Encompass Health Corporation (EHC) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary reflects strong financial performance, with improvements in turnover rates and strategic initiatives such as capacity expansion and partnerships with Palantir. The Q&A section highlights proactive strategies to manage occupancy and Medicare trends, though some uncertainty remains regarding Medicare proposals. The company’s commitment to share buybacks and joint ventures further supports a positive outlook. Despite some vague responses, the overall sentiment suggests a positive market reaction, likely resulting in a stock price increase of 2% to 8% over the next two weeks.
Key Financial Performance
Revenue Q1 revenue increased 9% to $1.59 billion. The increase was driven by 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 from patient mix and a favorable year-over-year comparison in the annual Medicare SSI adjustment.
Adjusted EBITDA Adjusted EBITDA increased 11.2% to $348.8 million. This growth reflects operational efficiencies and revenue growth.
Bad Debt Expense Bad debt expense increased 20 basis points to 2.2%, primarily due to writing off claims from 2013 associated with the legacy audit appeal.
Premium Labor Costs Premium labor costs declined $2.7 million from Q1 2025 to $25.9 million. This was driven by reduced contract labor and sign-on and shift bonuses. Contract labor FTEs as a percent of total FTEs decreased by 10 basis points to 1.2%.
SWB per FTE SWB per FTE increased 3.7%, driven by increased participation in career ladder programs, which led to higher licensing and compensation levels for clinical staff.
Adjusted Free Cash Flow Adjusted free cash flow was $194 million, reflecting strong cash generation during the quarter.
RN Turnover Rate Annualized RN turnover rate decreased to 17.8% from 20.2% in fiscal year 2025, representing the lowest rate since at least 2012. This improvement was attributed to clinical advancement programs and reduced clinical staff turnover.
Therapist Turnover Rate Annualized therapist turnover rate decreased to 6.4% from 7.8% in fiscal year 2025, driven by similar factors as the RN turnover rate.
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Operating Highlights
New Hospital Openings: Opened a new 49-bed hospital in Irma, South Carolina, and added 44 beds to existing hospitals. Plans to open 7 more hospitals with a total of 340 beds and add 100-150 beds to existing hospitals in 2026.
Small-Format Hospitals: Plans to open at least one small-format hospital in 2027, with potential for more depending on real estate transactions. These hospitals will operate as remote locations under the same Medicare provider number as an existing hospital.
Market Expansion: Pipeline includes 11 new hospital projects with 520 beds beyond 2026. Plans to announce additional projects, including small-format hospitals, over the year.
Clinical Staff Turnover: RN turnover reduced to 17.8% (from 20.2% in 2025) and therapist turnover reduced to 6.4% (from 7.8% in 2025). Lowest RN turnover rate since 2012.
Premium Labor Costs: Premium labor costs declined by 9.4% compared to Q1 2025, with contract labor FTEs reduced to 1.2% of total FTEs.
Free Cash Flow: Generated $194 million in adjusted free cash flow in Q1 2026, primarily used for capacity expansions.
Regulatory Adaptation: Addressing regulatory changes such as TEAM implementation and RCD expansion into Texas and California. Preparing for CMS's 2027 IRF proposed rule with a 2.4% pricing increase for Medicare patients.
Market Consolidation: Closed 3 IRF units and 1 SNF unit, consolidating volumes into other hospitals. Plans to close an 18-bed unit in Evansville, Indiana, in 2027 and add 40 beds to an existing hospital in the same market.
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Risk or Challenges
Regulatory Developments: The company faces challenges from regulatory changes, including the implementation of TEAM and the expansion of RCD into Texas and California. These changes may cause short-term transitory impacts on operations.
Bad Debt Expense: Bad debt expense increased by 20 basis points to 2.2%, primarily due to the write-off of claims from 2013 associated with a legacy audit appeal.
Unit Closures: The closure of three IRF units and one SNF unit impacted discharge growth by approximately 85 basis points in the quarter. Future discharge growth may also be affected until the volume is consolidated into other hospitals.
Staffing Costs and Turnover: While clinical staff turnover has improved, increased participation in career ladder programs has led to higher licensing and compensation levels, driving up staffing costs. Premium labor costs remain a concern, although they have declined compared to the previous year.
Pre-Opening and Ramp-Up Costs: The company incurred $4 million in pre-opening and ramp-up costs in Q1 and expects $18 million to $22 million for the full year, which could impact profitability.
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Guidance & Outlook
Revenue Guidance for 2026: Net operating revenue is expected to range between $6.375 billion and $6.470 billion.
Adjusted EBITDA Guidance for 2026: Adjusted EBITDA is projected to be between $1.35 billion and $1.38 billion.
Adjusted Earnings Per Share (EPS) Guidance for 2026: Adjusted EPS is expected to range from $5.89 to $6.11.
Bed Expansion Plans for 2026: The company plans to open 7 new hospitals with a total of 340 beds and add 100 to 150 incremental beds to existing hospitals.
Future Hospital Development Beyond 2026: The pipeline includes 11 hospitals with 520 beds, with additional projects, including small-format hospitals, expected to be announced later in the year.
Small-Format Hospital Strategy: At least one small-format hospital is expected to open in 2027, with potential for more depending on real estate transactions.
Medicare Pricing Update for 2027: The proposed rule includes a net market basket update of 2.4%, estimated to result in a 2.4% pricing increase for Medicare patients starting October 1, 2026.
Pre-Opening and Ramp-Up Costs for 2026: Net pre-opening and ramp-up costs are expected to range between $18 million and $22 million for the full year.
