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Encompass Health Corp.	EHC	Bank of America Healthcare	May 11, 2021
	Conference
Company▲	Ticker▲	Event Type▲	Date▲

PARTICIPANTS

Corporate Participants

Mark J. Tarr - President, Chief Executive Officer & Director, Encompass Health Corp. Douglas E. Coltharp - Chief Financial Officer & Executive Vice President, Encompass Health Corp.

Other Participants

Kevin Fischbeck - Analyst, BofA Securities

MANAGEMENT DISCUSSION SECTION

Kevin Fischbeck, Analyst, BofA Securities

All right. Great. I want to thank everyone for joining us. It's my pleasure to introduce Encompass Health here at our Virtual Las Vegas Health Care Conference. Encompass is the largest provider of inpatient rehab and one of the largest providers of home health and hospice services as well. Presenting today, we have Mark Tarr, President, CEO; Doug Coltharp, CFO; and Crissy Carlisle from Investor Relations.

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corrected transcript

Encompass Health Corp.	EHC	Bank of America Healthcare	May 11, 2021
	Conference
Company▲	Ticker▲	Event Type▲	Date▲

QUESTION AND ANSWER SECTION

: So, we're just going to jump right into Q&A. You guys, you have put out an 8-K this morning going through kind of the volume trajectory and trends into April. So, maybe that's a good place to start. Do you want to walk us through kind of what you're seeing across each of the businesses?

: Sure, Kevin, and thank you for having us today. We're delighted to be here. So yeah, we released an 8-K. I think the important takeaways is that we are seeing volumes rebound post-pandemic. We're certainly seeing a general willingness from the public to have greater confidence engaging back into the health systems. We have seen the decline in number of COVID patients in our hospitals as well as our home health agencies. And along with that, we're seeing fewer and fewer of our own staff in quarantine.

So, in first quarter, there was that one point where we had 30 hospitals, 30 marketplaces that had been capped due to COVID quarantine-related issues or just isolation of COVID patients in our hospitals. So, that number is down to two this week. So, there has been no capacity issues in our hospitals relative to COVID either on the quarantine side, of our staff or the COVID patients. We've seen nice volume increases downstream from the acute care hospitals that seem to be returning back to a normal rhythm. We've seen surgery schedules start to fill up now, so we're seeing the elective procedures begin to be admitted into our hospitals, primarily the lower extremity joint placements, as well as an uptick in our home health business with elective procedures.

So all in all, we're very positive about the momentum that we see. We feel very good about what we did in Q1. And I'd mentioned at that point that we felt we'd be taking some momentum out of Q1, and you can see the results with our April release on where we are.

: That's great. I guess when you think about your guidance and your expectation for the rest of the year, I mean, how are you thinking about that trajectory as we exit Q4 of this year? Are we back to normal? Do you see pent-up demand at any point during the year?

: We had factored in our guidance at the second half of 2021, we'd be back to normal, that any major impacts from COVID would be primarily in the first half. We do think that there's a chance that there's pent-up demand out there. As we've said on our Q1 call, our patient population being 76-year-olds in our hospitals and 77 on the home health side probably won't be the first group that goes back to select elective procedures, but we do feel this growing confidence with time to expect them to go back in and have those elective procedures.

We also think that you will see skilled nursing facilities and assisted living facilities, their volumes increase with time which ultimately impacts our home health volumes, and there's starting to be some anecdotal comments back from some of the providers in those two spaces that they're starting to see their populations come back after a real low point during the pandemic too. So, we think there's a lot of momentum going into the second half and hopefully will be beyond the pandemic then or at least very low impacts from the pandemic.

: All right. Great. And I guess one of the things that we've kind of been seeing for a while is that there has been this shift of volumes out of the inpatient setting into the outpatient setting. It's been a long-term trend and to some degree, it feels like that [ph] accelerator got (04:45) a boost during COVID. How do you think about the implications on your two main businesses of that shift? And as things return to normal, what does that mean at the end of the day for volumes? Does this volume shift persist longer than people might think? Can you capture more of that on the outpatient side? And then on the inpatient side, are there going to be pressures for longer than people may think?

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corrected transcript

Encompass Health Corp.	EHC	Bank of America Healthcare	May 11, 2021
	Conference
Company▲	Ticker▲	Event Type▲	Date▲

: I think the major shifts in terms of just post-acute settings, the beneficiaries are going to be home health. I think IRF will benefit from that as well. The sector that has seen the largest negative impact, of course, is skilled nursing homes, and a number of those patients that historically maybe have gone there for active rehab program, I think many of those were low acuity patients and in large part they've been lower extremity joint replacements. I think those patients, those that are able to go home and receive that rehabilitation in and receive that rehabilitation in the home setting versus skilled nursing facility, you're going to see that lower acuity take their opportunity to go home and have home health agencies treat those patients.

