Good morning, everyone, and welcome to HealthStyle Special Announcement 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. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.
I will now turn the call over to Krissy Carlisle, HealthStyle's Chief Investor Relations Officer.
Thank you, operator, and good morning. Joining me today on the call are Mark Tarr, President and Chief Executive Officer and Doug Coltharp, Chief Financial Officer. Before we begin, if you do not already have a copy, the press release, supplemental slides and related Form eight ks filed with the SEC are available on our website at www.helpsouth.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 press 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, uncertainties and other factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations are discussed in the company's SEC filings, including the press release issued and related Form eight ks filed last evening, the Form 10 ks for the year ended December 3136 and the Form 10 Q for the quarter ended March 3137. 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. Statements made throughout this presentation are based on current estimates of future events and speak only as of today. The company does not undertake a duty to update these forward looking statements.
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. Following this morning's call, I will be available later today and tomorrow for additional questions. Please call me at (205) 970-5860. With that, I'll turn the call over to Mark.
Good morning, everyone, and thanks for taking the time to participate in this morning's call, particularly on such short notice. We are excited and energized about our name change and rebranding initiative as described in last evening's announcement. This morning, Doug and I will provide the context and rationale for this decision and address your questions. Before we begin, I'll remind you that our Q2 earnings release is scheduled for July 31 with our investor and analyst conference call to follow on the morning of August 1. As such, we are currently in a quiet period regarding Q2 and year to date performance and will not comment on these topics or 2017 guidance today.
To reiterate the key points from last evening's announcement, HealthSouth Corporation plans to change its name to Encompass Health Corporation. The name change and rebranding reinforce our existing strategy and position us as an integrated provider of inpatient and home care. Our New York Jockeys change ticker symbol will change from HLS to EHC. The corporate name change and ticker symbol change will both be effective as of 01/02/2018, the first day of trading in the New Year. And both business segments, inpatient rehabilitation and home health and hospice will transition to the Encompass Health branding.
Doug will provide additional detail on the investment associated with the name change and rebranding in his comments. This decision to move from two brands to one unified brand has been the result of a year long process to understand how our brand could better reflect and support our business strategy. When we first set out on this, we had less ambitious intentions. Our goal is to improve awareness of our strategy and the value proposition for each of our business segments. Changing our name and logo was not under consideration.
We knew we needed outside expertise to augment our internal resources on this important project, and so we conducted an RFP that led to our engagement of Prophet, a leading brand consulting firm. We then conducted extensive research across multiple audiences, acute care leaders, physicians, case managers, patients and their caregivers, the investment community and our employees to learn how our businesses are currently perceived and to further understand what these audiences are seeking from post acute care providers. In analyzing the research findings, we found that maintaining two separate brands was limiting the awareness and understanding of our strategy and value proposition with key constituencies. Our company was not being consistently recognized for unique strengths that are shared across our businesses, specifically coordination of care across the post acute continuum through collaboration with acute care providers and partners, leadership in delivering integrated inpatient and home based care and a patient centered focus leading to superior patient outcomes. We also consider the changes underway in the market, moving increasingly toward integrated delivery payment models, value based purchasing and site neutrality.
We believe our integrated care delivery model positions us to thrive in this environment. For some time, we have articulated these market changes and our responsive strategic positioning. For example, Slides six and seven of the supplemental information should be very familiar to all that follow our company. Still, our research suggests that our outside constituencies have not consistently perceived the linkage between our inpatient and home based segments. These considerations contributed to the conclusion that a single strong brand would more effectively achieve our business goals.
After extensive consideration and deliberations, we determined that Encompass Health would be the best name to represent an integrated provider of healthcare solutions. This name and the word Encompass in particular represent our commitment to creating a seamless system where high quality care is coordinated by clinical teams across the inpatient and home settings. We are fortunate to have already owned substantial intellectual property rights in a name that so effectively reflects our business strategy and expanding national footprint, which includes a portfolio of inpatient rehabilitation hospitals, home health locations and hospice locations. We also appreciate how this name honors our foundational businesses, HealthSouth Corporation and Encompass Home Health and Hospice and the strong pride our employees have in each of these legacy organizations. While our name is changing, our leadership and strategy are not.
