Good morning, everyone, and welcome to Encompass Health’s, Third Quarter 2018 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 period. [Operator Instructions]. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now turn the call over to Crissy Carlisle, Encompass Health’s Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health’s third quarter 2018 earnings call. With me on the call in Birmingham today are Mark Tarr, President and Chief Executive Officer; Doug Coltharp, Chief Financial Officer; Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospitals; Patrick Darby, General Counsel and Corporate Secretary; Andy Price, Chief Accounting Officer; Ed Fay, Treasurer; and Julie Duck, Senior Vice President of Financial Operations. April Anthony, Chief Executive Officer of Our Home Health and Hospice segment, also is participating in today’s call via phone. Before we begin, if you do not already have a copy, the third 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 the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties 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 the related Form 8-K and the Form 10-K for the year ended December 31, 2017, and the Form 10-Q for the quarter ended March 31, 2018, June 30, 2018 and September 30, 2018 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 or 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 related press release, and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. Before I turn it over to Mark, 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.

Thank you, Crissy and good morning to everyone joining today's call. The third quarter was another strong quarter for Encompass Health. The operational and financial trends we experienced in the first half of the year continued in the third quarter with consolidated revenue increasing 8.8%, consolidated adjusted EBITDA increasing 9.6% to $224.3 million and adjusted earnings per share increasing 37.9% to $0.91 per diluted share. Revenue and adjusted EBITDA for the third quarter of 2018 included $4.5 million of business interruption insurance recoveries related to the 2017 hurricanes and adjusted EPS included an additional $2.9 million and property insurance recoveries also related to the 2017 hurricanes. Our company is extremely fortunate to employ industry leading clinicians and professionals who provide the highest level care to our patients with the support of the service oriented professionals in our home offices. Our employees again demonstrated their commitment to the care and safety of our patients when hurricane Florence impacted the Carolinas and hurricane Michael impacted the Florida Panhandle. Our employees stepped up in this time of need, working around the clock to care for patients and each other. The account of selfless compassion and leadership exhibited by these employees are numerous, and we can't begin to express our appreciation to, and admiration for those who put the care of their patients ahead of themselves. Within our inpatient rehabilitation segment, seven of our hospitals were in the path of hurricane Florence, with our hospital in [inaudible] in South Carolina being the most impacted by this storm. That hospital which opened just days before the storm and had not received its accreditation from the joint commission or its Medicare certification at the time of the hurricane was evacuated under mandatory orders from the Governor of South Carolina on September 12, 2018 and began accepting…

Thanks Mark and good morning everyone. As Mark highlighted, Q3 was another strong quarter for our company as both business segments exhibited solid revenue and earnings growth and we leveraged our corporate G&A expense. Let me begin by reiterating Mark’s summary of our financial results. Our Q3 consolidated revenues increased 8.8%, adjusted EBITDA of $224.3 million increased 9.6% and adjusted EPS increased by 37.9% to $91 per diluted share -- $ 0.91 per diluted share. Revenue and adjusted EBITDA for Q3 included $4.5 million of business interruption insurance recoveries related to the 2017 hurricanes and adjusted EPS included an additional $2.9 million in property insurance recoveries also relating to those hurricanes. Cash flow generation remains strong in Q3, driven by adjusted EBITDA growth and favorable working capital changes, primarily related to improved collection of accounts receivable. Adjusted free cash flow for the first nine months of 2018 was $424.8 million, an increase of 12.6% over the prior year. Our balance sheet remains well positioned, our leverage ratio at quarter end was 2.9 times and the balance on our $700 million revolving credit facility was $65 million. We faced no significant debt maturities until 2022. Moving on to segment results, IRF segment revenue increased 5.4% driven by volume and pricing growth. The aforementioned $4.5 million in business interruption recoveries is included in the outpatient and other line of IRF segment revenues. Our revenue reserve related to bad debt for Q3 was 1.3% as compared to 1.4% from the prior year. I'll remind you that Q3 of last year was when we first began to see a significant reduction in pre-payment claims denials, which we attributed to the implementation of TPE and the relating of the MAC contract in Cahaba to Palmetto. As can be seen on page 21 of the supplemental…

[Operator Instructions] And your first question comes from Matt Larew with William Blair.

Good morning Matt.

Hi, good morning guys and thank for the question. I first wanted to ask about the dynamics and the same store IRF growth. Obviously nice growth here at 2% and now coming off for the full quarter run, some of the strongest growth you’ve had in years. Could you just walk through some the dynamics of both same store growths in this quarter and maybe relative to the last several quarters to give us a sense of what might be sustainable moving forward?

