Enhabit (EHAB) Third Quarter 2024 Earnings Conference Call Transcript

Conference Call Overview

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Event Details

The conference call took place on Thursday, November 7, 2024, at 10:00 a.m. Eastern Time.

Participants

• Barb Jacobsmeyer – President and CEO
• Crissy Carlisle – Chief Financial Officer
• Jobie Williams – Vice President of Finance

Opening Remarks and Disclosures

Barb Jacobsmeyer and Crissy Carlisle began the call by referencing the third quarter earnings release, supplemental materials, and Form 8-K, all accessible on the company’s investor website. The Safe Harbor Statements are highlighted in the supplemental information and earnings release, emphasizing that forward-looking statements discussed during the call are subject to risks and uncertainties, many of which are outside the company’s control.

Risks that could cause actual outcomes to differ significantly from projections are outlined in SEC filings, including the annual report on Form 10-K, available online. Listeners are advised not to overly rely on forecasts and guidance, as these reflect current expectations and may change. The company does not commit to updating forward-looking statements.

Non-GAAP financial metrics will be discussed, with reconciliations to GAAP measures provided in the supplemental information and earnings release. Barb then handed the call over to Jobie Williams.

Business Performance Highlights

Barb Jacobsmeyer thanked the team and noted that the third quarter of 2024 marked the fourth consecutive quarter of successful volume growth. She provided updates on the company’s priorities and initiatives aimed at restoring revenue growth and improving profitability. The Hospice segment continues to show progress, with a focus on increasing census and leveraging operational efficiencies. Since January 2024, the average daily census has grown each month.

In Q3, the average daily census rose 6.9% year-over-year. The transition to centralized admission departments has improved response times to referral sources, resulting in higher admissions and a referral conversion rate increase from 74.2% to 77.4%. The cost per day remained steady year-over-year, as increased census offset fixed costs added in 2023.

Business Development and Technology Initiatives

Expansion of business development teams and local strategies has helped balance referral sources, boosting admissions and census. The case management model and technology usage ensure comprehensive patient care throughout hospice stays, with visits in the final days of life exceeding the national average by 53.2%. In the home health segment, the team’s use of “pulse” technology has improved care planning efficiency, reducing Medicare visits per episode from 14.9 to 14.4 compared to the previous year, thereby increasing revenue per visit.

Predictive analytics have enhanced patient care efficiency without compromising outcomes, supporting strong admission growth of 5.6% in the quarter, up from 1.6% last year. Medicare fee-for-service admissions have stabilized at 44% of home health admissions over the past three quarters.

Medicare and Payor Innovation Strategy

Growing Medicare fee-for-service remains a top priority. Although there was a sequential decline in fee-for-service admissions, improvement trends are evident. Admissions fell 2.5% from Q2 to Q3, compared to a 4.7% decline in 2023. Half of the branches saw sequential improvement. The company is deploying best practices from successful branches to others to retain and grow Medicare volume.

Branches that cannot reverse their Medicare decline or deliver acceptable returns are being considered for consolidation or closure. The payor innovation strategy is driving non-Medicare growth, with non-Medicare admissions up 20.1% and total admissions up 5.6% year-over-year. The proportion of non-Medicare business in payor innovation contracts increased from 19% in Q3 2023 to 45% in Q3 2024. Combined Medicare fee-for-service and payor innovation contracts now account for 73% of admissions, up from 63% last year.

Following the termination notice with UnitedHealthcare, the shift toward payor innovation contracts is expected to accelerate. Negotiations with UnitedHealthcare are ongoing, with significant progress made toward acceptable terms. Until an agreement is finalized, the company continues to replace United census.

From August 1 to October, total payor home health census grew by 884, while United patient census declined by 1,022. The team is successfully replacing admissions with payors that value clinical quality. Other payors emphasize timely access to high-quality home health providers to manage costs.

Challenges and Regulatory Updates

Despite positive trends in admissions and payor innovation contracts, the home health segment saw a decline in recertifications. This was mainly due to increased admissions from acute care facilities with shorter stays and ongoing payor mix changes in congregate living settings, where recertification rates are typically higher. Efforts are underway to mitigate these challenges by expanding and diversifying referral sources.