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Shareholder Return Plan
Cash Dividend Paid: $0.19 per share in Q1 2026
Cash Dividend Declared: $0.19 per share to be paid in April 2026
Shares Repurchased: Approximately 708,000 shares repurchased in Q1 2026
Total Cost of Share Repurchase: $71.6 million
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Key Q&A
Q:What was the impact of closures on organic volume discharge growth?
A:The impact of the closures was approximately 85 basis points for both total and same-store. This impact is expected to diminish over the year as volume consolidates and beds are added to existing hospitals in those markets. There was no impact on EBITDA.
Q:What factors contributed to the lowest nursing turnover since 2012?
A:The centralized talent acquisition team improved hiring, with net hiring for the quarter higher than the first two quarters combined last year. Clinical ladders have also been effective, with 35% of nursing staff now on clinical ladders, reducing turnover to 2.6% compared to 20.7% for non-laddered nurses. Retention programs and centralized talent acquisition have also contributed.
Q:What are the factors affecting same-store volume performance for 2026?
A:Four factors were cited: unit closures, occupancy levels, a light flu and respiratory season, and continuation of Medicare Advantage (MA) trends. Occupancy constraints were noted, with 35% of hospitals having occupancy above 90%. Efforts to address these include bed additions, converting semi-private rooms to private, and introducing small format hospitals.
Q:What is the company's perspective on the Medicare proposal regarding payment model adjustments?
A:The proposal is still a concept and lacks details necessary for modeling its impact. It is not a site-neutral concept but aims to adjust SNF PDPM buckets to account for more complex patient populations treated in IRFs. The company does not see it as a concern currently and will provide feedback to CMS.
Q:What is the company's strategy for addressing Medicare Advantage (MA) trends?
A:The company has implemented an admit and appeal strategy in nine hospitals, showing early positive results. MA penetration appears to have peaked at 52% and is slightly receding. The company sees opportunities in the growing Medicare fee-for-service population, which remains underserved.
Q:What is the company's approach to addressing occupancy constraints?
A:The company is adding beds to high-occupancy hospitals, introducing small format hospitals, and lowering the internal threshold for bed expansion from 80%-85% occupancy to 70%-75%. They are also evaluating larger hospital footprints in some markets.
Q:What is the company's outlook on capital expenditures (CapEx)?
A:CapEx as a percentage of revenue is expected to increase modestly over the next 2-3 years, peaking at about 15%, and then receding to a long-term run rate of 10%-12%.
Q:What is the company's view on share buybacks?
A:The company sees share buybacks as an attractive complement to its strategy, especially at current trading levels. They have capacity for additional buybacks, with leverage expected to remain between 2x and 2.5x EBITDA.
Q:What is the company's perspective on joint venture opportunities?
A:The company has a strong track record with joint ventures and sees continued opportunities, including multiple hospitals within existing partnerships. They are confident in their ability to compete and expand joint venture projects.
Q:What is the company's strategy for small format hospitals?
A:Small format hospitals are seen as a complement to de novos and bed expansions, with ROI between the two. They provide flexibility in addressing high-occupancy markets and are being evaluated in dozens of markets.
Q:What are the company's initiatives with Palantir and AI?
A:The company is using Palantir for market analysis, CRM, revenue cycle management, and clinical staffing. AI is being implemented to improve documentation efficiency for physicians and providers, allowing more time for direct patient care.
Q:What is the company's approach to Medicaid opportunities?
A:The company is exploring opportunities in states with attractive Medicaid reimbursement structures, working with acute care partners to increase Medicaid volume. They see potential for growth in this area.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer regarding the potential impact of the Medicare proposal on payment models, stating that it is too early to model its impact due to lack of details. They also provided vague responses about the long-term impact of the admit and appeal strategy for Medicare Advantage patients, noting that it is too early to form an educated opinion.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
California today
Certifications house
Certified Rehabilitation
Encompass Health
IRF rule
Irma South
RN Certifications
RN rate
Rehabilitation RN
Tarr start
ability acuity
acute rate
advancement program
average staff
balance format
bed expansion
benefit development
challenge past
comment result
control uncertainty
decline premium
development challenge
development program
development project
discharge acute
dynamic hospital
estate transaction
expansion strategy
fact demand
format hospital
front implementation
hospital Irma
hospital balance
hospital bed
hospital development
hospital potential
hospital project
impact fact
point discharge
rate basis
rehabilitation service
EHC Transcript
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The earnings call summary reflects strong financial performance, with improvements in turnover rates and strategic initiatives such as capacity expansion and partnerships with Palantir. The Q&A section highlights proactive strategies to manage occupancy and Medicare trends, though some uncertainty remains regarding Medicare proposals. The company’s commitment to share buybacks and joint ventures further supports a positive outlook. Despite some vague responses, the overall sentiment suggests a positive market reaction, likely resulting in a stock price increase of 2% to 8% over the next two weeks.
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Positive2-6
The earnings call highlights strong financial performance, including increased free cash flow and reduced labor costs. The company is expanding capacity and sees significant growth potential in inpatient rehabilitation services. Positive trends in managed care volume and strategic initiatives like the Palantir partnership further bolster sentiment. Despite some uncertainties in Medicare Advantage dynamics, the overall outlook remains optimistic, with solid guidance and strategic expansions. The Q&A section reinforces confidence with detailed responses and plans to address challenges. Consequently, a positive stock price movement is expected over the next two weeks.
EHC Slides
EHC Report
Frequently Asked Questions
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