Good morning, everybody.
Good morning.
Look at this crowd. This is great. Fantastic. All shareholders.
Yeah.
Okay. Welcome to our 2016 annual meeting. I'm Lee Higdon, chairman of the board of directors of HealthSouth, and I now call this meeting to order. Before we proceed to the formal business of the meeting, I would like to introduce the members of our board of directors. I will ask each of them to stand as I call their names. In addition to me, they are John Chidsey, Don Correll, Yvonne Curl, Charles Elson, Joan Herman, Leslie Katz, John Maupin, Ed Shaw, and Jay Grinney. Okay. We will now proceed with the business of this meeting. As you entered the meeting room, you should have received an agenda for the meeting and the rules of conduct that will govern our meeting today. I will preside at the meeting, and Patrick Darby will act as secretary. Mr. Secretary, will you please report on the procedural formalities?
Thank you, Mr. Chairman. I have an affidavit from the firm responsible for mailing our proxy material that the notice of annual meeting, proxy statement, and proxy cards were duly mailed commencing on April 5, 2016, to stockholders of record as of March 8, 2016. A list of those stockholders is present at this meeting and is available for inspection. The list has been available for a period in excess of 10 days. The company has appointed Deborah Baker as the Inspector of Election for this meeting. Ms. Baker has taken and signed an oath faithfully to execute the duties of Inspector of an Election. Mr. Chairman, I also report that the preliminary vote counts indicates that the holders of more than a majority of the outstanding shares of the capital stock entitled to vote at this meeting are present or represented by proxy, constituting a quorum.
There are four items to be voted on at this meeting, and they are listed in the agenda. These items were more fully described in the proxy statement previously mailed to stockholders. The company did not receive any stockholder nominations for this meeting. There will be a period for questions and comments about these agenda items before the voting. Later in the meeting, there will be another period for general questions and comments from stockholders. Questions and comments must comply with our rules of conduct for this meeting. In addition, some of the information provided today will include estimates, projections, and other forward-looking statements that reflect our current views with respect to future events and financial performance. All forward-looking statements, for example, 2016 financial guidance and priorities, speak only as of the day hereof.
We undertake no duty to publicly update or revise them, whether as a result of new information, future events, or otherwise. Everyone is cautioned not to place undue reliance on any such forward-looking statements, as they are based on current expectations and general assumptions that we believe are reasonable, and such forward-looking statements are subject to various risks, uncertainties and other factors, many of which are beyond our control, that may cause actual results to differ materially from the views, beliefs, and estimates expressed here today. In addition to those factors identified in our annual report on Form 10-K for 2015 and our quarterly report on Form 10-Q for the first quarter of 2016, each filed with the SEC, there may be other factors beyond our control that may cause future results to differ materially from our current expectations. Certain non-GAAP financial measures will also be referenced today.
For such measures, reconciliations to the most direct comparable GAAP measurements are available in our investor reference book, which can be found on our website at investor.healthsouth.com.
Great. Thank you, Patrick. The first item of business to be voted on today is the election of 10 directors to serve until our 2017 annual meeting of stockholders. The board of directors' nominees are the only persons standing for election, I declare that the nominations are closed. Does anyone second the nominations?
I second the nominations.
Okay. Our second proposal concerns the ratification of the appointment by the Audit Committee of PricewaterhouseCoopers, LLP, as HealthSouth's independent registered public accounting firm. I move for the approval of this proposal. Does anyone second this proposal?
Second.
You see a repetitive nature to this a little bit. The third item of business to be voted on today is the approval of the compensation of our named executive officers. I move for approval of this proposal. Does anyone second this proposal?
Second.
Okay. The fourth item of business to be voted on today is the approval of the 2016 Omnibus Performance Incentive Plan. I move for approval of this proposal. Does anyone second this proposal?
Second.
Okay, there we go. We will now proceed to the period set aside for questions and comments regarding the proposals only. As mentioned earlier, there will be an opportunity later in the meeting for general questions and comments. If you would like to speak, please stand up and wait to be recognized. Okay. The polls are now open. Do we go to the opening of the polls?
Yep.
