Encompass Health (NYSE:EHC) held its first-quarter earnings conference call on Friday. Below is the complete transcript from the call.
This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.
Access the full call at https://events.q4inc.com/attendee/918380473
Summary
Encompass Health reported a 9% increase in first quarter revenue and an 11.2% rise in adjusted EBITDA, leading to a raised guidance for 2026.
The company highlighted improvements in patient discharge rates and staff turnover, with RN turnover reaching its lowest since 2012.
Encompass Health is expanding capacity with new hospitals and bed additions, planning to open seven more hospitals and add 100-150 beds to existing facilities this year.
The company is exploring small format hospitals to complement its existing strategy and address occupancy challenges.
Management noted the strong demand for inpatient rehabilitation services and discussed strategic investments in clinical staff development programs.
Guidance for 2026 includes revenue between $6.375 and $6.470 billion, adjusted EBITDA of $1.35 to $1.38 billion, and EPS of $5.89 to $6.11.
The company is maintaining a strong pipeline of joint venture projects and is confident in its ability to secure new partnerships.
Operational efficiency has improved, with premium labor costs declining and a focus on reducing clinical staff turnover.
Encompass Health is seeing favorable results from its admit and appeal strategy for Medicare Advantage patients, aiming to expand this initiative.
Full Transcript
OPERATOR
Good morning everyone and welcome to the Encompass Health first quarter 2026 earnings conference call. At this time I would like to inform all participants that their lines will be in a listen only mode. After the speaker’s remarks, there will be a question and answer period. If you’d like to ask a question during this time, please press star1 on your telephone keypad. You’ll be limited to one question and one follow up question. 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 Mark Miller, Encompass Health’s Chief Investment Relations Officer. Please go ahead.
Mark Miller (Chief Investment Relations Officer)
Thank you Operator and good morning everyone. Thank you for joining Encompass Health’s first quarter 2026 earnings call. Before we begin, if you do not already have a copy, the first quarter earnings release supplemental information and related Form 8K filed with the SEC are available on our website@encompasshealth.com on page two 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 such as guidance and growth projections which include which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties like those relating to regulatory developments as well as volume, bad debt and 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 8K, the Form 10K for the year ended December 31, 2025 and the Form 10Q for the quarter ended March 31, 2026. 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. 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 8K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we would 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 President and Chief Executive Officer Mark Tarr.
Mark Tarr (President and Chief Executive Officer)
Thank you Mark, and good morning everyone. We are pleased with our start to 2026 as first quarter revenue increased 9% and adjusted EBITDA increased 11.2%. Based primarily on our Q1 results, we are raising our guidance for 2026. Doug will review the details in his comments. We achieved these strong results while once again delivering outstanding patient outcomes. Compared to Q1 of 25, our discharge community rate improved 50 basis points to 84.5%, our discharge acute rate improved 30 basis points to 8.6% and our discharge to SNF rate improved 20 basis points to 6.2%. Our performance on each of these quality metrics exceeds the industry average. We continue to invest in our clinical staff by providing professional growth and development programs such as our Career Ladder programs, providing nurses with support to attain certified rehabilitation RN certifications, and offering in house continuing education opportunities. We’ve seen increased participation in and benefits from these development programs. We believe our success in these programs contributes to the continuing improvement in our clinical staff turnover trends. Q1 to 26 annualized RN turnover was 17.8%, down from fiscal year 25’s 20.2%, and annualized therapist turnover was 6.4%, down from last year’s 7.8%. This represents our lowest RN turnover rate since at least 2012 and helped drive a 9.4% decline in premium labor spend compared to Q1 2025. We also believe that our clinical advancement programs and reduced clinical staff turnover further enhance our abilities to serve high acuity medically complex patients and increased patient satisfaction scores. Demand for IRF services remains strong and we are continuing to invest in capacity additions to meet the needs of patients requiring inpatient rehabilitation services. In Q1, we opened a new 49 bed hospital in Irmo, South Carolina, our 11th hospital in that state. We also added 44 beds to existing hospitals. Over the balance of the year. We plan to open seven more hospitals with a total of 340 beds and add an incremental 100 to 150 beds to existing hospitals. We continue to build and maintain an active pipeline of new hospital development projects, both wholly owned and joint ventures while also executing on bed expansion opportunities as dictated by occupancy trends and market dynamics. Our pipeline of announced new hospital projects with opening dates beyond 2026 currently consists of 11 hospitals with 520 beds and we anticipate additional projects including small format hospitals will be announced over the balance of the year. We have previously discussed the innovation of our small format hospital which will serve to facilitate a hub and spoke strategy in large and growing markets. We are confident we will open at least one small format hospital in 2027 with the potential to add more depending on the timing of pending real estate transactions. The small format hospitals will operate as remote locations under the same Medicare provider number as an existing in market hospital and will share certain administrative services with that hospital. Small format hospitals will complement our existing development de novo and bed expansion strategies. This is a particularly active year on the regulatory front with implementation of TEAM beginning on January 1st and the expansion of RCD into Texas effective March 1st and California beginning today. We will work to address these developments as we have the numerous other regulatory challenges which we have successfully navigated in the past through extensive preparation and proactive refinements of our operations. This is not to say that we will be immune from short term transitory impacts to our business. Nonetheless, the fact remains that demand for inpatient rehabilitation services remains considerably underserved and and is growing as the US Population continues to age. We are uniquely positioned to address this important societal need. On April 2nd of this year, CMS released the 2027 IRF proposed rule. The proposed rule included a net market basket update of 2.4%, which we estimate would result in a 2.4% pricing increase for our Medicare patients beginning October 1, 2026. We expect the IRF final rule to be released in late July or early August. With that, I’ll turn it over to Doug.
