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EH

Encompass Health Corp (EHC)·Q1 2025 Earnings Summary

Executive Summary

  • Strong quarter with broad-based volume and pricing: net operating revenue rose 10.6% to $1.46B on 6.3% discharge growth and 3.9% higher net patient revenue per discharge; Adjusted EBITDA grew 14.9% to $313.6M and adjusted EPS was $1.37 .
  • Beat vs S&P consensus: revenue beat by ~1.8% ($1,455.4M vs $1,429.7M*), and “Primary EPS” beat by ~15% ($1.37 vs $1.19*). Management raised FY25 guidance across revenue, EBITDA, and adjusted EPS, citing stronger Q1 performance and sustained demand .
  • Operating leverage improved on record occupancy (78.8%) and lower premium labor, while SWB per FTE inflation was contained at 3.2%; group medical benefits remained elevated (up ~14%), expected to ease in H2 as comps normalize .
  • Capacity expansion remains a core growth driver: one de novo (Athens, GA) and 25 bed adds in Q1; 2025 plan now includes 6 more de novos plus a 50‑bed satellite and 100–120 additional beds to existing hospitals; net leverage improved to 2.1x and $32.1M of buybacks executed .

What Went Well and What Went Wrong

  • What Went Well
    • Volume and mix: Discharges +6.3% (same-store +4.4%); payer mix shifted toward higher-reimbursing Medicare FFS and MA (+150 bps combined), lifting net revenue per discharge +3.9% .
    • Labor leverage: Premium labor fell to $28.6M (down $5M YoY); contract labor FTEs dropped to 1.3% of FTEs; record occupancy (78.8%) supported productivity .
    • Confidence and strategy: “We are very pleased with our first quarter performance…”; long-term outlook “highly optimistic,” underpinned by de novos and bed additions .
  • What Went Wrong
    • Benefits inflation: Benefits expense per FTE up ~14% (group medical severity/frequency) and expected to stay elevated in Q2 before easing in H2 .
    • Policy/audit overhang: Palmetto TPE and Alabama RCD processes remain lumpy; bad debt reserve at low end (2.0%) helped Q1 but management is cautious on durability .
    • Provider taxes/Medicaid items: Other OpEx included a $7.1M increase in provider tax expense; outpatient/other revenue benefited from $5.3M higher Medicaid supplemental payments (volatility, modest EBITDA impact) .

Financial Results

P&L summary and beats vs estimates

MetricQ1 2024Q4 2024Q1 2025S&P Consensus (Q1 2025)*Surprise
Net Operating Revenue ($M)1,316.0 1,405.0 1,455.4 1,429.7*+$25.7M / +1.8%
Diluted EPS – Continuing Ops ($)1.11 1.18 1.48 ——
Adjusted EPS ($)1.12 1.17 1.37 1.19*+$0.18 / +15.3%
Adjusted EBITDA ($M)273.0 289.6 313.6 290.1*+$23.5M / +8.1%
Adjusted EBITDA Margin (%)20.7%20.6%21.6%——

Notes: Adjusted EBITDA margin is calculated from cited revenue and Adjusted EBITDA.
Asterisk indicates S&P Global consensus values.

Segment revenue mix

Segment ($M)Q1 2024Q4 2024Q1 2025
Inpatient1,282.7 1,366.1 1,417.7
Outpatient & Other33.3 38.9 37.7
Total Net Operating Revenue1,316.0 1,405.0 1,455.4

Key KPIs

KPIQ1 2024Q4 2024Q1 2025
Discharges61,111 63,839 64,985
Same-store Discharge Growth—5.8% 4.4%
Net Patient Revenue/Discharge ($)20,990 21,399 21,816
Occupancy (%)76.7% 75.3% 78.8%
Avg Length of Stay (days)12.3 12.0 12.2
Licensed Beds10,781 11,094 11,159
Occupied Beds8,269 8,354 8,793
Contract Labor FTEs434 394 375
EPOB3.34 3.42 3.29

Cash flow and leverage highlights (Q1 2025): Adjusted free cash flow $222.4M (+32.7% YoY); net leverage 2.1x; $0.17 dividend paid and 333,679 shares repurchased for $32.1M .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Operating Revenue ($B)FY 20255.80 – 5.90 5.85 – 5.925 Raised
Adjusted EBITDA ($B)FY 20251.160 – 1.200 1.185 – 1.220 Raised
Adjusted EPS ($)FY 20254.67 – 4.96 4.85 – 5.10 Raised

Guidance considerations: tax rate ~26%, diluted shares 102–103M; SWB per FTE inflation 3.25–3.75%; MA pricing +2–3%; Medicare pricing +3.3% in Q2–Q3 and ~2.7% in Q4; pre‑opening/ramp-up costs $18–$22M; Oracle Fusion costs $5.5–$6.5M; higher NCI from Augusta JV .