Yeah man, so this is Mark. You know we have 3% on our business outlook for total discharge growth and we're very pleased with what we saw in the vast majority of the markets relative to the same store in terms of taking market share, continuing to develop programs, specifically around the growth of stroke and other minerals which we continue to believe will help sustain this growth moving forward. That's one piece of additional color that we throw on top of that that relates to timing. What we experienced in the month of September is that the build back in our ADC following the Labor Day weekend occurred a little more slowly this year than it did last year, but that is built back very substantially in the second half of the month, and then that was compounded by the fact that September and the quarter end was on a Sunday, which is our lowest discharge day of the week and so we carried the higher balance of in house patients over into the month of October than we had in the previous years. So that had some impact on third quarter third quarter volume. It maybe a little harder to see that show up in the fourth quarter numbers, (a) because of the comp that we're up against, and (b) because of the impact of the hurricane.

Okay, thanks. And then just as a follow up about longer term De Novos and expansion activities, and IRF mentioned that that expansion may be you know behind the 100 target for this year, but we’ll be above that in ’19. Obviously your free cash flow generation is strong year-to-date. Can you just help us think about those targets of four to six neuro, a 100 new beds per year in the context of the strong growth environment and the free cash flow generation. You know is there a chance we see any upside revisions or different targets at some point here in the future.

That is definitely something we’re evaluating. We speak a lot to the investment community internally. The demographic tailwind is favoring both of our business segments. It reminds you that the average age of the patients that we treat in our inpatient facilities is 76 and the vanguard and the baby boomers turned 72 this year. That age cohort between 75 and 85 that is an anticipated CAGR over the next 5 to 10 years between 4% to 5% and yet over the last decade the static of birth beds or the supply of birth beds in the U.S. has been relatively static. All of that speaks to us about the opportunity potentially to add capacity more quickly. I think it’s hard. It’s unlikely to change for 2019, but it is something that we’re evaluating beginning in 2020.

And your next question comes from Matthew Gillmor with Baird.

Hello Matt.

Hey, good morning everyone. Hey, let me start with the guidance. You know your implying to a lower sort of growth rate in the fourth quarter versus the year-to-date and another hurricane explains some of that, but I just wanted to confirm, are you maintaining the bad debt assumption and medical cost assumption for the fourth quarter or there are other things you'd call out to kind of help us understand the difference in the growth rate.

Those are the two primary drivers Matt. We carry those assumptions that they would both be mean reverting into the fourth quarter and then also on top of that we should expect that the increase that we saw in the NCI related to the composition of our joint venture hospitals is likely to perpetuate, not only into Q4, but beyond that as well.

And then as a follow-up, I wanted to ask about the Medicare advantage mix on the IRF segment. You know the revenues from M&A keeps climbing. It seems like you made a lot more progress this year than in prior years, so can you tell us what some of the internal drivers are that's attributing or contributing to that or is that more sort of external factors in terms of just M&A penetration.

Yeah, thanks Mark. One of the primary drivers is we believe that the value proposition has really started to unfold for the payers Medicare advantage, particularly when it comes to stroke patients. Almost 30% of the volume we get in Medicare advantage is tied to stroke patients and that is a program that they have seen the benefits of having patients and the strong outcomes we get in the IRF setting versus sending them to a skilled nursing facility particularly.

And Matt, the combination of getting more stroke patients and more higher acuity patients on the Medicare advantage plans, together with an increasing percentage of our contracts being on a case rate basis on a per diem continues to close the gap between our average payment per discharge on the pay per service and Medicare advantage. As a specific example in Q3 of last year, Medicare advantage on average paid us 82% of what we received from pay per service on a revenue per discharge and that was up to 88% in Q3 of this year. The other thing that I would throw out there that may seem a little bit contrary to some of the Medicare advantage trends is we track on a quarterly basis the enrollment in all of the counties in the U.S. and which we operate in IRF, the new enrollment in Medicare advantage and the new enrollment in fee-for-service. In the counties in which we operate the third quarter, enrollment fee-for-service was higher than it was in Medicare advantage.

Now one more thing on the – just in terms of our efforts and building our stroke program, is that we’re excited that next year we’ll be doing a co-marketing program with The America Strokes Association, so I’m going to ask Barb Jacobsmeyer to elaborate on it.

Yeah, so what we’re kicking off in January of next year, a three year commitment with The American Heart / The American Stroke Association to co-brand on educating both the consumers, as well as the professional, the physicians and other clinicians on stroke and where should stroke patients receive their rehabilitation care. So we think that's just going to continue to give us the information we need out to the referral sources and the clinicians to support IRF level of care for stroke patients.

