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Presentation

Operator: Good morning, everyone, and welcome to Encompass Health Corporation’s fourth quarter 2024 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 speakers’ remarks, there will be a question and answer session. Today’s conference call is being recorded, and if you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health Corporation’s Chief Investor Relations Officer.

Mark Miller: Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health Corporation’s fourth quarter 2024 earnings call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information, and related Form 8-K filed with the SEC are available on our website at 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 this call, we will make forward-looking statements such as guidance and growth projections, 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 8-K, and the Form 10-K for the year ended December 31, 2024, 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 8-K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will 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 Mark Tarr, Encompass Health Corporation’s President and Chief Executive Officer.

Mark Tarr: Thank you, Mark, and good morning, everyone. The fourth quarter was a great finish to a very positive 2024, characterized by strong financial performance, broad-based volume growth, and significant advancement of our strategic positioning. Getting to the highlights for Q4, revenue increased 12.7%, adjusted EBITDA increased 13.6%, adjusted EPS increased 23.2%, and adjusted free cash flow increased 103.7%. Total discharge growth for the quarter was 7.8%, once again exhibiting strength across patient mix, payers, and geographies. Same-store discharge growth was 5.8%. Our primary focus remains on serving the Medicare beneficiary population, which for more than a decade has been the fastest-growing segment of the US population. It is estimated that by 2030, one in five Americans, more than 70 million people, will be aged 65 or older.

Mark Miller: In Q4 of 2023, benefits per FTE decreased 9.6%, so some of this year’s increase is attributable to the lower base. Similar to Q3 of this year, within our group medical, we continue to experience a higher incidence of large dollar claims and an increase in utilization of high-cost specialty drugs. While the incurrence of large dollar claims is sporadic and the frequency of such claims tends to be mean-reverting, we expect group medical prescription drug cost growth to remain elevated at least through the first half of 2025 when we anniversary the increase in utilization of these specialty drugs. For 2024, our benefits expense per FTE increased 12.4%. This increase comes off of two very good years. As in 2022, benefits expense per FTE declined 0.8%, and in 2023, the increase off this lower base was only 0.2%.

Premium labor cost, comprised of contract labor and sign-on and shift bonuses, was $29.7 million in Q4, a decrease from $30.9 million in Q4 2023. During Q4, contract labor FTEs comprised 1.4% of total FTEs. Net preopening and ramp-up costs were $1.3 million in Q4 2024 as compared to an adjusted EBITDA contribution of $1 million in Q4 2023. Our Q4 adjusted EBITDA included approximately $7.7 million in favorable reserve adjustments for workers’ comp and general professional liability insurance. On a full-year basis, 2024 included approximately $13 million in favorable reserve adjustments for these self-insured programs. We continue to generate significant free cash flow. Our Q4 adjusted free cash flow increased 103.7% to $190.5 million, bringing our 2024 full-year total to approximately $690 million, a 31.3% increase from 2023.

Our leverage and liquidity remain very favorable. As Mark cited, net leverage at year-end was 2.2 times. Moving on to guidance, our 2025 guidance includes net operating revenue of $5.8 to $5.9 billion, adjusted EBITDA of $1.16 to $1.20 billion, and adjusted earnings per share of $4.67 to $4.96. The key considerations underlying our guidance can be found on page 11 of the supplemental slides. There are a number of factors to keep in mind as you contemplate quarterly and year-over-year comparisons. Recall that Q1 2024 discharge growth benefited from an extra day due to leap year and because the quarter ended on Easter Sunday. We are anticipating $18 to $22 million of hospital net preopening and ramp-up costs. We expect these costs to be heavily weighted towards the second half of the year because five of our eight hospitals are expected to open between September and year-end.

This estimate also includes costs related to openings in early 2026. 2024 included approximately $13 million in favorable reserve adjustments for workers’ comp and general professional liability insurance. Our second half 2024 adjusted EBITDA included approximately $2.3 million in Oracle Fusion implementation costs and approximately $3.2 million in NCI expense related to the addition of our Augusta Hospital to the Piedmont joint venture. 2025 will include a full-year impact of fees, which we expect to be $5.5 to $6.5 million for Oracle Fusion implementation costs and $6 to $7 million in NCI expense related to the Augusta joint venture. With that, we’ll now open the lines for Q&A. Ladies and gentlemen, at this time, if you would like to ask a question, simply press star and one on your telephone keypad.