It's as of 11:06 A.M., right? Central Time. If you previously voted by proxy, you do not need to vote by ballot unless you wish to change your vote. However, if any shareholder present has not yet cast a vote or wishes to change a prior vote, you may do so by completing a new ballot. If you need a ballot, please raise your hand now, and we will bring one to you. Anybody need a ballot? Nobody dares raise their hand, so that's okay, so there being no requests for ballots, and thus, no further ballots, I declare the polls closed as of, I don't know, 11:08 A.M. Central Time. I ask that the Inspector of Election prepare a report on the final voting results and submit it to the Secretary when complete. I now ask the Secretary to present the preliminary voting results.
Thank you, Mr. Chairman. Based on the preliminary results received from the Inspector of Election, the stockholders overwhelmingly have elected each of the 10 nominees as a member of the board of directors to serve until the 2017 annual meeting of stockholders, has ratified the appointment of PricewaterhouseCoopers, LLP as our independent registered public accounting firm, have approved the compensation of our named executive officers, and approved the 2016 Omnibus Performance Incentive Plan.
Good. I will now open the floor for general questions and comments. If you would like to speak, please stand up or stay standing to be recognized. Okay. There don't appear to be any further questions. The formal portion of this meeting is now complete. I move to adjourn our meeting.
I second the motion.
With that, I declare this 2016 annual meeting of the stockholders adjourned. Done. Okay. At this time, our President and Chief Executive Officer, Jay Grinney, will share with everyone an update on the state of the company.
Great. Thank you, Lee.
Thanks.
Don't feel bad, Lee. When we have town hall meetings, I don't get questions either. First of all, I want to thank all of you for coming this morning. As I mentioned at our town hall meeting, this is your company, and it's very important to me, and I hope it is for you, that you have an opportunity to see my bosses right here, and the people who have led this company over the last 12 years have done just a superb job. The role of the board of directors is not easy. They challenge us. They provoke us to think about things that we otherwise might not have considered. They've been very supportive of all of the actions that we've taken over the years. They put in an enormous amount of work. We give them a lot of material for every single meeting.
To a director, they come, they've read all of the material, they're knowledgeable, they ask us tough questions. Then, as I said, they've been extremely supportive of this management team and all of the actions that we've taken. What I want to do is to present to you just a quick update on the company and where we're going. As you know, I'm not someone who likes to look back and be too introspective, 2015 was a pretty incredible year. As you know, we started 2015 with the strategy of advancing our long-range goal of being the preeminent post-acute provider of both facility and home-based services through the acquisition of Encompass. That was probably the most important strategic move that we've made in the 12 years that I've been here. We're very fortunate to have April Anthony here today. April is the CEO of Encompass.
You want to stand up? Probably she doesn't, please stand up. It was because of the company that she created that HealthSouth was able to enter into a new segment of the post-acute space and to continue offering high-quality post-acute care to a broader population. That acquisition allowed us to then, in turn, expand our footprint with the acquisition of CareSouth, which we completed towards the end of 2015.
We entered 2015 with the strategic imperative to expand into home health and expand our post-acute footprint. We did that through the acquisition of Encompass. We supplemented that with an acquisition of CareSouth. At the same time, we looked to expand our footprint in the inpatient rehabilitation arena. Not only did we add eight hospitals, either through the acquisition of Cardinal Hill, executing joint ventures, building de novos, we also purchased Reliant. That acquisition at the end of 2015 was a very significant acquisition for us that again, positioned this company for growth in the future. Not only did we accomplish significant growth in 2015, we also achieved some very important metrics and milestones with respect to quality. As I've said many times, our company is going to be defined by the quality that we provide day in and day out.
Historically, payments for providers, healthcare providers, have been pretty standardized. As you've heard me say on many occasions, we are moving toward value-based purchasing of healthcare services. What does that mean? That means that we're moving to a point in time where the quality that you provide will dictate the payment that you receive. It's very important that we keep our eyes on that long-term trend and make sure that we are always focusing on the quality of care that we provide and ensuring that quality is superior to the national benchmarks. As you can see, both on the inpatient side and on the home health side, we achieved that in 2015. Huge accomplishment for us. Equally important is to ensure that we have an engaged workforce. We're only as good as the people that make up this company.