I will serve as the President and CEO of Encompass Health Corporation. Barb Jacobsmeyer will continue to lead operations for inpatient rehabilitation hospital segment and April Anthony will continue to lead the home health and hospice segment of our businesses. Our strategy and priorities remain intact. Our primary focus remains on delivering high quality care in a cost effective manner to Medicare beneficiary population. Demand for these services is being driven by the growth in this segment of The U.
S. Population. We believe the movement towards episodic and value based payment models will continue as will the progression towards site neutrality within post acute inpatient sector. Our portfolio of freestanding inpatient rehabilitation hospitals is well positioned for this progression towards site neutrality given their physical construct, clinical staffing, operating expertise and advanced information technology. We are increasing our use of data analytics to advance clinical initiatives to further improve our patient outcomes.
We will continue to drive the clinical collaboration between our business segments as we believe this enhances patient outcomes and positions us as a partner of choice with healthcare systems and payers. We are making good progress on identifying and codifying best practices for overlap markets through our TeamWorks project. We remain confident in our strategy and our ability to execute on our key operational initiatives. Now I'll turn it over to Doug to provide additional detail on the investment associated with the rebranding initiative.
Thanks, Mark, and good morning, everyone. Although we are planning on our corporate name change and ticker symbol change taking effect on 01/02/2018, the rollout of the Encompass Health brand across our franchise will be gradual and is expected to be completed by the 2019. The total rebranding investment to be incurred over this multiyear period is estimated to be approximately 25,000,000 to $30,000,000 These costs relate to managing and executing the conversion of branded assets, developing the strategy and plan to engage our stakeholders and executing targeted marketing for broader awareness of the new Encompass Health brand. In 2017, we expect to incur approximately 7,000,000 to $10,000,000 of which 6,000,000 to $8,000,000 will be included as operating expenses and 1,000,000 to $2,000,000 will be capital expenditures. As Mark stated in his comments, the decision to move from two brands to one brand is the result of a year long process, a process that was not initially targeted at this destination.
Accordingly, our previously provided full year 2017 guidance included approximately $1,000,000 in anticipated consulting fees related to improving our brand awareness, but did not include the balance of the expected 7,000,000 to $10,000,000 related to the name change. We incurred approximately $500,000 in branding related expenses in Q1 of this year and an additional approximately $1,700,000 in Q2 of this year. We will update our 2017 guidance in conjunction with our second quarter earnings release scheduled for July 3137. With this announcement, we are now initiating a detailed planning process for the transition of our branded assets such as signage at our hospitals, home health and hospice locations and home offices. We will be sharing more information with you later this year on the specific transition goals for 2018 and 2019.
And now we'll open the line for questions.
Our first question comes from the line of
Good morning, Mark. Thanks. Good morning, Doug, Chris, you as well. So just the first question, just the cadence of expenses. I heard you, Doug, say $500,000 in the first quarter and 1,700,000.0 just want to make sure, that 2,200,000.0 has that all been fully expensed?
Or was any of that in CapEx? And is it safe assume that only that part of the $1,000,000 that was in guidance has already been spent? Is that the way to think about it, the incremental $1,200,000 is not was not in guidance. Is that the way to think about it?
You're right on all accounts, Josh. All of the incurrence to date has been in OpEx, not CapEx. And yes, the amount over $1,000,000 was not included in guidance.
Okay. All OpEx. Okay. And then secondarily, I understand that there's more of a strategic rationale and sort of understanding where the future is moving. But are you have you guys thought about this as a potential return on investment?
Or should we just think of this as sort of a necessary spend to sort of advance the strategy, right? Is there a way to measure benefit?
Drex, it's Mark. I think it's difficult to put a number on this. We certainly view this as an opportunity to go towards a branding that would better identify with our strategic initiative. And by having two brands, one for each one of our business segments, we're actually missing out on an opportunity and became more and more difficult as we're out in the marketplace to try to support two brands. So I think it's difficult to put an actual dollar on there for a return on investment, but we do think this is the right thing to do for the company moving forward.