The final home health rule from CMS includes a permanent adjustment cut resulting in a negative 1.8% impact, offset by a positive market basket update of 3.2%. After productivity and dollar loss ratio adjustments, the net result is a 0.5% increase, compared to the proposed negative 1.7%. Continued cuts to home health reimbursement are destabilizing the sector and hindering policy goals of providing equitable, high-quality care to seniors at home. Advocacy efforts with industry associations and congressional allies remain active.

While other healthcare sectors receive positive annual payment updates, home health rates have lagged inflation for three consecutive years, presenting a significant challenge to revenue growth. The company is conducting a comprehensive review of all home health and hospice branches, with plans to consolidate or close eight to ten underperforming branches by early 2025. Additional corrective actions will be taken for branches that remain open but underperform.

Details on branch closures and profit enhancement measures will be shared during the Q4 earnings call. Strategic investments in the de novo strategy continue, complementing organic growth and enabling entry into new markets at low capital cost. Market analysis includes Medicare CAGR, Medicare Advantage penetration, and clinical labor access. Three de novo locations opened this year, with three awaiting CMS approval and nine additional projects underway. EBITDA from de novos opened in 2022 and 2023 is funding 2024 projects.

Impact of Hurricanes

Barb expressed gratitude to teams for their dedication during Hurricanes Helene and Milton. Hurricane Helene affected 29 home health branches, and Milton impacted 21, with 12 branches affected by both. The financial impact will be discussed further during the guidance update. All affected branches have resumed patient care in impacted areas.

Financial Results

Crissy Carlisle reported consolidated net revenue of $253.6 million for Q3, down $4.7 million (1.8%) year-over-year. Adjusted EBITDA was $24.5 million, up $1.3 million (5.6%) year-over-year. The payor innovation strategy continues to drive non-Medicare growth, with non-Medicare admissions up 20.1% and total admissions up 5.6% year-over-year. 45% of non-Medicare visits are now in payor innovation contracts at improved rates.

Despite admission growth, recertifications declined, causing a $9.9 million (4.7%) decrease in home health revenue year-over-year. Steps have been taken to address this issue. A $1 million net increase in home health revenue reserves during the quarter negatively impacted revenue and adjusted EBITDA. Revenue cycle management improvements are ongoing, with expectations for continued improvement in cash collections and reserve rates.

Home health adjusted EBITDA decreased $5.3 million (12.7%) year-over-year, mainly due to lower revenue. Cost per visit increased 1.1% year-to-date, remaining flat compared to the prior year. In the Hospice segment, revenue increased $5.2 million (11%) year-over-year, driven by higher patient days and increased Medicare reimbursement rates. The average daily census grew 6.9% in Q3 compared to the prior year, with 5% same-store growth. Hospice adjusted EBITDA increased $2.3 million (29.9%) year-over-year, primarily due to higher revenue. Cost per day was flat year-over-year, as increased volumes provided operating leverage. Patient volumes are expected to rise without significant staff additions.

General and administrative expenses at the home office decreased $4.3 million year-over-year, representing 8.7% of consolidated revenue, due to lower incentive compensation and cost control measures implemented in late 2023 and throughout 2024. Jobie Williams then discussed the balance sheet.

Balance Sheet and Cash Flow

This year’s focus has been on accelerating cash flow and reducing debt, resulting in a third consecutive quarter of decreased leverage. The leverage ratio at the end of Q3 was 4.8 times. The cash balance benefited by approximately $18 million due to payroll timing. In September, $10 million of debt was paid down, including a voluntary $5 million payment on the revolving credit facility. An additional $5 million voluntary payment was made in October due to strong cash flow.

Available liquidity increased from about $61 million to $94 million, deemed sufficient to support operations and the de novo strategy. Year-to-date through September, free cash flow totaled approximately $59 million, with a conversion rate of 79%. Adjusted free cash flow benefited from working capital changes, mainly around accounts receivable and payroll timing. The full-year free cash flow conversion target remains at about 50%.

Hurricane Impact and Guidance Update

Barb noted that Hurricane Helene affected volumes in late September and into October, resulting in an estimated loss of 125 to 150 admissions in the last week of September, which would have raised Q3 admission growth to 5.9% year-over-year. Hurricane Milton in October caused an additional estimated loss of 425 to 450 admissions. Admission volumes depend on referral sources, patient return to impacted areas, and doctors rescheduling procedures. Overall, the hurricanes are expected to negatively affect Q4 revenue and adjusted EBITDA by about $2 million.