I think, on the other side of it, there have always been a fair number of stroke patients, there's always been a fair number of fractured hip patients with significant comorbidities that could have benefited from an IRF setting instead of being sent to a skilled nursing facility. So I think both of our sectors have a potential to benefit from changes in the post-acute setting world just given what we saw from the results or lack thereof provided through the nursing.

: Okay. That makes sense. And I guess you guys have been talking about assisted living and nursing home volume coming back and that's helping to boost to some degree the volume in the home health business. I guess it's just a little counterintuitive today to think about that being a tailwind when, in theory, you've been taking some volume out of the nursing home. So how does that net out in your view?

: So I think the types of patients, I think that the nursing homes will - the volumes will start to come back in nursing, but I think what you're going to see is a different kind of patient. And so and I think you're going to see patients that historically are able to receive rehab, active rehab, those short-term patients, short-stay patients in the nursing home, those are the patients that will go home with home health.

I think they're going to have more of a convalescent type of patient in a skilled nursing facility. They will still need to have care provided to them. And so I don't think that you'll see a large number of the types of patients that we're currently treating with our home health there in the assisted living or the skilled nursing facilities. So, I see it being a change due to more of a convalescent patient going to a skilled nursing facility versus home or to an IRF.

: Okay. Yeah. That makes sense. And then the company is in the process of reviewing strategic alternatives for the home health and hospice businesses. How do you think about the potential range of scenarios there? Are you feeling confident there's going to be some sort of transaction on that asset, or is you keeping that asset still a very viable potential outcome?

: So, we announced in December that we were going to be undergoing a strategic alternative review for the home health and hospice. That process is well underway. As we've said, we're evaluating all options, whether that is a partial separation, complete separation, merger, sale. We do not go into the process with any bias in any direction. We are being very - working with our advisers and we're doing a great deal of due diligence on this. As you might imagine, it's a very comprehensive and complex review. Our focus right now is identifying how best to return our shareholders for the long term. And so, we hope to provide and certainly intend to provide an update on our Q2 earnings call and update the investment community on where we are with the process at that point.

: Okay. I guess maybe with that potential transaction out there, it might make sense to kind of step back and say, if you do get rid of that home health asset, how should we be thinking about the RemainCo growth there? You obviously outlined some long-term targets on the IRF side but I just want to make sure that we're thinking about it right if we think about G&A, deleveraging and things like that. I mean, what should we be expecting from the RemainCo if you spin-off the home health business?

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corrected transcript

Encompass Health Corp.	EHC	Bank of America Healthcare	May 11, 2021
	Conference
Company▲	Ticker▲	Event Type▲	Date▲

: Well, as we've announced, we have eight hospitals, eight de novo hospitals that we're bringing on in 2021. We have 12 that we're bringing on 2022. So we'll be using a pretty substantial amount of our free cash flow in funding the growth for the next few years just servicing the growth opportunities that we have in our IRF facilities. And - but we're very excited about the future of that if that were the way that we would go and think that the free cash flow that we have would either help fund the growth or we would certainly consider continuing on with the dividend program or the potential for share buyback.