Doug
Thank you Mark and Good morning everyone. Q1 revenue increased 9% to 1.59 billion and adjusted EBITDA increased 11.2% to 348.8 million. The revenue increase was comprised of 4.3% discharge growth inclusive of 1.6% same store discharge growth and a 3.7% increase in net revenue per discharge. Net revenue per discharge growth benefited both from patient mix and a favorable year over year comparison and in the annual Medicare SSI adjustment, bad Debt expense increased 20 basis points to 2.2%, primarily as a result of writing off claims from 2013 associated with a legacy audit appeal. As a reminder, since the end of Q2 2025, we have closed three IRF units hosted within acute care hospitals as well as our loan SNF unit hosted within one of our freestanding hospitals. Together, these four units were essentially break even in terms of adjusted ebitda. The unit closures impacted total and same store discharge growth in the quarter by approximately 85 basis points. The impact on future period discharge growth will diminish as we consolidate this volume into other proximate hospitals and as we anniversary the unit closure dates. We expect to add 66 beds to our existing hospitals in these markets. We previously announced the closure of our 18 bed unit hosted within our Acute Care Hospital JV partner in Evansville, Indiana. This closure will occur in early 2027 and and represents another market consolidation opportunity. We are in the process of adding 40 beds to our existing freestanding hospital in this market to support the consolidation and future growth. These incremental beds are expected to be operational in late 2026 following the Evansville unit closure, we will have nine remaining hospital and hospital locations with no further closures currently planned. The hospital and hospital format remains a viable strategy to capitalize on market opportunities. Over the next two years we expect to open three additional hospital and hospital locations in existing markets. These three projects are already in our bed addition assumptions and will address needed capacity in these markets. Q1 SWB per FTE increased 3.7% driven in part by the increased participation in our career ladder programs Mark discussed earlier. Greater participation in career ladder programs leads to more of our clinical staff obtaining higher licensing and compensation levels over time. We believe this drives financial and operational benefits primarily in the form of reducing turnover and premium labor costs. Premium labor costs comprised of contract labor and sign on and shift bonuses declined 2.7 million from Q1.25 to 25.9 million. Contract labor FTEs as a percent of total FTEs was 1.2% in Q1 down 10 basis points from Q1.25. Net preopening and ramp up costs were $4 million. We continue to expect net preopening and ramp up cost of 18 to 22 million for the full year 2026. We continue to generate significant free cash flow. Q1 adjusted free cash flow was 194 million. Our primary use of free cash flow can continues to be capacity expansions. During Q1 we repurchased approximately 708,000 shares of our common stock for a total of $71.6 million. We paid a 19 cent per share cash dividend and declared another 19 per share cash dividend that was paid in April. Our leverage and liquidity remained well positioned. Net leverage at quarter end was 1.9 times. Based primarily on our Q1 results, we have raised our 2026 guidance as follows. We now expect net operating revenue of 6.375 to 6.470 billion, adjusted EBITDA of 1.35 to 1.38 billion, and adjusted earnings per share of $5.89 to $6.11. The considerations underlying our guidance can be found on page 11 of the supplemental slides and with that, operator will open the line to Q and A.
OPERATOR
Thank you. If you’d like to ask a question, press Star one on your keypad to leave the queue at any time, press Star two. Once again, press Star one to ask a question. In the interest of time we ask you, please limit yourself to one question and one follow up and we’ll pause for just a moment to allow questioners a chance to enter the queue. And we’ll take our first question from Ann Hines with Mizuho Securities. Please go ahead. Your line is open.
Ann Hines (Equity Analyst)
Morning, Ann. Morning, Ann. Hi, good morning. Yep, thanks for the question. So I know your organic volume of discharge growth was impacted by closures. Do you have a number of what that would have been if you exclude the closures?