Yes. I think it will be less than a direct line, but I do think that there will be tangible benefits that accrue. Some of the reasons that led us down this path are: one, in discussing the current pipeline for joint venture opportunities for new IRFs with our business development group, it became aware to us that many acute care systems were not familiar with HealthSouth in spite of our prominence in this particular sector of post acute care, and they didn't understand the relationship that we had with Encompass and what we could bring to the table in terms of the coordination of post acute network services. So we do believe that ultimately the rebranding is going to further smooth the process for negotiating new joint venture relationships. We think it will help underscore the value proposition with other payers as well, particularly Medicare Advantage plans.
And then finally, we identified that in the overlap markets in which we are currently working on clinical collaboration opportunities that the maintenance of two separate brands was in some ways serving as an impediment to our progress. And so that we believe that this initiative together with TeamWorks is going to be imperative in terms of achieving our goals with regard to clinical collaboration.
Our next question comes from Cheryl Skolnick with Mizuho Capital.
Good morning, Cheryl.
Good morning, everyone. So a couple of things. Your last answer Doug was very helpful because I did wonder whether you were despite the success you've had in increasing the number of HealthSouth discharges that are treated in Encompass Home Health and that's been notable success, I did wonder if there was a bit of a hitch with the different brands. So that's important and appreciated. I guess the one thing though that I I do have to ask there's two questions really that I have to ask.
The first one being the timing of this announcement and why it wasn't put together so you could give us a whole coordinated view of guidance because this is sort of piecemeal. We need to we know we need to adjust expenses. Unfortunately, we don't really have a good sense of whether or not we need to adjust anything else. So I don't know if you could either discuss why now or or how we should think about that given that you're in a quiet period. Then the second question goes to a more strategic point, and I know I'm only allowed one but I'm asking two, which is you've got the situation with Kindred who seems to be having much less success in increasing the number of home health episodes that it gets from its own upstream partners within its company, yet you're now moving in that direction of integrated post acute care.
So why are you having success or why is the timing to build this network now better than the timing when others might have tried it in the past?
Cheryl, this is Doug. Let me start with the first one. And it was a decision that we kind of batted back and forth for a long period of time whether to combine the two announcements or to separate them. Ultimately, we were concerned that with an announcement magnitude were to be coupled together with the Q2 earnings report, there was a potential that both elements of that report would be diluted and that it would be difficult to focus on the Q2 results when we were talking about the rebranding and vice versa. We recognize that that puts the analysts in a bit of a difficult position because they don't have the ability to incorporate our Q2 results in updating their own models.
But what we're saying right now is that the guidance is unchanged and we have just given you some new information regarding specifically the branding expenses. It will also be the case that on a go forward basis with each quarterly report, we will provide for you the amount of investment in both OpEx and CapEx dollars related to the implementation of the branding strategy.
And to answer your second question, Cheryl, the timing on this is particularly good, we believe, relative to extending the clinical collaboration. The two organizations have had essentially two years now to work together to establish the framework for the clinical collaboration. If you take into account the fact that we closed on the transaction with Encompass at the 2014, we had all of 2015 and 2016 for the two organizations to grow close together. 2017 has been focused on looking at the best practices. And ultimately now we're in the throes of a TeamWorks initiative to standardize those best practices for that clinical collaboration.
Those all go together in terms of why we believe now is a great time to make this announcement and rebrand the company under one brand. And Cheryl, in
terms of comparing the relative success we've had to other post acute care providers, it's difficult for us to comment on their strategies. I think what is the case is we have been very focused and targeted in the investments that we've made and in the direction of our efforts. And so we've invested in establishing more overlap markets between home health and IRF. April and her team at Encompass have invested in staffing the home health agencies so that they were better positioned to service the types of patients that are coming out of our rehab facilities. We had already each made the substantial investment in the information technology and then linked the two together so that from an EMR perspective, we had a seamless flow.
We've been continuing to work with Cerner on developing our overall post acute network coordination capabilities. So I think it's been a series of very focused initiatives and investments that have led to our success in this regard to date.