Earnings Call Themes & Trends

TopicPrior Q (Q3’24)Prior Q (Q4’24)Current (Q1’25)Trend
Volume & DemandDischarges +8.8%; raised FY24 guide Broad-based volume; stroke/neurology mix strong Discharges +6.3%; strong Medicare mix; quality metrics favorable Sustained strength
Labor & ProductivityPremium labor moderating; free cash flow up SWB per FTE +6.4%; benefits spike on Rx SWB per FTE +3.2%; premium labor $28.6M; EPOB benefit from occupancy Improving ex‑benefits
Payer Mix & MAMix supportive; conversions to episodic MA growth outpacing; contracting steady Unusual FFS > MA growth in Q1; overall mix favorable; MA rate +~5% in Q1 Positive mix; watch MA dynamics
Audits/Bad Debt—TPE/RCD lumpiness; Q4 favorable reserve Bad debt 2.0% at low end; TPE activity still lumpy Manageable but lumpy
Capacity ExpansionPipeline robust; hurricanes managed 7 de novos + 100 bed adds in 2025 1 de novo + 25 beds in Q1; 6 more de novos + 50-bed satellite planned Accelerating
Tariffs/Supply Chain—Prefab yields speed; costs stable Tariff near-term risk low; materials largely secured Stable
Capital Allocation—FCF $690M FY24; leverage 2.2x; buybacks ongoing FCF $222M in Q1; leverage 2.1x; buybacks $32M Ongoing returns

Management Commentary

  • CEO: “We are very pleased with our first quarter performance, which drove a 10.6% increase in revenue and a 14.9% increase in Adjusted EBITDA… We further increased our capacity… opening one new 40-bed hospital and adding 25 beds” .
  • CFO: “Net revenue per discharge growth of 3.9% was higher than anticipated due in part to payer mix… Q1 SWB per FTE increased 3.2%… Premium labor… declined $5 million YoY to $28.6 million… Contract labor FTEs… 1.3%” .
  • Strategy: Demand “remains considerably underserved” and the company is increasing bed expansions in 2026–2027 (~120/year) while maintaining 6–10 de novos per year .
  • Policy: Proposed FY26 IRF update implies ~2.7% Medicare increase effective 10/1/25; watch TPE/RCD audit cadence; pushing for better MA pre-authorization and IRF network adequacy recognition .

Q&A Highlights

  • Payer mix: Rare quarter where Medicare FFS outgrew MA; not assumed to persist; combined Medicare FFS+MA mix rose ~150 bps, boosting RPD .
  • Labor/efficiency: Occupancy-driven leverage lowered EPOB; premium labor spending fell; management not embedding a new structural productivity level given seasonality and H2 ramp costs .
  • Tariffs/Construction: Near-term tariff risk low; prefab drives 25% faster time-to-open; per‑bed costs stable ($1.2M de novo; >$800k bed adds) .
  • Medicaid supplemental/provider taxes: EBITDA net impact modest and variable; Q1’25 ~+$3M vs +$4.9M in Q1’24 .
  • Capital returns: Ongoing buybacks; leverage trending toward sub‑2x could prompt more repurchases; dividend maintained .
  • Bad debt/audits: TPE activity remains lumpy; low Q1 activity helped reserves; management kept full-year assumptions unchanged .

Estimates Context

MetricS&P Consensus Q1 2025*Actual Q1 2025Result
Revenue ($M)1,429.7*1,455.4 Beat (+1.8%)
Primary EPS ($)1.19*1.37 (Adjusted EPS) Beat (+15.3%)
EBITDA ($M)290.1*313.6 (Adj. EBITDA) Beat (+8.1%)

Note: S&P “Primary EPS” aligns with company’s adjusted EPS presentation; company also reported GAAP diluted EPS of $1.48 .
Asterisk indicates Values retrieved from S&P Global.

Key Takeaways for Investors

  • Demand/mix tailwinds and pricing drove a clean top-line/EPS/EBITDA beat; mix shift toward higher-yield Medicare (FFS+MA) and low bad debt were key contributors .
  • Labor productivity benefited from record occupancy and lower premium labor; watch group medical inflation (expected to ease in H2) .
  • Guidance raised early in the year suggests estimate revisions upward; upside levered to volume/mix sustainability and manageable audit activity .
  • Capacity expansion remains the core earnings algorithm (de novos + bed adds); prefab accelerates speed-to-market; leverage at 2.1x supports both growth capex and buybacks .
  • Risks: audit/TPE lumpiness, benefits cost inflation, MA authorization friction; none appear thesis-breaking per management’s tone and planning .
  • Near-term: seasonality and H2 skew of pre-opening costs could temper sequential margins; medium-term FCF supports continued shareholder returns alongside growth .
  • Stock catalysts: sustained same‑store growth, continued payer mix favorability, and incremental bed announcements could support multiple and estimates; any regulatory clarity on MA pre-auth/network adequacy would be a positive .
Additional data references:
- Full Q1 2025 8‑K press release and supplemental schedules (revenues, EPS, Adj. EBITDA, FCF, KPIs, guidance) **[785161_0000785161-25-000018_ehcearningsrelease33125.htm:0]** **[785161_0000785161-25-000018_ehcearningsrelease33125.htm:3]** **[785161_0000785161-25-000018_ehcearningsrelease33125.htm:5]** **[785161_0000785161-25-000018_ehcearningsrelease33125.htm:11]** **[785161_0000785161-25-000018_ehcq12025earningsslides_.htm:2]** **[785161_0000785161-25-000018_ehcq12025earningsslides_.htm:4]**. 
- Q1 2025 earnings call transcript (labor, mix, tariffs, audits, capital allocation) **[785161_EHC_3423476_3]** **[785161_EHC_3423476_4]** **[785161_EHC_3423476_6]** **[785161_EHC_3423476_11]** **[785161_1976238_14]**. 
- Q4 2024 8‑K (prior-quarter comps and initial FY25 guidance) **[785161_0000785161-25-000003_ehcearningsrelease123124.htm:0]** **[785161_0000785161-25-000003_ehcearningsrelease123124.htm:3]** **[785161_0000785161-25-000003_ehcearningsrelease123124.htm:6]**. 
- Q3 2024 press release (two-quarter trend context) **[785161_20241028CL41887:0]**.