Whit Mayo: Once again, that is star and one to ask your question. We’ll take our first question this morning from Whit Mayo at Leerink Partners. Morning, guys. Thank you. My question first just on the MA growth. This has been outpacing other payer classes for some obvious reasons with all the health plans scrutiny, the fewer denials and such. But is the growth you’re seeing more apparent in certain states or certain markets versus others? Is it more broad-based as it trends across the portfolio? I’m just trying to get a sense of, you know, sort of when you unpack the business, where we’re seeing that level of growth come from.

Mark Miller: Yeah. It’s been a little bit of both. We are seeing same-store growth in Medicare Advantage as well, but it’s definitely being aided by our movement into new markets. We continue to believe that there’s a lot of upside within the Medicare Advantage book of business, both because of the enrollment trends and also due to the fact that our admissions to a referral rate remains substantially lower within Medicare Advantage than it does within fee-for-service, and there’s really no reason for that discrepancy to exist. If we just kind of look at some of the discharge growth patterns, you know, for the quarter, Medicare Advantage was up 14.7%, up 12% on a year-to-date basis. The same-store growth within that for the full year of 2024 was 9.9%, and we’re looking at a five-year CAGR in the Medicare Advantage discharge growth of 11.6%.

So we really do feel like we’re making substantial inroads there. As you know, it’s been a multiyear process for us in terms of making sure that we are loaded with data share out and our value proposition. So that’s what we’d lead with whenever we go in and meet with the plans and make sure that they’re aware of the outcomes we’re able to get in our facility. So we continue to refine that process and would expect to continue to see growth in Medicare Advantage going forward.

Mark Tarr: I think it is also important to note that it doesn’t mean that Medicare fee-for-service is not growing. Again, Medicare discharges in the quarter were up 6.8% year-to-date, which is the full year of 2024. 8.6% same-store for 2024, up 5.7%. And the five-year CAGR there is a little bit lower, but still impressive at 3.4%.

Whit Mayo: No. That’s helpful. Just my follow-up on free cash flow and priorities here, I mean, the cash flow’s hit an inflection the last two years with, presumably, a lot of the earnings from the prior year investments now overcoming the incremental capital investments which you’ve made, which is nice. But I just want to hear any views on buybacks as a larger priority going forward. And, Doug, if you could just maybe comment on total CapEx expectations for the year. I don’t know if I caught that.

Mark Miller: Yeah. So, CapEx is gonna be up this year. Probably gonna be up on the order of about $100 million. Most of that is in growth-related CapEx, specifically related to our continued capacity expansion. Gonna be a big year. We expect both this year and next year with regard to that addition, which, as you know, is our highest returning form of capital deployment. So we’re excited about the opportunities to bring more beds on. And we’ve also got an increased spend in de novo activity. Some of that is related to the fact that we’re opening one additional hospital this year, but it also gets to the timing of the 2026 openings. So that number will be up, and it’s probably approaching what we think will be a run rate for the next several years.

With regard to deploying cash flow beyond that, we did increase and begin utilizing the share repurchase authorization midyear of 2024. And we would expect continued and probably more consistent utilization of that program with excess free cash flow going forward. And we do have the cash dividend that gets adjusted from time to time at the discretion of the board. It’s not specifically policy or formula-driven. But I think once you move beyond our spend on growth-related discretionary capital expenditures, the most likely utilization of excess free cash flow, given where we sit from a leverage perspective, is going to continue to be shareholder distributions.

Matthew Gilmore: Okay. Guys. Next, we’ll hear from the line of Matthew Gilmore at KeyBanc. Morning, Matt. Hello, Matt.

Mark Tarr: Hey. Good morning. Hey. I wanted to ask about the pace of the bed additions in 2025. It seems like that’s accelerated, you know, a little bit this year compared to last year, and I appreciate Mark’s comments at the top of the call about the supply and demand imbalance. Should we think about 2025 in terms of the pacing more of just, you know, a timing issue? It happens to be a good year, or is there anything more to discuss in terms of your ability to move projects forward and meet the demand and maybe even accelerate the pace of bed additions over time?

Mark Miller: And that so we’re adding one more hospital in 2025 than we did last year. We have seven de novos and one satellite coming on this year. We’re also adding 100 beds. So both of those, it’s one additional hospital. It’s a higher number of total bed additions too. You’re just gonna see some fluctuations from one year to the next, and I think we’ve done a really nice job in showing our ability to meet our growth target in terms of bringing on new hospitals. As we said, we are bringing on five in the state of Florida this year, which, you know, it certainly has some benefit when we see that market density in terms of staffing and having experienced members of senior management teams maybe float from one hospital over to a new hospital to help that startup process. But, you know, we feel pretty good about the pace that we’re bringing them on, and, yes, this year is a little bit higher pace than what we had last year.