One of the things we've seen
is that the cultures encompass and help South. We're actually very closely aligned relative to focus on quality outcomes, taking great amount of pride in being the most efficient provider out there, having high regard for low turnover and being great places to work. So all of that has enabled us to come together under one brand and move forward on our clinical collaboration efforts.
Our next question comes from Kevin Ellich with Craig Hallum. Just
got a couple for you guys. Of the remaining spend in 2018 and 2019, I think it'll be about 18,000,000 to $20,000,000 How should we think about the cadence of that? And should the same proportion or about 15%, 17% be CapEx versus OpEx? Or how should we think about that? And then my follow-up question is, Doug, I think you mentioned in your prepared remarks that, you know, the brand, you know, some some health care systems and JV partners didn't really know the HealthSouth name.
Was that more geographic in in nature in terms of what systems didn't know HealthHealth? Have they never watched ESPN or SportsCenter and seen the HealthHealth rehab facility with the football player coming out of it, or how should we think about that?
We would have to be doing a '90s rewind to see the professional athletes coming out of one of the HealthSouth facilities. That was a long time ago in our past. I think in terms of the lack of familiarity with the brand name, certainly as you move further and further away from the Southeast, the degree to which we were encountering that situation increased, but it wasn't specific to any geography. Having said that, as you know from some of our recent reports, we've had quite a bit of development activity, for instance, in the state of California. And the name HealthSalve doesn't always resonate very well in a place like California.
Don't want to overemphasize how much of an impediment that was, but we certainly think that the name change will facilitate some of those JV development opportunities. In terms of the cadence on the balance of the expenses, it's a little difficult to estimate, and a lot of that relates to our existing joint venture relationships. So we're not going to force a specific logo change and name change upon our JV partners. We take the term partnership very seriously. So we've already been in contact with our existing JV partners, and we're going to work with them to determine the best timing and the best modality for incorporating our new branding initiative into each specific hospital.
And so that makes it difficult for us to know the exact timing of some of the changes that will result in additional expenses over that two year period. In terms of the breakdown between OpEx and CapEx, of the aggregate 25,000,000 to $30,000,000 spend, we estimate that about 60% to 70% of that will be operating expenses and the balance will be capital expenditures. The reason that we can't be more specific is again because we don't know what specific path on a hospital by hospital basis we'll head down, particularly with our JV partners. And then depending on the strategy we pursue, there will also be some accounting traps to be run with regarding which elements will be capitalized and which will be expensed. But again, our current estimate is that out of the aggregate, 60% to 70% will be OpEx and the balance will be CapEx.
Great. Thank you.
Our next question comes from John Ransom with Raymond James.
Good morning, John. Good morning, John. Hey, good morning. So
my question is, I guess, a little more philosophical. We all know the some of the sad history of the Screwchy days. Is part of this just defensive that the HealthSouth brand still had a little bit of a legacy tank to it even though you guys have been hard at work for a decade to erase some of the unfortunate history?
It's really not a driving force here. Certainly, indirectly, being able to change names, we will be moving into a new home office building next spring. All those have a way of distancing ourselves from that particular chapter in our past, but it was not a driving force and factor in this rebranding initiative.
Okay. And is it just your view that discharge planners just had more familiarity in general with the Encompass brand? Is that to oversimplify it, is that an easy way to think about it?
No, that's
not the right way to think about it. I think when we think about Encompass, first of all, the definition of Encompass itself is a nice overlay when we think about treating the patient across business segments and start to think about integrating our clinical approach. And it also gives us a chance with the name Encompass Health to take a portion of both of the foundational businesses from the business segments that make up our current company and have a way of representing both of those business segments in the new name.
What our research uncovered, John, is that we actually had fairly low brand recognition for each of our two existing brands. And that's not surprising because neither one of our organizations had invested much in any kind of marketing or branding initiatives. What we did find is that where our brands were known, they were both recognized as extremely high quality providers of care in a very cost effective manner and being organizations of high integrity. As we consulted with Prophet about once we had made the determination about the fact that we wanted to move to one name and we thought about what name we might choose, profit to their credit came to us and said, we could charge you guys a lot more in the way of fees and try to come up with a brand new name. We'll make something up.