And your next question comes from Frank Morgan with RBC Capital Markets.

Hey Frank, good morning Frank.

Good morning. Hey, I wanted to go back to one of the earlier questions about your capital deployment strategy and I mean I guess I would asked the question the opposite direction, which is just with the uncertainty around the IRF proposed rule and maybe even the home healthcare, does that – does that sound like that's giving you any cause with regard to maybe even slowing down capital deployment until you are really getting this thing resolved. And it sounds like your capital deployment through ‘19 will be unchanged, but I guess that's a sign of confidence. Your previous answer that you are not that worried about these new proposed IRF rules for the new case mix system or the patient driven grouper model.

We would never say that we're not worried about those new rules because they're going to be very substantial and we anticipate that both business segments in spite of our best efforts to prepare for them, they're going to be bumpy on implementation. But nothing changes our view about the long term growth and demand for each of the two business segments and each of the three service lines that we operate in. I mean the population in the U.S. is getting older. There isn't anything on the horizon that points to any kind of technical obsolescence for the types of conditions that we treat through our business segments and somebody's who got to be there on the provider side to add capacity increase and address that increase in demand and we think that we should be one of those parties. So we remain very optimistic about the demographic tailwind and yes, it is our anticipation that we’ll continue to add capacity. We also believe that to the extent there is any bumpiness in either one of the two business segments as we progress to these new payment model revisions in 2020, that can create additional acquisition opportunities for us and therefore we may find it prudent to move into 2020 with a little extra slack in the balance sheet.

Frank just to remind you, the patient in our IRFs are non-discretionary in nature. They are very medically complex, they need this intense level of care and in spite of what the reimbursement scenario lays out, these patients need to be treated in-patient rehabilitation setting and therefore the Doug said, we are very positive on the outlook going forward.

Got you, and that’s a good answer. And maybe on the – absolutely I get it, demand is not changing and that maybe that bumps was just with the change in the system, but the demand is still there. In terms of just through the bumpiness, could you maybe give us a couple of examples of what you could do from a mitigation standpoint? Kind of what would be the normal levers that you would pull to kind of offset this until you kind of comp your way through that and rebase off of it. Thanks.

Frank, at least on the IRF side the first thing we are doing is just marking sure that our staff is educated on care tool. I’ll ask Barb Jacobsmeyer to go a little bit further in depth on that.

Right, so when we thought of the initial set of data what we did see, there was a lot of variability now just within our company, within the industry on how things are being poured on that new care tool and so the base of this for us right now is really educating our clinicians on some clarification that we’ve received from CMS on some of the ways that this care tool is bored, and so our focus right now is just making sure we have the consistency among our clinicians on how that's being done so that we'll prepare for that come next October.

Back in august, CMS had come out with some Q&A that provides some information to us, at least in terms of clarifying how to apply the care tool itself and we had some questions on application and that led to some of the differences from one side to another. So some of those questions have been clarified and we feel better about it going forward. April, do you want to comment on the PDGM and the focus?

Sure. On the mitigation side for Home Health, I mean obviously so much of our cost is tied up into the direct personnel costs. We always have to keep a close eye on our cost per visit, make sure that we're doing a good job of balancing our utilization of RNs verses LPN, PTA's versus the physical therapist, and so that certainly will be a continued focus in the PDGM era. I think the other thing that we’ll have to look at is utilization control and really we are working on a number of tools that we can implement to use more of a data science based approach to make sure that we're actually providing really a best practice set of utilization for visits during these episodes. So I think we'll look at our utilization controls and how we can do a better job there. And then the third thing I would say is given the high level of expected behavior change 6.4%, we're going to have to understand exactly what Medicare's expectations are on that and then we’re going to have to successfully execute and implement strategies around those expectations so that we don't come in on the wrong side of what they expected us to do. So those would be three major efforts and they'll be others that will evolve as we get closer and have more clarity on PDGM with the final rule, but those would be the three big ones for now.

And your next question comes from A.J. Rice with Credit Suisse.

Good morning A.J.

Good morning A.J.

A.J. your line is open, you maybe on mute.

We will come back to A.J.

And your next question comes from Sarah James with Piper Jaffray.

Good morning Sarah.

Thank you. Good morning. I just wanted to clarity some of these comments that you have made on the call today. So when you talk about utilization control, is that the timing of treatment between the first and second 30 days or total treatment over the course of care and could you be more specific about some of the aspects that you got further clarification on from CMS that made you feel more comfortable with the rate.

