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EH

Encompass Health Corp (EHC)·Q2 2025 Earnings Summary

Executive Summary

  • Strong quarter with broad-based volume and pricing: net operating revenue up 12.0% to $1.458B, Adjusted EBITDA up 17.2% to $318.6M, and diluted EPS $1.40; management raised full-year 2025 guidance on revenue, Adjusted EBITDA, and adjusted EPS .
  • Beats vs S&P Global consensus: Q2 EPS beat by ~$0.19, revenue beat by ~$31M, and EBITDA above consensus; guidance implies continued momentum driven by discharge growth and pricing leverage (values retrieved from S&P Global)*.
  • Capacity expansion is a key catalyst: opened Fort Myers (60 beds), added 26 beds; July dividend lifted to $0.19/share; pipeline includes multiple de novos and a 50-bed satellite with costs/returns supported by improved cash flow .
  • Watch headwinds: benefits expense per FTE rose ~18% YoY and TPE audit activity may be lumpy in 2H; management expects moderation of group medical costs in H2 and still raised free-cash-flow outlook .

What Went Well and What Went Wrong

  • What Went Well

    • Discharge and pricing strength: total discharges up 7.2% with same‑store up 4.7%; net patient revenue per discharge up 4.2% .
    • Bad debt rate improved 90 bps YoY to 2.0%, aiding net revenue per discharge and EBITDA leverage .
    • Capacity expansion and guidance raise: Fort Myers opening, bed additions, and higher FY25 ranges for revenue ($5.88–$5.98B), Adjusted EBITDA ($1.22–$1.25B), and adjusted EPS ($5.12–$5.34) .
    • CEO quote: “Our clinical expertise and commitment to delivering high-quality, cost-effective care continues to benefit our patients, referral sources and payors.” .

  • What Went Wrong

    • Benefits expense headwind: benefits per FTE increased ~18% in Q2; management attributes pressure to higher frequency of high-dollar medical claims (partly mean-reverting) .
    • Corporate items and ramp costs: FY25 guidance includes $11.5–$13.5M Adjusted EBITDA headwind from Oracle Fusion and JV NCI; pre-opening/ramp-up costs expected at $18–$22M .
    • Potential audit lumpiness: management anticipates possible resumption of TPE activity in 2H, which may temporarily elevate bad debt within the guided 2.0–2.5% range .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Net Operating Revenue ($USD Billions)$1.405 $1.455 $1.458
Adjusted EBITDA ($USD Millions)$289.6 $313.6 $318.6
Adjusted EBITDA Margin (%)20.6% 21.6% 21.9%
Diluted EPS – Continuing Ops ($)$1.18 $1.48 $1.40
Adjusted EPS ($)$1.17 $1.37 $1.40

Segment revenue breakdown:

Segment ($USD Millions)Q4 2024Q1 2025Q2 2025
Inpatient Net Patient Revenue$1,366.1 $1,417.7 $1,413.7
Outpatient & Other$38.9 $37.7 $44.0
Total Net Operating Revenue$1,405.0 $1,455.4 $1,457.7

KPIs and operating metrics:

KPIQ4 2024Q1 2025Q2 2025
Discharges63,839 64,985 65,237
Same‑Store Discharge Growth (%)5.8% 4.4% 4.7%
Net Patient Revenue per Discharge ($)$21,399 $21,816 $21,670
Average Length of Stay (days)12.0 12.2 12.0
Occupancy (%)75.3% 78.8% 76.6%
EPOB (Employees per Occupied Bed)3.42 3.29 3.39

Estimates vs Actuals (S&P Global):

MetricQ2 2025 ConsensusQ2 2025 ActualSurprise
Primary EPS Consensus Mean ($)1.2088*1.40 +0.19*
Revenue Consensus Mean ($USD)1,426,755,900*1,457,700,000 +$30,944,100*
EBITDA Consensus Mean ($USD)294,514,370*339,000,000*+$44,485,630*
Primary EPS – # of Estimates12*——
Revenue – # of Estimates11*——