But you already own a name that really underscores the strategy that you're attempting And we think that bringing that out and underscoring the value proposition and bringing a new logo to life is really the best strategy. So that decision actually became fairly easy.
Well, I congratulate you, least, on not picking some new made up word that nobody knows what it means. Essentially, the health care companies do. They come up with some strange double name that means nothing to anybody.
We were unaware of that and wanted to make sure we didn't fall into that trap.
Make sure the word exists in the dictionary already. Okay.
It could also, just from a pure risk management perspective, it substantially derisks this rebranding because we already owned so much of the intellectual property surrounding the name.
So you're gonna be passing out some T shirts to us at some point with the name?
Golf shirts, John, for you.
Golf shirt, all Well, that works for me. Thanks, guys.
Thanks, John.
We do have a follow-up question from the line of Cheryl Fulnik with Mizuho.
Okay. So John Ransom gets the award for the best questions and most entertaining conversation on this call and for many of them. Thank you, John. But more seriously, so let me just go back to this guidance if I may please because I just wanna make sure I understand exactly what you're saying. You're saying your guidance is unchanged.
You're saying your OpEx above and beyond what's already been spent this year should be 5,000,000 to $7,000,000 higher for the balance of the year, the three quarters that are not yet reported and you gave us the detail. Should I be adding those two three things together, those various statements together to draw a conclusion or am I missing a piece?
Yes. Again, as Mark commented at the outset, we are not reaffirming our guidance. We're just not changing our guidance until we release our second quarter information. We've done is just given you some information about expense items that were not included in that previously provided guidance. We're not trying to signal anything regarding Q2 performance at this point.
Okay. Well, I'm very glad then that asked that question. So then we should feel free to make whatever changes we need to make even if it falls outside or inside the bounds of guidance depending on our models. Got it.
That's correct. And again, we recognize that puts you in a bit of an uncomfortable position. We apologize. We thought this was the right strategy.
No, it's fine. It's fine. I just wanted to thank you. I'm sorry to interrupt, but I just wanted to make sure that I understand it. And I can't disagree with the strategy even if it's uncomfortable.
It's sort of like there's no good time. I understand that. Can we go back to the strategic points
for a couple
of minutes? Because it has been troubling to me that there hasn't been this sort of cultural coordination in the leadership roles or as close an integration between Encompass and HealthSouth as I might have liked. There's been sort of a separateness. So what does this rebranding signal about the collaboration coordination? Because I think it's happening on Main Street where it clearly needs to happen.
It sounds like branding will allow it to be exported to other markets as one brand, which makes perfect sense in markets where the HealthSouth name was perhaps not as dominant as it is in some. But but that that running these businesses very separately has troubled me. So is this a signal that there's gonna be more strategic coordination at the top or more integration and feeling like it's one whole company rather than two really strong companies that get along really well?
Well, Cheryl, let me clarify. There has been extensive collaboration between the two business segments and the senior leadership literally from day one. And April and her team have worked extensively with the team here in Birmingham, The inpatient senior management group along with the home health and hospice senior management group have worked extensively. So we didn't want to do anything to give you the wrong impression that these two teams have not been linked at the hip from the day of the closing of the businesses. What we're doing with this rebranding is only drawing that even tighter and actually making it easier to continue down the path that we're already on by eliminating this process of trying to support two separate brands.
So we think this will only continue to add momentum to what we've already participated in thus far.
And I would just add to that. I think that the branding strategy that we're revealing today is following the internal coordination of activities, not leading it. I do think it will lead some of the external activities, but we are completely aligned from a strategic perspective. April and her team coordinate we're one organization that has been functioning that way. If we've created any misperception regarding two separate organizations that only occasionally get together, then we apologize for that.
But we are we have been functioning and will continue to function as one organization with two complementary business segments.