Due to lower recertifications in Q3 and hurricane impacts, guidance for full-year 2024 was revised. Net service revenue is now projected between $1,031,000,000 and $1,046,000,000, with adjusted EBITDA expected between $98 million and $102 million. Free cash flow for 2024 is anticipated to be $47 million to $55 million, normalizing for working capital changes in Q3.

Revenue Growth Strategies and Outlook

Barb outlined plans to reignite revenue growth, highlighting favorable industry trends. About 20% of revenue comes from hospice, and effective October 1, reimbursement rates for this segment increased by roughly 4%, estimated to add $8 million annually based on current census. Investments in the case management model and business development team are expected to drive mid- to high-single digit growth in hospice volumes and revenues in 2025.

For home health, the final rule and industry impact of a 0.5% net payment increase are estimated to boost Medicare revenue by $2 million to $3 million annually. The company is analyzing the specific impact. The payor innovation strategy and shift from lower-paying Medicare Advantage contracts to higher-paying contracts are building a foundation for revenue growth. Considering demographic trends, clinical capacity, and efficient visit management, home health admissions are expected to grow at a mid- to high-single digit rate. Home health revenues are targeted to increase by low- to mid-single digits in 2025.

Efforts to streamline and reduce costs continue, with several profit improvement initiatives implemented in Q3. Restructuring the care management department and regional leadership is expected to yield annual savings of about $3 million, fully realized in 2025. Outsourcing coding functions will transition all branches off the centralized coding platform by the end of Q1 2025, anticipated to save an additional $2 million annually, with $1.5 million realized in 2025. The company is also exploring technology and AI solutions to reduce inefficiencies, with more enhancements expected in 2025.

Active evaluation of branch closures and consolidation aims to improve profitability and margins in 2025. The financial impact of these actions will be summarized during the Q4 earnings call.

Leadership Update

Ryan Solomon has been appointed Chief Financial Officer, bringing over two decades of experience in finance, planning, revenue cycle management, and accounting. He will assume the role on December 9. The company appreciates Crissy Carlisle’s contributions during the transition. The operator then opened the floor for questions.

Q&A Session Highlights

UnitedHealthcare Negotiations and Payor Innovation

Brian Tanquilut from Jefferies asked about the UnitedHealthcare situation. Barb explained that while no agreement has been signed, negotiations are progressing positively. The company continues to operate as if an agreement will not be reached, focusing on shifting capacity to payor innovation contracts and monitoring census daily. The decline in United census has not negatively affected overall census, which has grown since August. The team is actively managing referrals and expects to finalize terms soon.

2025 Outlook and EBITDA Growth

Brian also inquired about the outlook for 2025, referencing mid-single digit home health volume growth, improved hospice rates, CMS payment increases, and payor innovation success. Barb confirmed that these factors, along with corporate overhead savings, should support EBITDA growth next year. The main challenge remains maintaining competitive merit increases for staff, but pricing improvements and G&A savings are expected to offset this.

Branch Closures and Revenue Impact

A. J. Rice from UBS asked about the potential revenue impact of branch closures. Barb responded that details will be provided during the Q4 call, as some closures may involve consolidation, allowing volume to be transferred rather than lost. The impact on admissions and revenue will be clarified once decisions are finalized.

A. J. also asked about cost per visit metrics for 2025. Crissy Carlisle noted that labor is the largest component of service costs, and a 3% wage increase is considered reasonable for recruiting and retaining staff. As volumes grow, operational leverage should offset some costs through productivity improvements.

Business Development in Hospice

Ryan Langston from TD Cowen asked about successful tactics in hospice business development. Barb explained that expanding the business development team and leveraging Trella data to target referral sources have been key. Diversifying referral relationships allows management of both short and long stays, meeting patient needs. Centralized admission departments have improved response times, enhancing the company’s reputation with referral sources.

Ryan also asked about UnitedHealthcare volume recovery if an agreement is reached. Barb indicated that turning referrals back on would be gradual, but the company is prepared to resume accepting United patients as part of census management.

Closing Remarks

Jobie Williams thanked participants and invited further questions via email. The operator concluded the call.

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