Mark Tarr: And, Matt, if I could elaborate on that, we have more hospitals today that are candidates for bed expansions than we’ve had in recent history. And that is largely due to the fact that we are coming off of two years, really three years, of very strong total discharge growth. If you roll all the way back to 2022, up 6.8%, 2023 up 8.7%, and 2024 up 8.3%. And as a result, our occupancy level has been increasing. Now some of that is also attributable to the fact that we continue to push the percentage of our overall portfolio comprised of private beds up, but this has started to create more opportunities, more hospitals that are on our list for future period bed expansions. Our ability to move quickly on those two primary constraints or limitations.

One is a significant number of those bed expansion opportunities are subject to CON permits. That CON hurdle is a lot lower than it is for a new hospital, but it still exists and it takes some time to navigate. And the second, quite frankly, is that the number of projects that is on our plate somewhat limited the capacity within our design and construction department. We’re adding resources there. This is a high-class problem to have. But that’s why some of what you’re starting to see in this year’s number and in what we’re anticipating for 2026 as well.

Matthew Gilmore: That’s great. And then, you know, Doug, maybe asking about the SWB per assumption in the guide. I know you’ve got a little bit, I think, of a deceleration in growth down to 3.5% at the midpoint. Was hoping maybe you could unpack that a little bit. It sounds like you’ve got a really easy comp on the benefit side, but is there anything you can call out in terms of what you’re seeing in terms of other factors, whether that’s wage growth or turnover, that’s helping to explain that modest deceleration.

Mark Miller: I think all of it gets tossed in. And so that SWB inflation range that we have, 3.25% to 3.75%, is on total SWB. So that also includes those premium labor categories. And we’re making an assumption that our spend in those premium labor categories will still stay relatively constant in terms of total dollars, so that’s gonna give us a point of leverage in the inflation rate as well. Your comment on benefits is appropriate. As I noted in my comments just a moment ago, we do expect that group medical inflation continues through the first half of this year, but then you’re gonna anniversary it in the second half of the year. And we do expect to see some benefits related to lower turnover rates. So all of that kind of in the mix. I will note that the range is just slightly higher than what I had alluded to as a potential range in our Q3 call. But it’s really just based on the trends that we witnessed in Q4 that are carrying into 2025.

AJ Rice: Alright. Thanks a lot. Our next question today comes from AJ Rice with UBS. Please go ahead.

Mark Tarr: Hello, AJ.

AJ Rice: Hi, everybody. First of all, maybe just to ask about your Laura has been a great opportunity for you. How has the are you the primary person adding or IRF beds in that statehouse? Overall market look now? Is it run any risk of being somewhat overbated that people overshot the target, or do you feel like that’s wrong to other markets, the best for thousand and so forth? They’re still in a good spot there? Yeah. Actually, maybe how much of your overall, you know, once you get these all up and running, will be part of the base, if I could ask?

Mark Tarr: So let me take your first question, AJ. It’s Mark. So we feel good about our growth in Florida. We are the we’ve taken the lead, have been in the lead in terms of adding beds there. That was by design. When we stated we had fifteen marketplaces that we were prioritizing for future growth, we went out and bought the real estate. And we’re first to market, which was an important part of our strategy in the state of Florida. As we said, we already had twelve hospitals that were legacy hospitals there. So we knew exactly what markets we wanted to go into and where we would add beds to. So it’s been very intentional, our accelerated pace, in the state of Florida. As you know, the demographics for the state of Florida play into our line of business.

They’re continuing to be strong growth in the markets that we’re entering, and so we don’t see that state as being overburdened. If anything, as I noted, we have additional opportunities in the state of Florida, whether that’s through new hospitals or adding beds to our existing hospitals. Yeah. And, AJ, maybe just

Mark Miller: piggyback on that a little bit. First of all, because the CON was in place until 2021, there was an artificial cap on the number of IRF beds in the state of Florida. And as the population continued to grow even during that period preceding 2021, particularly amongst the senior population, the supply-demand gap really opened up pretty significantly. So they were starting in a very significant deficit. As Mark noted in his comments as well, and I think it’s important to go back to that 2020 time frame, obviously, when the pandemic hit, most operators in the business kind of lost visibility into the near-term operating trends of their business. But as we’ve recounted previously, we made the decision in April of 2020, even in the midst of all of that, to begin pushing forward with the accelerated de novo program and doing things like purchasing land in the state of Florida for de novos because we had identified those markets previously.