For those of us in the corporate office, we recognize that we exist to support those who are in the hospitals, in the home health agencies, who are actually providing that care. One of the accomplishments of 2015 was the fact that both HealthSouth and Encompass were recognized as one of the top 100 best places to work by Modern Healthcare. For those of us at HealthSouth, we feel really good about that achievement, but our friends at Encompass, sort of same old, same old, they've been recognized many times before. Encompass also received recognition this year as one of the top 100 best places to work in the country, not just healthcare, in the country by Fortune Magazine. That was a real kudo and a real accomplishment for April and the entire team at Encompass.
We also achieved very strong financial results in 2015, continuing a trend of strong revenue growth, strong EBITDA growth, strong earnings per share growth, and strong free cash flow growth over the last five years. That success has allowed us to then position the company for continued growth and continued success into 2016. We have three basic objectives this year. For those of you who have been in the town hall meetings, you've heard me walk through a number of other objectives, 22 other objectives that we're working on simultaneously. If you boil it all down, there are three things that we want to focus on in 2016. The first is continue the growth of the company. Now, I will say that the growth that we saw in 2015 is not going to be replicated. We're not going to duplicate that.
We hit the pause button in terms of major acquisitions. The integration of Encompass and the integration of CareSouth and Reliant I think taxed us a little bit, frankly, in 2015. We need to make sure that those integrations continue smoothly into 2016, so we are not contemplating any major acquisitions for the remainder of this year and for the foreseeable future. We're putting a pause on that. On the other hand, we do see opportunities to expand our portfolio, both on the inpatient side and on the home health side, and we will continue to invest in that growth. You can see on the hospital side, we have a number of hospitals already in some form of development. Some will be opening this year, some will be opening in 2017.
Even though there's only one showing in 2018, based on our development pipeline, we are very confident that there will be other hospitals that we will be adding to the portfolio in the balance of this year, 2017, and in 2018. In addition to acquisitions, we're also expanding our hospital footprint through the bed additions that are part of feeding that organic growth in the markets where we have very strong presence. The demand is there, and we are there to meet the demand and to continue to expand our hospitals. Home health also has a very attractive growth profile. In fact, April just announced yesterday the closing of an acquisition of agencies in Georgia. There are others in the development pipeline that we're looking to acquire.
A big part of the objectives for the company in 2016 is to continue that growth in both segments, but not to stress the balance sheet with large acquisitions. Second objective has to do with the balance sheet and with the financial underpinnings of the company. We want to make sure that we continue to focus on reducing our debt. As you know, we've had the goal of having our leverage ratio at about three times or less. We levered up to acquire Encompass and CareSouth and Reliant. We got to 4.6 times at the end of 2015. We now have a goal of getting it below four times at the end of this year, and then continuing to move that leverage ratio down over time, eventually getting back into that three times range.
As shareholders, you need to be assured that this management team, and most importantly, this board is very focused on maintaining a very strong, flexible capital structure. We will be focusing on growing EBITDA, paying down debt, and reducing that leverage ratio. At the same time, we have the opportunity, because of the free cash flow that we're generating, to return capital to our shareholders, to you as shareholders, either through dividends, and that is a very important way. We introduced that several years ago. The board just approved the next dividend payment at our meeting just a moment ago.
The second way of returning value to shareholders is by buying back shares, so that all of us who are shareholders and maintain that ownership position have a larger ownership piece of the enterprise as we buy back shares from those who no longer wish to be invested in the company. This is a very important objective for us in 2016, and I believe positions us to be successful going forward. The last major priority for us has to do with positioning the company to be successful in this evolving delivery system.
You heard me talk about what we need to do to utilize the data in our ACE IT system, use the data that April has at Encompass through Homecare Homebase to start assembling that data into meaningful information that will allow us to move down that road of improving quality, improving patient satisfaction, and improving our position in the evolving delivery system. We've taken some baby steps in 2016. We're going to start using the ACE IT system to do some predictive modeling as we look at acute care transfers. One of the key quality metrics in our industry, we need to reduce the number of patients who come into our hospitals, and then for whatever reason, their condition starts to deteriorate, and then they have to go back into the acute care hospital.