We’ll start first with April.

So on the Home Health side the utilization control I would be referencing would be more over the total episode. I think there may be some opportunities to look at the way care is distributed across the 60 days, but I think it's really going to be – the primary focus will be on making sure that we truly adding value with every single encounter that we have with the patient and that that we're really doing our very best to drive as much value through each interaction as possible so that we can potentially cut one or two interactions out without diminishing in anyway the quality or the outcomes that we deliver for the patient.

And then on the rehab rule, Barb.

On the IRF rule there were questions around, on the same tool you always did it by burden of care and on the care tool there was this for the patient based on usual and customary. There was a lot of confusion around what did that mean and what was the timeframe that you support the patient. So we got some clarification on you know that you really look to at the patients burden of care until therapy was initiated, so some good clarification to help us at least give direction and time frames to our staff on how to evaluate the patient initially.

Got it, that’s helpful. And last clarification here on rates. So when I think about the change to 30 days trend, 60 days and trying to get the pace of treatment right, how do you think about on average what percent of total treatment costs are happening in the first 30 days for encompass given your mix and how is that varying from the industry or what you can tell so far of CMSs view, how they like to set up the split.

Yeah, I don’t have the specific data on the split between for proportion of care in the first 30 to the second 30 days at my fingertips. I don’t think as we looked at it globally we saw anything that led us to believe we looked materially different than the average across the industry, but I don't have that exact date in front of me.

And your next question comes from Kevin Fischbeck with Bank of America.

Good morning, Kevin.

Good morning, thanks for taking the question. So I think you mentioned before that your MA continues to grow on the IRF side of things. Can you talk a little but about on the home health side of things, if you can give maybe a similar kind of view about where MA rates are there and whether they're trending back towards fee for service?

I’m going to ask April to weight on that Kevin.

Yes, so when we look at Q3 ‘17 to Q3 ‘18 we see our Medicare advantage rates remains pretty static from 9.6% of our total patient population to 9.4%, and we think that part of that slight weighting down was really more about the Camellia locations, which were in a little less intensive Medicare advantage markets, in Mississippi in particular. So we haven't seen dramatic changes in that. I think what we have seen within that category is continuing to push toward the types of Medicare advantage relationships that can really work successfully for us. And so although the percentage is relatively flat, I think we've had some puts and takes with our individual relationships and what we've then done just as Doug mentioned on the IRF side is that we’ve actually driven up the value of those relationships and the relative revenue that we can drive from those relationships continues to improve. You know it's a slow evolution overall I would say to the Medicare advantage world. But we are just continuing to see more and more opportunities for acceptable relationships in that segment.

And I guess maybe just building on that, what’s driving that increased dialogue. Is it still within the same types of services? So it’s just really about, you obviously know about the rehab capabilities or when I talk to the MA plans, it seems like they are actually a lot more interested in treating chronic patients and I always wonder whether the changer or reimbursement that we're looking at here, with this new model taking money out of rehab and putting it into other you know non rehab, things might open up more MA relationships if you will, if you are starting to treat some of the patients that they really want to you know get a control of.

I think that's absolutely the case on the IRF side. Again, Mark used the term value proposition and what we are seeing it started with Stroke where we think we had a fantastic story to tell just about the clinical expertise that we have and the results that its producing on a consistent basis. Now expanding the dialogue around other neurological complexities in really the higher acuity of patients for whom there's no opportunity to bypass the post-acute inpatient setting altogether, where it's clearly better do have that patients discharge from acute care facility in a reasonable period in time, both in terms of patient's outcome and the cost of the payer and that really aggressively managing the length of stay on the post-acute inpatient stay has produced negative consequences for those plans as well. So we find it particularly at the top end of the acquit spectrum on the IRF side, but are much more willing to engage in dialogue and to have us manage the patient the way that we believe is appropriate and not have a case manager on the phone with us on a daily basis.

I think on the Home Health side what we're seeing is, you know patients that are being sent directly home from the acute care hospitals and not making that intermediary saying the skilled nursing facility and we’re finding that our payers are recognizing that if the patient has the right home support and the right care giver support, that they can really accomplish with home health much the same outcome as they accomplished with the sniffs stay at a much lower cost and so we're seeing kind of those chronic morbid patients that are frequent flyers to the hospitals, that Medicare advantage plans are looking more to home health the nursing homes to solve those issues.

[Operator Instructions]. And your next question comes from Kevin Ellich with Craig-Hallum.

Good morning, Kevin.

Good morning, Kevin.