That had the effect of creating a first-mover advantage and, frankly, made a lot of our competitors shy away from adding to capacity because they weren’t in a position to do so. The final thing that I would add is if you just look at the current rate environment versus what it was several years ago, for those IRF operators that are owned by private equity sponsors that have been heavily reliant on leveraged transactions with REIT financing, economics have just become a lot less palatable. If you combine elevated construction costs with higher cap rate costs embedded in those leases, it’s just difficult, particularly without enjoying the same economies of scale that we do, to make the numbers work.

AJ Rice: Okay. Great. Maybe just my follow-up. Obviously, there’s a lot of focus across healthcare services on the new administration, the new Congress, and what they might do. It seems like you’re fairly insulated from the laundry list of Medicaid reforms and so forth. But are there any areas where you’re watching that are a particular area of focus, and then as well on the you mentioned prior authorization. There’s been some chatter about that. Are you advocating for some relief relative to MA and other health plans on prior authorizations, and what’s the prospects for that?

Mark Tarr: So as you know, there’s not a lot of specifics coming out relative to policy from DC right now until the confirmation of an HHS and CMS are Junior and Dr. Oz. But we’ve spent some time up there. We’ve had a chance to meet some of the incoming senior staffers for CMS and otherwise, and we made the point of wanting to make sure that there is not regulatory overreach and those are unnecessary expenditures and have no positive benefits for the patients. And so we’re watching it closely. We’re not hearing anything of concern right now that are specific policy changes or regulatory changes facing the IRF industry, but we will absolutely remain active and involved in DC and want to be on the front edge of meeting the new incoming leaders of CMS.

Mark Miller: And, AJ, I would say that with regard to conversations that we have with CMS and then also with our elected representatives on the subject of Medicare Advantage, our two primary focus points are improvements in pre-authorization processes and philosophies. And then the second is, as we’ve discussed before, right now, there is no requirement for Medicare Advantage Plans to include IRFs in their definition of network adequacy. And we think that that is simply an oversight that should be corrected.

Andrew Mok: Okay. Thanks. Andrew Mok with Barclays. You have our next question. Hello there, Andrew. Morning, Andrew.

Andrew Mok: Hi. Good morning. You noted that group medical prescription drug costs are expected to continue to increase through the first half of 2025 before you anniversary some of the acceleration. Can you give us a bit more detail on the trends you’re seeing there? Are there any specific drugs or categories that you would call out as driving the increase in the group medical line? Thanks.

Mark Miller: Yeah. There are three. So the two largest, there’ll be no surprise to anybody on this call. One is certainly GLP-1. And it is just getting even though we limit that to those that are at risk or have diabetes, physicians are prescribing it much more widely as even somewhat of a prophylactic. So we’re seeing increased utilization there, and it remains expensive. We’re hopeful that given the number of entrants into the GLP-1 category that over time, the cost of that drug will decrease. Right now, what we’re counting on is anniversarying the stepped-up usage in the second half of the year. The second is there are a, and this is a good thing, but there are a number of notable enhanced cancer-related drugs that we’re seeing increased utilization of.

Those are expensive as well. I’d make similar comments with regard to cost trend and utilization trend there. And then the third, and I’m not sure that I could pronounce the name even if I wanted to, is there is one drug that’s specifically related to eyesight and eye health that has popped up a little bit more frequently.

Andrew Mok: Got it. That’s helpful. And if I could just follow-up, I think the total net benefit from provider taxes this year totaled $16 million, I think, for the year. How should we be thinking about this for 2025? Is there an explicit assumption around these items in guidance? And is that benefit in 2024 largely expected to continue? Any color there would be helpful.

Mark Miller: Sure. So the EBITDA impact from net provider tax, so the revenue less the associated expense for 2024, was $15.4 million. As we’ve noted previously, approximately $5 million of that was related to prior periods, and so there really isn’t any reason to expect that portion would repeat itself. The balance then of about $10 million, as we’ve talked about before, has a low level of predictability to it. And to reinforce that point, we just point to the net impact from provider taxes in the two prior years. In 2023, the net provider tax impact to EBITDA was a decrease of $800,000, and in 2022, it was an increase of $2 million. So, you know, this feels a little bit like an outlier. And we’ll just have to wait to see. In terms of the 2025 guidance, we haven’t included a point estimate for provider taxes within that guidance range.