Values retrieved from S&P Global.*

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Operating Revenue ($B)FY 2025$5.85–$5.925 $5.88–$5.98 Raised
Adjusted EBITDA ($B)FY 2025$1.185–$1.220 $1.220–$1.250 Raised
Adjusted EPS ($)FY 2025$4.85–$5.10 $5.12–$5.34 Raised
Bad Debt Reserve (% of revenue)FY 20252.0–2.5% 2.0–2.5% Maintained
SWB per FTE inflationFY 20253.25–3.75% 3.25–3.75% Maintained
Pre‑opening & ramp‑up costs ($M)FY 2025$18–$22 $18–$22 Maintained
Medicare pricing (net)FY 20253.3% Q1–Q3; ~2.5–3.0% Q4 3.3% Q3; ~2.7% Q4 (update timing) Clarified
Managed Care pricingFY 2025~2–3% ~3.0% Clarified
Tax rateFY 2025~26% ~26% Maintained
Diluted share count (M)FY 2025~103 102–103 Narrowed
Adjusted FCF ($M)FY 2025$590–$690 $705–$795 Raised
Quarterly dividendOct 2025$0.17 $0.19 declared Jul 24 Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
Capacity expansion (de novos, beds)2024: 427 beds added; 7 de novos; strong Florida expansion Opened Athens JV (40 beds); plan 6 more de novos + 50-bed satellite; +120 beds in 2026/2027 Opened Fort Myers (60 beds) and +26 beds; more openings in H2; pipeline steady ~50 projects Accelerating
Occupancy & private roomsOccupancy up; push private rooms (56% in Q2 2025 referenced later) Occupancy 78.8%; private room mix at 56%; EPOB leverage Occupancy 76.6%; >80% triggers bed expansion list for all-private facilities Elevated
Pricing & payer mixBad debt 2.1% in Q4; MA contracting steady Revenue/Discharge +3.9% aided by payer mix; FFS outpaced MA temporarily Bad debt 2.0%; VA Community Care Network growth improving pricing within managed care Favorable
Benefits costs & laborBenefits per FTE up 30.6% in Q4; premium labor down Benefits per FTE +14%; premium labor down YoY; contract labor 1.3% of FTEs Benefits per FTE +18%; premium labor and bonuses down ~$4.9M; expect moderation 2H Mixed headwind, moderating
Regulatory/audit (TPE/RCD)Q4 explained DAB reserve and audit dynamics TPE lumpy; recovery rate favorable Assumed higher bad debt in 2H if TPE resumes Watch
AI/technology & qualityFall prevention and ReACT tools improved outcomes Quality metrics strong; staffing programs; predictive modeling Palantir/Oracle AI use to reduce admin burden; nurse liaison eval time cut by ~20 minutes; predictive analytics improved falls by 30% since 2020 Expanding adoption
Tariffs/supply chainConstruction cost per bed stabilized; minimal tariff risk Limited near-term tariff risk; procurement insulated No pronounced tariff impact yet; recycled US steel; monitoring Stable

Management Commentary

  • CEO Mark Tarr: “During the quarter, we further increased our capacity to serve patients in need of inpatient rehabilitation care, opening a new 60-bed hospital in Fort Myers, Florida, and adding 26 beds to an existing hospital.” .
  • CEO Mark Tarr on demand: “The demand for inpatient rehabilitation services remains considerably underserved and continues to grow as the U.S. population ages.” .
  • CFO Doug Coltharp: “Revenue for the second quarter increased 12% to $1.46B and adjusted EBITDA increased 17.2% to $318.6M… net revenue per discharge benefited from a decrease of 90 basis points in bad debt expense to 2%.” .
  • CFO on capital allocation: expect elevated growth CapEx and “likely place to go is… more share repurchase activity” given low net leverage and bonus depreciation benefits .

Q&A Highlights

  • Occupancy/private rooms: >80% sustained occupancy at all‑private facilities triggers bed expansion planning; occupancy can run mid‑to‑high 90s in all‑private configurations .
  • Managed care/VA CCN: VA Community Care Network growth now ~18% of managed care business, pays at Medicare CMG; supports managed care pricing .
  • Labor dynamics: Premium labor sign‑on/shift bonuses declined sequentially; contract labor FTEs ~1.3% of total; centralized talent acquisition and clinical ladders aiding retention .
  • Guidance bridge 2H: Expect majority of pre‑opening costs in 2H, potential TPE resumption lifting bad debt, slight EPOB increase with new capacity, while Q4 pricing uplift offsets some headwinds .
  • AI initiatives: Palantir partnership reduces admin burden; nurse liaison documentation time down ~20 minutes; predictive models improved fall rate ~30% and acute transfers ~24% since 2020 .

Estimates Context

  • Q2 2025 beats vs S&P Global consensus: EPS $1.40 vs $1.2088 (+$0.19); revenue $1,457.7M vs $1,426.8M (+$31.0M); EBITDA $339.0M vs $294.5M (+$44.5M)*.
  • Implication: Street likely revises FY25 higher given raised guidance ranges and sustained discharge/pricing trends; note EBITDA definition differences (company reports Adjusted EBITDA) when reconciling models .
    Values retrieved from S&P Global.*

Key Takeaways for Investors

  • High-quality beat and guidance raise: sustained discharge growth and pricing leverage, with improved bad debt rate underpinning EPS/EBITDA outperformance .
  • Capacity expansion supports multi‑year growth: Fort Myers opening, additional beds, and a robust pipeline across several states; expect near-term occupancy normalization as new capacity ramps .
  • Labor headwinds manageable: benefits expense pressure remains but should moderate in H2; premium labor trends improving, aided by centralized recruiting and clinical ladders .
  • Watch audit cadence: potential TPE resumption could temporarily elevate bad debt within guided bands; recovery rates on audited claims have been favorable historically .
  • Capital allocation optionality: net leverage ~2.0x and higher adjusted FCF outlook ($705–$795M) create capacity for growth CapEx and buybacks; dividend increased to $0.19 in Oct .
  • Managed care mix evolving with VA CCN tailwind: improving managed care pricing and episodic conversion efforts support revenue per discharge .
  • Near-term trading: guidance raise and clean beat are positive catalysts; monitor benefits cost trajectory and audit updates in H2 for potential volatility .