It's not only additional cost, but from a patient standpoint, it is a step back in their recovery and in their rehabilitation. Joe Stillo is working with other physicians, other members of our company to focus on what are the causes of these acute care transfers, and how can we predict when a patient's medical condition starts to deteriorate so we can intervene before that patient gets to the point where they're so critically ill that they need to go back into an acute care hospital. Nobody else is doing that in post-acute. It gives you an idea of the strength of this company and the value of this $200-plus million investment that we made into ACE IT.
Another example would be to work with our partners at Encompass, looking at clinical pathways that will allow us to provide a better level of care for patients who need both inpatient rehabilitation and home health services, to integrate the care as soon as that patient hits our hospital. To the extent that we can even get that patient identified before they're ever admitted into an acute care, begin working that process and those clinical protocols the patient comes into our hospitals, and as soon as they're here in our facilities, they then start the process of coming up with a discharge plan that will bring them home and allow them to resume their lives as quickly as possible. I think we've got an exciting year. We started the year off on a very strong note. As you know, we reported our results last week.
A very strong reaction from our shareholders. Our stock went up 9% that day. Again, the reaction has been very strong, but the results were very solid. That also allowed us to then increase our guidance for 2016. The current guidance for net operating revenues is between $3.58 billion and $3.68 billion, with adjusted EBITDA between $770 million and $790 million, and EPS between $2.37 and $2.49. In conclusion, as we look at HealthSouth today, I think there's a lot of reasons why you, as shareholders, should feel very comfortable in your investment with us and very confident of the future. We're in a very attractive segment of healthcare. The underlying demographics of Medicare population growing at a 3% per year clip provides a very nice tailwind for those of us who are providing care primarily for Medicare beneficiaries. The industry that we're in is still highly fragmented.
There are a lot of different providers. We're the largest in inpatient rehabilitation. We're the fourth-largest Medicare provider of home health services. We're in these industries with a position of strength, and that industry-leading position cuts across a lot of different variables. Not only is it in our ability to scale our operations, but also to use the data and the information that we've assembled to come up with best-in-class clinical protocols that can be then disseminated across all of our hospitals. We also have the advantage of being able to provide that care on a very cost-effective basis. That, too, will differentiate us going into 2017, 2018, and beyond. We're not going to see a lot of additional rate increases. As you know, in 2017, for inpatient rehabilitation hospitals, the expected increase is going to be 1.7%.
Where costs are going up at 3%, 4%, 5%, we're going to be losing ground. We have to be always focused on the efficiency and the effectiveness of the care that we provide. One advantage of this company, unlike other post-acute companies, is that we own a lot of our real estate, and that gives us a lot of control and flexibility as we think about the future. We have a very strong balance sheet. It's flexible. We don't have any near-term maturities. The first major maturity is in year 2020 with the credit agreement, and the bonds begin to mature in 2020. A lot of runway between now and the time that any of these major maturities come to pass. Finally, as I mentioned just a minute ago, we have significant growth opportunities both in 2016 and beyond. That concludes my comments.
I want to again thank all of you for coming today, for participating in this meeting, and I'm now going to turn the podium over to Mark Tarr.
Okay. For seven years now, we've had the opportunity to host what we call our Outstanding Employee Achievement Award Gala, and this is our opportunity to recognize remarkable staff that do remarkable activities at our hospitals day in and day out, taking care of our patients. The process for this is that each one of our hospitals have an employee of the year or an employee of the quarter that they would like to submit up to their regional management team for consideration to be a regional representative. We then bring in the six representatives from each one of our six geographic operating regions, and then ultimately, one is selected to be the recipient of this award each year, which is a very difficult task, as you can very well imagine. Today, I want to introduce each one of our honorees.
You'll have a chance to see a brief video, and then we will announce the final recipient of the award. First, let me begin by announcing each one of the regional award winners. We'll start first with Christy Bautista-Harris. Christy, if you'll stand, please. Christy is here with her husband, Anthony.