That's great to hear. And it may just have been me, but I'm very glad to hear that clarification and couldn't be more pleased for the success of the organization. One final more strategic question. So as I look through your presentation and as I listen to what you're saying, you've got inpatient rehab having disposed of LTACs in the past, you're not in SNFs and you are in home health. And so, you know, given that I think that that HealthSouth is trying, you know, its entry into home health through the acquisition of Encompass pretty much perfectly, that you've abandoned sectors that have or or, you know, repositioned out of sectors that are more challenged from a reimbursement perspective.
Do you still think that it is enough to be in rehab and home health skipping over skilled nursing in between or to the side? Or should we also think about this branding initiative as having strategic implications for what other businesses you could get into?
Right now, we believe that this provides our existing two business segments provide a significant growth platform moving forward. We do think it positions us well for this movement towards site neutrality that we have discussed relative to having IRFs versus the need to have a footprint or a toehold in on either LTACs or skilled nursing facilities. So we believe that we are well positioned, Cheryl, going forward for having the growth platform necessary to drive our business.
And Cheryl, it really gets back to the two slides, and by now you're familiar with them. We've included them here in this deck to reiterate our strategy to Slide six and seven in the supplemental slide. And so you can kind of put the two goalposts out there as the delivery system will go in one of two directions. One is if no change is ever made to the silos that define the post acute inpatient settings, then we like our position by investing in the IRFs because of the demographic tailwind that is out there and we think there are substantial growth opportunities starting with the fact that if you look across the country at the number of CMS-thirteen eligible discharges that ultimately wind up in a rehab setting, nationwide it's less than twenty percent. So there's still a lot of room to grow.
And again, the demographic cohort that we serve is growing at a rate faster than the national average. So if we have to stay in our swim lanes, we're perfectly comfortable continuing to invest in IRFs and complementing that business with a home health offering. We believe, however, that we are going to move more towards site neutrality. And as Slide seven points out, we are a firm believer that as we progress towards site neutrality, an IRF setting is best positioned in terms of its physical construct and its current clinical staffing to be able to move upstream and downstream in terms of acuity to capture more of the addressable market. So we believe it's the right place to continue to invest.
Our next question comes from A. J. Rice with UBS.
Good morning, AJ.
AJ, your line is open. Can you please unmute it on your end?
Yes, sorry about that. Hello, everyone. In describing the rationale for doing this, most of the discussion's been around, you know, referral sources, making sure they understand the coordination, the fact that you're in the two business lines, and there's some cross fertilization to be had there. I know some other players, whether it's payers or providers, are talking about this move to consumers being more involved in the decision making, wanting to have more of a brand recognition among consumers. I'd be interested to know, did that have any impact on thinking about the timing and the one brand approach?
And is any of this money going to be spent more directly targeting consumers and trying to raise your profile with them?
Yes, both of those comments, A. J. We do recognize that the choice patient choice is taking different areas and directions than it has in the past. While certainly the physician referral is critical and influencing the patient choice, We now are seeing more and more family members that are influencing the patient choice because they have gone online, because they have accessed other information that is out there and available that now influences those decisions. So yes, we are trying to respond to this changing marketplace as part of this rebrand initiative, and it was one of the motivating factors for moving forward in this direction.
And A. J, I'd also add to that that those same factors apply to recruiting prospective employees.
Interesting. Okay. And is any of the any meaningful portion of the $28,000,000 sort of targeted in any way on a consumer outreach? Or is it is that just sort of that will come along with the overall rebranding?
No. A portion of that investment is definitely targeted towards more marketing. And I say more marketing because basically we've done none before.
Right.
Okay. Interesting. All right. Thanks a lot. Thank you.
And with that, there are no further questions. I will now turn the call back over to Mark Tarr for closing remarks.
Okay. Thanks again, everyone, joining this morning's call. In closing, this important milestone represents a new chapter in our company's combined history. We are energized by the opportunities Encompass Health brand will create to communicate the strength of our business model, highlight our value proposition and support our ongoing business growth. We look forward to speaking with you again on August 1 for our Q2 earnings call.
As a reminder, please reach out to Krissy Carlisle with any questions following the call. Thank you.
Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. Please disconnect your lines at this time.