Encompass Health Reports Strong Q2 Earnings Growth

Encompass Health ((EHC)) has held its Q2 earnings call. Read on for the main highlights of the call.

Encompass Health’s recent earnings call revealed a robust financial performance, marked by significant revenue and EBITDA growth. The company showcased successful expansion plans and effective management of labor costs, although concerns about rising benefit expenses and preopening costs were noted. Overall, the positive developments significantly overshadowed the challenges, reflecting a strong sentiment throughout the call.

Revenue and EBITDA Growth

Encompass Health reported a 12% increase in revenue for the second quarter, reaching $1.46 billion. Adjusted EBITDA saw an impressive 17.2% rise to $308.6 million. This growth was primarily driven by a 7.2% increase in discharges and a 4.2% rise in net revenue per discharge, highlighting the company’s successful operational strategies.

Increased 2025 Guidance

Following the strong performance in Q2, Encompass Health has raised its 2025 guidance. The company now anticipates net operating revenue between $5.88 billion and $5.98 billion, adjusted EBITDA ranging from $1.22 billion to $1.25 billion, and adjusted earnings per share between $5.12 and $5.34, reflecting confidence in future growth.

Expansion and New Hospital Openings

The company expanded its footprint by opening a new 60-bed hospital in Fort Myers, Florida, and a 50-bed hospital in Daytona Beach, Florida. With plans to open five additional hospitals and expand existing ones, Encompass Health is poised to add significant capacity to its operations.

Strong Free Cash Flow

Encompass Health’s Q2 adjusted free cash flow surged by 30.5% to approximately $186 million, with a year-to-date increase of 31.7% from the first half of 2024. This strong cash flow performance underscores the company’s financial health and operational efficiency.

VA Community Care Network Growth

The VA Community Care Network now constitutes nearly 18% of Encompass Health’s managed care business, benefiting from improved managed care pricing due to increased volume. This segment’s growth is a testament to the company’s strategic partnerships and market presence.

Labor Cost Management

Encompass Health effectively managed labor costs, with contract labor and sign-on bonuses declining by $4.9 million or 15.1%. Additionally, nurse turnover rates have returned to pre-pandemic levels, indicating stability in workforce management.

Benefit Expense Increase

Despite the positive financial performance, benefit expenses per full-time equivalent increased by 18%, driven by a rise in high-dollar medical claims. This increase poses a challenge that the company will need to address moving forward.

Preopening and Ramp-up Costs

The company incurred net preopening and ramp-up costs of $4 million in Q2, with full-year costs expected to range between $18 million and $22 million. These costs are associated with the company’s expansion efforts and are anticipated to stabilize as new facilities become operational.

Potential Bad Debt Increase

Encompass Health anticipates a potential increase in bad debt expense in the second half of the year if TPE activity resumes. This expectation highlights a potential risk area that the company is monitoring closely.

Forward-Looking Guidance

Encompass Health’s forward-looking guidance reflects optimism for future growth, driven by increased demand for inpatient rehabilitation services due to an aging population. The company projects a net operating revenue of $5.88 billion to $5.98 billion, adjusted EBITDA of $1.22 billion to $1.25 billion, and adjusted EPS of $5.12 to $5.34. These forecasts underscore the company’s strategic positioning and growth potential.

In summary, Encompass Health’s earnings call painted a picture of strong financial health and strategic growth. While challenges such as rising benefit expenses and preopening costs were acknowledged, the overall sentiment was positive, with significant achievements in revenue growth, expansion, and effective cost management. The company’s forward-looking guidance further emphasizes its confidence in continued success.