It is highly variable. And wherever provider taxes wind up falling in 2025 will obviously be a determinant as to where we land within that $40 million EBITDA guidance range.

Joanna Sylvia Gajuk: Great. Thanks for both the call. We’ll hear next today from the line of Joanna Sylvia Gajuk at Bank of America. Please go ahead. Your line is open.

Joanna Sylvia Gajuk: Hi. Yes. Hi. How are you? Thanks so much for taking the question. So I guess, first, to follow-up on the maintenance CapEx. In the slides, you talk about major renovation projects and programmatic hospital asset replacement. So a little bit closer if there’s something you do a little bit here differently than prior?

Mark Miller: Yeah. So just we’ve got more hospitals now. The hospitals utilize a lot of the same equipment, and we have programs that will, in order to leverage our scale, buy that equipment and replace it on a regular basis, sometimes in cycles across the hospitals and sometimes more uniformly. The spend specifically in that programmatic category for 2025 relates to bed replacement. About every five to seven years, all of the beds need to be replaced in order to ensure safety and comfort for our patients. Other categories that will occasionally fall into that, wheelchairs or pretty significant spend. Sometimes the machinery that we utilize to dispense narcotics, not narcotics, drugs, prescription drugs, is a better term, will fall into that category as well. So we just we think it’s really important that we maintain all facets of our hospitals.

Joanna Sylvia Gajuk: Okay. That’s helpful. And if I may, so the adjusted free cash flow came in, call it, $100 million, so better than expected in your prior guidance for the full year. So what drove it? Was there some sort of pull forward from 2025? Because now I guess your guidance for 2025 kind of calls for a decline from 2024 because 2024 came in so much better.

Mark Miller: Yeah. So it’s really two things. One is EBITDA came in better than we’ve expected. The second is the favorable result in working capital was better than we expected, and some of that will definitely be a pull forward because some of that relates to the increase in claims activity under our group medical where we’re seeing a liability and near-term liability increase, and it doesn’t translate into cash until you get into subsequent periods.

Ann Hynes: Great. Thank you so much. Ann Hynes at Mizuho. Please go ahead. You have our next question.

Mark Tarr: Hello there, Ann. Good morning, Ann.

Ann Hynes: Hi. How are you? Thanks. So I know post the pandemic, Encompass Health Corporation has really benefited from gaining market share from nursing homes. What is that like now? Is that still a tailwind for the company?

Mark Tarr: Yeah. Yes. And it is. I mean, we I think we, along with the industry as itself, distinguished ourselves from the nursing homes and the differences that, in terms of patients that could be treated, we continue to see increasing numbers of stroke and other neurological types of patients that are typically higher acuity in our hospitals. And we think the outcomes that we are able to get versus what previous referral sources saw from nursing homes that has had some stickiness to it in terms of changing referral patterns in some of our marketplaces.

Mark Miller: I think there’s no perfect way to measure market share gains from the SNF industry, but I’d point to a couple of things. One is we’ve now had ten straight quarters where our same-store discharge growth was north of 4%. And that is growing faster than the underlying demographic. It means that we are taking market share from someplace. The patients that we’re treating are not patients that were eligible for discharge directly home. So the most likely source is either from SNFs or other IRFs. But I think that’s a pretty good indication of the fact that we are gaining market share.

Ann Hynes: Yeah. Great. Thank you. And then just on the floor, like, Florida’s an interesting state just because they were able to lift the CON laws. Is there any other state that is on the company’s radar that would be similar to Florida? And if not, do you have that type of potential in other states that you currently operate like Florida?

Mark Tarr: Yeah. So and there are other states that we have on our radar screen. Clearly, we have a strong presence in the state of South Carolina, and I only have one in the state of North Carolina, but if you look at the growth in the state of North Carolina, it would be a very attractive state for us to have a greater presence than what we currently have.

Mark Miller: And particularly when you consider the fact that South Carolina and North Carolina are really those are destination states for retiring seniors right now. And they are considerably underbedded. Thank you.

Scott Fidel: Our next will come from Scott Fidel at Stephens. Hey, good morning, Scott. Hello, Scott.