Good morning guys. Thanks for talking the questions. I guess just going back to you know I think Craig might have asked a question about mitigation or the potential reimbursement changes. You know going to April for PDGM, what sort of topline perspective can you do? I think there is maybe some benefit from seeing more admissions in the home health from hospitals. Could you kind of expand upon that?

That is correct. We do also see that as we shift mix to a more post-acute discharge patient, that there are higher revenue levels associated with those patients that are coming out of not only acquit care facilities, but also inpatient rehab, LTCH and even sniff patients have some higher opportunities. So I think we are seeing with the growth of our care transitions coordinator program we are working with hospital facilities to bring patients home sooner. We see that as an opportunity and as Mark and Doug mentioned previously, part of the reason that we're uncomfortable really committing to the impact in 2020 is that we do believe there'll be significant changes to our business mix and a lot of that change will be driven by the effectiveness of this care transition coordinator program that was put in place actually about a year ago, but is really beginning to you know gain some momentum as it relates to bringing patients out of hospitals and directly home.

Great and then April since you got – can you comment about the legislation going through DC right now and I guess you know you’ve seen this happen in the past with home health reimbursement changes. Wondering how the support looks this time versus in the past and if you think it's different this time versus what it's been like in the past.

You know I think we feel encouraged by the bipartisan support that we had, just at the House and Senate level on the bills that are floating around obviously. It’s still early in the progress with those bills, but when you look at this idea that Medicare is going to presume a 6.4% behavior change, which is exponentially higher than any actual behavior change that's been seen over the course of the last 20 years; has there been varying changes to the reimbursement model? It's not that difficult to get support to say hey, this is not a reasonable expectation and then when you drill down further to what Medicare has said their expectation is, why they got to that 6.4% number, you read some of that and you say boy! That that would be a very unusual outcome that for example that 100% of the time we could alter the way coding is addressed for a particular patient than have a secondary diagnoses that might have a more valuable primary diagnoses. And so when you look at the details of how Medicare got to that, it's just not that hard to rally support to say “Hey we're happy to be subject to an adjustment for where our behavior does change,” but it's really an unfair approach to presume what we will do particularly when your presumptions are as aggressive as theirs are in this case. So I think we found pretty good support and believe that it will not be that difficult to rally support behind those bills, because of the dramatic effect that these presumed changes would have on the industry.

And your next question comes from A.J. Rice with Credit Suisse.

Welcome back.

Hi everybody. Two quick things, first of all in the capital deployment, I know you haven't done any share repurchases this year and I wonder if you’ll just comment on your thinking about that in the context of overall capital deployment. I know it may have something to do with saving dry power for the Encompass rollover shares that potentially get bought out early next year, but any comment along the lines of what you're thinking there?

A couple of things there, A.J. First of all, yes, we do view the acquisition of that, third of the shares from management shareholders in our home health and hospice subsidiaries that were put to us in September or in the beginning part of the year as a form of share repurchase. Second is, you noted that in July or board replenished the stock repurchase authorization back up to $250 million level. But the third is, we really are optimistic about the growth opportunities that are going to be presented to us in three specific business lines, on the IRF side, in home health and in hospice where we continue to want to build scale. We are very optimistic about the opportunity to deploy capital, to grow our presence in all three of those businesses in 2019 and beyond, because there will be again some trepidation with regard to the providers cross the segments regarding a new rule changes and we want the flexibility to be able to capitalize on that against the long term growth in demand in all three of these business lines is not going away.

Okay, that's great and this is obviously very specific to Q4. But if I look at your Q4 implied EBITDA guidance at the midpoint its around $206 million, sort of flattish to slightly down year to year assumption. I know you’ve highlighted these $4 million to $5 million of negative impact around the hurricane, but alternatively I guess you still have some benefit year-to-year from the contribution from the Camellia acquisition. I don’t know what the underline assumption on bad debts and medical expanse, whether that’s changed in anyway or are you assuming that sort of goes back to the historic bounce back versus what you are seeing so far this year. But anyway, I’m just trying to understand the puts and takes that lead you to something that’s sort of flattish, even recognizing your $4 million to $5 million negative impact from the hurricane.

Its three line items, all of which are within the IRF segment and it’s the anticipation that both group medical and bad debt revert back to historic levels and not to levels that we could experience within the last few quarters here and those would be pretty significant increases. And then the third again it’s just the increase in NCI that we are seeing as a result of the composition of our beds between joint venture relationships and wholly owned and also where the more substantial portion of EBITDA increase is approved.

Thank you. I would now like to turn the call back over to Crissy Carlisle for any closing remarks.

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