for-service Medicare, which pays at a higher rate [75]