Scott Fidel: Sacha, on the applied EBITDA margins in the guide. At the midpoint, it would imply a modest around thirty basis point contraction year over year, obviously, a very strong year in 2024. You know, just to, I guess, sort of put a fine pen on that, sort of, what would you say sort of be the drivers of that and then more importantly, maybe some of the upside, you know, opportunities that you see tangible to potentially ultimately get margins landing at stable or even improving year over year in 2025?

Mark Miller: Yeah. So a number of things. One is we continue to believe that EBITDA dollars are better than EBITDA margin. It’s tough to pay the bills with a margin. Some considerations in terms of a comparison from 2024 to 2025. I mentioned in my comments, 2024 included $13 million in favorable self-insurance accrual adjustments. As we just mentioned, when we were responding to Andrew’s question, 2024 benefited from $15.4 million in provider tax impact, including $5 million of out-of-period. If you look at the startup and ramp-up costs associated with new hospitals, the midpoint of the range is about $5 million higher in 2025 than it was in 2024, owing both to the fact that five of our hospitals in 2025 will open between September and the end of the year, and right now, we’re targeting three new hospitals opening up in the first quarter of 2026.

And then the delta on a year-over-year basis in terms of the G&A expense and NCI impact of the Piedmont joint venture, specifically our contribution of the Augusta Hospital to that. Infusion implementation cost is $7 million. So I think if I do the math right on all of those items, including just, say, the $5 million out of period on provider tax impact, right there, you’ve got about $30 million of EBITDA that needs to be overcome moving from 2024 into 2025.

Scott Fidel: Okay. That’s helpful. And then for my follow-up question, especially given just all of the development activity playing out, it would be great if you could give us an update just on sort of, you know, construction, sort of inflation dynamics, obviously, that’s been swinging around. And then related to that, just curious, you know, whether, you know, as you sort of think about the prefab models that you spend a lot of time putting into place. Have you been able to do any type of analysis around, you know, Trump’s tariffs, and are there any sort of, you know, I guess, elements of those prefabs that may come from, you know, international sources, that could be affected by the tariffs and have alternative, you know, options in the US. Just curious, I’m sure, what work you’ve been doing or if there is any team in any effect on the tariff side. Thanks.

Mark Miller: Yeah. Absolutely. I’ll try to take those in order. One is construction new construction costs continue to stabilize right around $1.2 million per bed for new hospitals, somewhat lower, closer to $800,000 a bed for bed additions, but depends on the specific project. And we’re not seeing any overt inflationary pressures on that cost right now. If anything, we think we may be seeing some green shoots in terms of maybe some relief on that. But too early to call the ball. The second is we remain very pleased with our prefabrication effort. Mark mentioned earlier that in the fourth quarter, we brought on our first fully prefabricated hospital, that 61-bed facility in Houston, Texas. Our second fully prefabricated hospital is getting ready to open any day right now in Athens, Georgia.

So that’ll continue to be part of our construction strategy along with hospitals that are utilizing components of prefab everywhere from head walls to bathrooms to the Uber modules, which are groups of rooms that are attached by a corridor. The cost for the prefabrication right now from a per bed perspective is essentially right on top of conventional construction as well. The primary benefit that we’re seeing today is on the full prefab, we’re getting about a 25% enhancement in terms of the speed to market, which is not insignificant. With regard to the threat of tariffs in the near term, it’s very low for us in terms of design and construction. There could be some impact if you impose those upon Mexico in terms of our concrete cost, but that’s a very small component of our overall construction cost.

With regard to steel, we use predominantly US-sourced steel. And much of it is recycled specialty steel that comes out of the US. We did a broader analysis of our potential exposure to tariffs coming out of Mexico, Canada, and China. Around overall supplies, it’s difficult to say what that might look like right now because we don’t know how comprehensive it would be. You should also bear in mind that in prior periods when tariffs have been invoked, typically, medical supplies have been exempted from those tariffs. Having said that, we do not believe that there’s a lot of near-term risk to the imposition of any tariffs. Certainly something we’ll continue to monitor.

Pito Chickering: Great details. Thank you. Our next question comes from Pito Chickering at Deutsche Bank. Morning, Pito. Hello, Pito.

Pito Chickering: Hi. Thanks for taking my questions. I guess, looking after 2024, you know, with provider taxes, you know, the medical fees, you know, and then looking at 2025 with the headwinds, the startup losses, and then the Oracle and PUD and implementation, just want to make sure that we’re modeling the year right. You know, looking at quarterly EBITDA seasonality, is 2025 different than a normal year? If so, how should we think about EBITDA in the first half of the year versus the back half of the year? And any thoughts on LEAP year and the Oracle Fusion on the first quarter?