Doug
Yeah. As I mentioned in my comments, the impact of the closures was approximately 85 basis points and that would be the same for both total and same store. And again, we would anticipate that that impact will diminish through the course of the year because we’re going to be consolidating some of that volume and in certain instances adding beds to those markets, the existing hospital in those markets. And then we’ll also be anniversarying the closure date. And then just a reminder as well, there’s no impact on ebitda. That was discharges only.
Ann Hines (Equity Analyst)
And then juicy comments around nursing. You have the lowest nursing turnover in 2012, which is very impressive. What do you think is driving that? I’m sure there’s internal factors and external factors like inflation, but any observations you can provide on why you think that’s so low?
Pat Tuhr
Ann, I’m going to ask Pat Tuhr to weigh in on that. So Ann, the a couple things on that we talked about our centralized talent acquisition team before and they have done a great job bringing talent into our organization. Net hiring for the quarter was higher, in fact, than the first two quarters combined last year on the same store basis. And on the turnover front, you know, our ladders are really starting to take hold. So we have about 35% of our nursing staff is now, on clinical ladders, that’s up about 300 basis points from last quarter turnover. If we can get a nurse on the ladder in Q1, the turnover for that group was a little over 2%. It was 2.6% compared to 20.7% for non laddered nurses. So really, our hospital teams are doing a great job engaging our staff to become more organizationally rooted and get into these latter programs and as a result earn more compensation. I would say more broadly, the dynamics around the labor environment can be unpredictable, but we have seen a lot of positive momentum from a hiring and retention standpoint.
Doug
And as Pat noted, having that centralized talent acquisition here in Birmingham frees up the local hospital staff then to do nothing but really focus more on retention. So there’s a lot of other programs involved. Certainly clinical ladders are, are an important part of the tools they’ve added in the last couple years.
OPERATOR
Great. Thank you. Thank you. We’ll take our next question from Matthew Gilmore with KeyBank. Please go ahead. Your line is open.
Matthew Gilmore (Equity Analyst)
Morning, Matt. Hey, thanks for the question. Good morning. Maybe following up on Anne’s line of questioning on the same store volumes, the 2.6 number, if you adjust out the 85 bits, is still still a pretty healthy number, but slightly moderated from the trends you saw in 2025. Curious if there were any other sort of puts and takes to think about and how you’re sort of thinking about same store volume performance for the balance of 2026.
Doug
Yeah. And Matt, we don’t want to make it sound like a litany of excuses, but since you’ve asked for further insight on volume, I think we would cite four factors in the first quarter. The first was the unit closures, which we’ve already covered. The second is occupancy levels, and I’ll go through that in more detail in just a moment. The third is something that you’ve heard from the acute care hospitals reporting, which was it was a relatively light, meaning low severity, flu and respiratory season. And the fourth is some continuation of the MA trends that we experienced in Q4. To dive a little bit deeper on the occupancy story. Our Q1 average occupancy of 78.7% was essentially flat with our record high levels in Q1 of 25. And that was up 200 basis points from Q1 of 24 and up over 500 basis points from Q1 of 23. And that’s reflective of our strong growth and as Mark pointed out, the underlying demand for inpatient rehabilitation services to meet that demand. We’ve obviously been adding beds via de novos and bed additions, and we’ve been seeking opportunities to convert semi private rooms to private rooms. That’s something we’ve talked about quite a bit before. At the end of the first quarter, 58% of our beds were private, and that compares to 41% being private at year end 2020. But in spite of those efforts, occupancy has become a bit of a constraint in certain markets. In Q1, approximately 35% of our hospitals had occupancy in excess of 90%, with that cohort having an average occupancy of 95%. A subset of that group is comprised of relatively recent de novos that have been growing quickly and they crossed the 90% threshold in Q1. More than half of our hospitals within Q1 that had occupancy in excess of 90% are slated for bed additions between 2026 and 2028. And we anticipate adding more of those hospitals to the list as well as introducing small format hospitals per March discussion in certain of those markets. So, you know, we probably fell a little bit behind because the growth was faster than we anticipated. But we’ve got a plan to address that just a little bit more Commentary on the flu in respiratory season Debility for us is a proxy for the severity of the flu season and also for respiratory illness. And as you know, as you’ve heard from, the acute Q126 was relatively light in that regard. Debility is approximately 11% of our patient mix and it only grew by 70 basis points in total for the quarter and actually declined 1.5% on a same store basis. That’s purely a seasonal item and it’s going to fluctuate from year to year. And then again, MA continued to be a bit of a struggle as we moved into the quarter. You know, I’d probably there point to some things on a longer trend. We can talk about, obviously the success that we’re having with regard to the admit and appeal strategy that we began implementing at the end of February. That’s very early on. …
This post was originally published here