: I think the segment results that we've been publishing provide a pretty good proxy for a starting point of the IRF business even as a RemainCo. The long-term targets that we put back out with the fourth quarter earnings release and the issuance of guides this year will remain intact for the IRF business because those were specific to the IRF. In terms of the leverage profile, we would continue to target leverage for that business at about 3 times. And with regard to the impact on G&A and any stranded cost we might incur as you separate out the home health and hospice business, it's important to remember that we've maintained a fair degree of autonomy for that business along the way. And so even if there is some friction cost [indiscernible] (11:49) completely offset dollar for dollar the G&A expenses that might have been associated with providing centralized services to home health as you separate it out. Those costs are likely to be absorbed by the expansion in the IRF business which, as Mark just referenced, is accelerating over the next several years. : Yeah. Maybe next just talk a little bit about that organic growth on the IRF side because it is an acceleration [ph] as it's always been - it's looking (12:19) part of your plan to do these de novos but it is a market acceleration the next couple of years. How do you think about the 2023 and beyond opportunity? Is this the new run rate or does this - is this more about Florida opened up and this is a huge opportunity in the near-term but it should normalize to something else longer term? : No, we've put out there for the next five years we think that we'll be between six and 10 new IRFs [ph] per M (12:48). Obviously we're exceeding that in 2022. Florida is playing a role in that. But if I look at the composition of our pipeline today, you've got the 12 to 15 opportunities that we had identified beginning back on the Investor Day, March of 2020 that are related to Florida. But you got an equal or potentially larger pool of identified projects that exist outside the state of Florida. And those cut across both the CON and non-CON space. : Kevin, you've also seen us with a number of announcements. There are also a combination of 100% owned, solely owned, or projects that we're doing with either current partners where we're adding hospitals into that partnership or new partners such as the hospital we opened this year in San Angelo, Texas with Shannon Health. : I think the partnership that we announced last week with Piedmont in Georgia's real exciting. There, we're taking a couple of existing hospitals and turning those into JVs but it's also giving us the opportunity to look at expansion opportunities in a strategically very important market for us and one that has had some challenges in regard to [ph] CO (14:02) and procurement. : And I guess how do you think about the joint venture versus 100% fully owned? Which is a better economic outcome for you guys? : Depends on the market. And really they both kind of wind up in the same place. From pure ROIC perspective, you're going to do better on the www .CallStreet.com • 212-849-4070 • Copyright © 2001-2021 CallStreet 4

corrected transcript

Encompass Health Corp.	EHC	Bank of America Healthcare	May 11, 2021
	Conference
Company▲	Ticker▲	Event Type▲	Date▲

joint venture. To cut the capital that you're putting forward in half [indiscernible] (14:29) venture because we're managing the facility we also get the benefit of a management fee as part of our economics, get more than 50% of the economics and 50% of the capital [indiscernible] (14:44) that drives them. But from a pure growth and EBITDA perspective, we prefer to be 100% owned. We like the blend of those markets. It depends on any number of things. If there is a single dominant acute care system in a market and a lot of times it's going to make sense to go in with a joint venture relationship and derisk your entry. If there are several acute care hospitals who all have roughly equal market shares, we can find it better to be independent and play Switzerland [indiscernible] (15:15).

: And Kevin, there are times when we'll enter a market as a wholly owned entity and then partner it later on as we see strategic opportunities. And the joint venture model, we always like to stress we've been doing that particular model for over 30 years now. Our first partnership is with Vanderbilt in Nashville and we've never had a partnership unwind. So we're very proud of that track record and think it's been a very effective business model for us.

: And specifically an example of what Mark's talking about is with Piedmont. We're taking our existing Newnan hospital, which is a suburb of Atlanta that's been highly successful, and we're folding that into the partnership. Piedmont is actually paying cash to acquire their [indiscernible] (16:03) interest based on a current market valuation. And we're also taking our Henry County facility, which is not yet open, but is very far along in development which we had initially pursued on a solo basis [indiscernible] (16:17). So we've got a lot of flexibility with regard to that, as Mark suggested. We have more than a third of our hospitals operated in JVs. We have more experience in joint venture relationships than anybody else [indiscernible] (16:31). : Yeah. And I guess when we think about all these de novo facilities, oftentimes when companies are [ph] opening - not bringing as many (16:38), there's a decent amount of start-up losses associated with that. I mean, how do you think about that? Should we be forecasting a bigger drag in 2022 or do you think that the long-term CAGRs that you've outlined for IRF growth is more or less a consistent growth target over the next few years? : I think because you're accelerating, you're going to see a couple of years where there's going to be an EBITDA drag. Pointing to $15 million to $20 million of preopening expenses plus EBITDA drag from the ramp-up this year. With 12 openings next year and with the eight that have opened this year still seasoning into 2022, we're going to see an even larger drag in 2022. That's going to start to flip in 2023. And I would assume that by the time we get to the second half of 2023, the EBITDA contribution from the early vintages of this accelerated growth are going to contribute enough EBITDA to overcome start-up and ramp- up costs associated with the next class. : Sure. And it's about between $1 million and $2 million per hospital in preopening costs. : Then you've got about six to nine months before you're EBITDA positive on a four-wall basis. : Okay. And then you guys are still active even though you're going through a strategic review of buying home health and hospice assets. The Frontier deal a reasonably-sized deal. How do you see the M&A outlook there? What's the pipeline look like and how are you thinking about home health versus hospice assets? : So certainly, the M&A pipeline for hospice recovered very quickly. It really became pretty robust in the second half of last year. That was not www .CallStreet.com • 212-849-4070 • Copyright © 2001-2021 CallStreet 5