Mark Miller: Yeah. So a couple of things. One is in terms of our assumptions regarding specifically group medical expense, and Oracle and Oracle Fusion implementation and the NCI impact from the contribution of Augusta to the Piedmont Joint Venture, you had those second-half expenses in 2024. So it’s really going to be a more pronounced impact on EBITDA from a comparison perspective in 2025. The second thing to keep in mind is one that I just alluded to with regard to the pace of the preopening and ramp-up cost. And that is that it’s gonna be skewed more heavily towards the back half of the year because of the timing of the openings in 2025 and 2026. And then the other thing I’d ask you to remember is that we had that spike in bad debt expense in Q2 because of the timing of the TPE review by Palmetto, which subsequently then reversed itself in the second half of the year.

And, look, there’s a chance just based on what we’ve seen in terms of the historical review pattern from Palmetto over the last couple of years, that you see a similar spike in Q2 of this year, but there’s no real way for us to determine that. I think those are the primary pacing considerations I can think of.

Pito Chickering: Great. And then a follow-up to Whit’s question on leverage. Is there a minimum leverage ratio where you deploy all $1.3 million? And looking at your EBITDA growth and the cash flow generation, it just seems like a minimum leverage ratio would be helpful for investors to just calculate how much cash could be returned via share repo. Thank you.

Mark Miller: Yeah. It’s a fair question. I wouldn’t draw a hard line there, but I would say that certainly, if we see the leverage drop below two times, it’s feeling like there’s a lot of inefficiency in our cost of capital.

Pito Chickering: Alright. It’s a two times is your minimum where we’ll model all that going into SharePoint going forward.

Mark Miller: Nope. Minimal with your term, not my term. As I said, I’m not putting a hard line there. I would make the observation. If we fall below two times, then we’re gonna be looking hard at what I would view as an unnecessary inefficiency in our weighted average cost of capital.

Pito Chickering: Alright. Fair enough. Thanks so much, guys.

Benjamin Hendrix: Our next question comes from Ben Hendrix at RBC Capital Markets. Good morning, Ben.

Benjamin Hendrix: Good morning, guys. Thank you very much. Just wondering if we could get a quick update on the managed care contracting environment. Rate assumptions and guidance seem consistent with last year, and I know you guys have historically maintained a favorable spread between MA and Medicare rates, but with the ongoing margin pressure among some payers, just anything changing in your negotiations and separately any changes in how payers are assessing patient eligibility for IRF care?

Mark Miller: Yeah. I would say the answer there is not nothing new. So we continue to do, I think, well with regard to our managed care, including Medicare Advantage contract negotiations. The rates that we’re seeing in terms of the update are pretty consistent with what we’ve seen in recent history, which is somewhere kind of call it the mid to high 2%. We’re not seeing any pressure against those based on some of the conditions that are facing Medicare Advantage plans. And some of that just relates to the fact that when they were seeing 6 and 8% increases, they weren’t passing those onto us. So it seems only appropriate. They appear to recognize this as well that they not try to reverse that trend when they’re seeing more pressures.

I think they also understand that we provide great value. And finally, we continue to make progress, albeit it’s more marginal as just given the substantial improvement in our overall base on converting more of our per diem MA contracts to an episodic basis. We’ve got a really good team that oversees our Medicare Advantage and our managed care contracting, and they continue to make good progress.

Benjamin Hendrix: Appreciate that. And just as a quick follow-up to something you mentioned in prepared remarks. I think you noted some misconceptions among discharge planners around IRF versus SNF care. And I was wondering if you’re entering new markets ramping up de novos, what is involved in that education process, and how long does it take to break that muscle memory among the discharge planners and instill the value proposition of IRF versus SNF care?