You get to stand, Anthony. Come on.
Yeah, you get to stand. We know you want to. Come on.
Do we?
All right. From the Northeast region, we have Kate Bowman. You get to clap again because her husband is here with her, David. From the West region, we have Royce Conner from Tucson. Royce is here today with his partner, Joe Wallen. Joe? From the Central region, we have Tim Kiser. Tim? Tim's wife, Emily, is here with him today. From the Mid-Atlantic region, we have Clayton Lippert. His wife, Maria. Last but not least, from the Southwest region, we have Marynell Plumley. Her sister, Gina, is here with her.
I want to take the next few minutes here and give you a chance to watch some videos that I think are very representative of the caliber of activities and what they have to provide to their hospitals, and making sure that our staff, our patients, the team that does the hard work in our hospitals every day. Let's see the first video.
Hey, Mark. Let's see if the lights
An early memory, I always wanted to be a nurse. When I was 16, I was able to be a candy striper. My friend and I, we worked every Saturday at the local hospital, passing water pitchers, doing the tray with the magazines, the candy cart. Some of the best times are interacting with the patients, talking to them, holding their hands, just getting to know them. Just love every day I'm at work.
Changing over from a retail setting in pharmacy to a hospital setting, I believe it allowed me to use my education to benefit the patients through monitoring lab work, monitoring drug interactions, and I'm just amazed on how the therapist can work with the patient and just privileged to have my part in the healthcare role to help them get on their way and be independent when they leave.
The thing that I like most about this hospital was its culture. It so aligns with my own personal culture. We talk in CPR class about the golden rule. I noticed that culture right away when I started here. When they asked me to take on the hospital educator role, which is my current position, and to have the opportunity to teach that CPR culture to people coming in, I kind of considered that my calling and where I needed to be.
Everything comes from me as a little girl looking at my dad, how he was such a great doctor, such a holistic person, and how much he respected his patients and loved them. I learned how to care for others, not just our family, but other patients, people he didn't even know. He always taught me to understand them. Don't judge, because you never know what their story is. One of the things he always said to me while I was going to school, he said, "Just remember, think of me when you're treating the patients.
I love this place. Working here with these people. When I work with the Parkinson's patients, I can give them one or two very small suggestions and it changes the way they move, and their family members will stand and watch me give cues, and they learn, so that they can be more helpful at home. The patients are ecstatic that they are able to do some of even the smallest things they haven't been able to do in one treatment session.
One of the things I wanted to do was be more involved, be able to actually make a difference. HealthSouth has been the type of place where not only do you meet patients, but they become your friends. You get to celebrate when they have a success, and you get to celebrate their being able to graduate and to go back home, to be independent, to live their life again. At the end of the day, when you go home, there's a satisfaction in knowing that you went to work, not only did you work hard, but you are rewarded, and the reward is just fantastic.
How about one final round of applause for Jay, would you come up and assist, please?
Sure.
As I said, it's extremely difficult. There was one individual that was named the award winner for 2015, and that's Kate Bowman. Kate. Congratulations again.
The good news is you got some things last night that you got to keep. The bad news is you don't get to keep this one. As you all know, we do place this prominently, and your name will be added to the names of the other six award winners. All right, congratulations.
Let me ask where we keep that plaque.
Right outside.
Right outside this room, isn't it?
Yep.
Isn't that where we.
Yep
That memorializes this. We now have concluded the entire agenda for this meeting. Thank you for all for attending today. I feel like I should turn it over to Patrick to say, "And now, can you second that?" I mean- I think since we have been having the annual meeting here, this has been, I think, the most-
No, there were meetings early on where-
No.
They were pretty bad.
No. You didn't let me finish. You can tell what the relationship is like. In the modern HealthSouth era-
Yes, this is true.
I think on behalf of all of my colleagues here, we want to thank you. I'll add my thanks to Jay and to Mark for all that you do to make HealthSouth the premier company in its industry. It couldn't be done without each and every one of you. On behalf of, I think, my board colleagues, the thanks go to you for everything you do every day. Thank you very much. That concludes our meeting today.