Mark Tarr: Yep. That’s a great question. So, yeah, that is a priority. Whenever we enter a new market, we’ll have our nurse liaisons. We’ll have our administrative staff. We’ll have our medical director. Whoever we can get out, whoever will listen to what we describe goes on in our hospital an IRF at a SNF, especially in a marketplace that has no other IRF facilities in there. Just talking about the differences in the intensity of care, the types of patients, the length of stay, what typically happens at the time of discharge, that can vary from market to market, but I think we’ve gotten really refined on that. I think that has proven and the ramp-up of the de novos. You’ve seen us bring on the last several years, but what you identified is a key priority as we go into new marketplaces with both the newly hired staff that are there as well as existing staff that may come from that region or the home office going in to educate the marketplace. And that education process

Mark Miller: starts as early as six months prior to projected opening. You know, it’s what we frequently encounter is some of the confusion is related to as simple a concept as the naming convention. And, unfortunately, there’s no prohibition within the Medicare regulations from a skilled nursing facility calling itself a rehabilitation center. Can’t call themselves a rehabilitation hospital because you have to be licensed as an acute care hospital, which all of our IRFs are, in order to be able to use that naming convention. But it’s just things like that, and we’ve demonstrated great success at being able to overcome those challenges.

Mark Tarr: Part of that education, if we can get people over to tour the hospital, they’ll see a big difference between a rehab hospital and a nursing home.

Brian Tanquilut: Thank you very much. Our next question will come from Brian Tanquilut at Jefferies. Hey, Brian. Good morning, Brian.

Brian Tanquilut: Hey. Good morning, guys, and thanks for squeezing me in. Hey, Doug. Maybe just one question for me. As I think about the vital carrying ruling that came out, how should we be thinking about, you know, the benefits to you guys or how you’d be recognizing that ruling on the PNL going forward?

Mark Miller: Yeah. So first of all, great outcome for us. We’re just really pleased with the judge’s ruling on that. This is ongoing litigation, so we’re not really able to comment further. And it’s still playing out, so we can’t give you with any specificity what it’s ultimately going to look like. But as it does and as it proceeds, and we are able to share more with you, we will do so in a timely manner.

Brian Tanquilut: Alright. Got it. Thank you.

Jared Haase: And our next question will come from Jared Haase at William Blair. Hey. Good morning, Jared. Hi, Jared.

Jared Haase: Good morning. And thanks for squeezing me in as well. I’ll stick to one also. Just wanted to follow-up on the comments you made about career ladders or career progression for the workforce. I thought that sounded interesting, and I was just curious. Like, what percent of the workforce today would you say is taking advantage of the progression opportunities that you offer? And then you mentioned, you know, that supporting better turnover. I was wondering if there’s any way to, I guess, quantify or unpack what you see, excuse me, what you see in terms of turnover among those clinicians that pursue additional certifications versus those that don’t.

Mark Tarr: You know, Jared, I don’t know that we have an exact number for you in terms of the participation level and the subsequent impact on our turnover. If you can if you just take our turnover for RNs, for 2024, we had taken that down to 20.4% for RNs, and then therapist turnover was 7.7%. So both of those are on the downturn for us. Certainly, at or below pre-pandemic levels, specifically the RN turnover rate, this improvement and in retention, it’s playing in a number of different ways. There’s not one particular approach, I think, to addressing retention, but clinicians appreciate having the opportunity to and providing those opportunities to them through clinical ladders and exposure to different experiences that has proven itself over the years to be a really effective way to retain them.

And if they’re interested in working in a rehabilitation hospital, there’s a strong chance they’re gonna be in Encompass. And whether that’s a therapist or nurses, we put a lot of effort and thought in terms of the educational opportunities that we provide for these staff members.

Mark Miller: Jared, you’ve given us something that we now need to add to our proper materials because as I’m sitting here, I know that our HR team tracks both the percentage of our clinicians, nurses, and therapists who participate in these programs. And I also know that they’re tracking the change in turnover within those groups. I simply don’t have those at our disposal, but we won’t be caught off guard on that question in future periods. So thank you for asking. And I do want to note that when you consider our hospital staffing, just a reminder, that about 36% of our overall FTEs in a hospital are gonna be comprised of nursing FTEs, and about 20% are therapy FTEs. So again, great question, and we will be better prepared to answer that with specificity in future periods.

Jared Haase: Thanks for giving us another metric, Jared.

Mark Tarr: Of course. Yeah. Happy to give you more work here on a Friday. Appreciate all the context.

Mark Miller: Thank you. You’re welcome.

Operator: And this does conclude today’s Q&A session. Mister Mark Miller, I’m pleased to turn it back to you, sir, for any additional or closing remarks you have.

Mark Miller: Thank you. If anyone has additional questions, please call me at 205-970-5860. Thank you again for joining today’s call.

Operator: Ladies and gentlemen, this does conclude today’s teleconference, and we do thank you all for your participation. You may now disconnect your lines.