Encompass Health Q2 2025 slides: double-digit growth drives raised guidance

Encompass Health Corp (NYSE:EHC) presented its second quarter 2025 earnings results on August 5, 2025, showcasing strong financial performance across all key metrics and prompting management to raise full-year guidance. The rehabilitation hospital operator continues to execute on its expansion strategy while delivering robust operational results.

Quarterly Performance Highlights

Encompass Health reported impressive growth in Q2 2025, with net operating revenue reaching $1,457.7 million, a 12.0% increase compared to $1,301.2 million in Q2 2024. This growth was driven by a 7.2% increase in discharges (4.7% same-store and 2.5% new-store) and a 4.2% rise in net patient revenue per discharge.

As shown in the following summary of Q2 2025 results:

Adjusted EBITDA rose to $318.6 million, up 17.2% from $271.8 million in the prior year period, while adjusted earnings per share increased 26.1% to $1.40 from $1.11. Adjusted free cash flow showed particularly strong growth, climbing 30.5% to $185.9 million compared to $142.5 million in Q2 2024.

The company’s revenue growth was supported by both volume increases and higher reimbursement rates, as detailed in this revenue breakdown:

Notably, revenue reserves related to bad debt decreased to 2.0% of revenue in Q2 2025, down from 2.9% in the same period last year, representing a 90 basis point improvement. The company also benefited from an $8.5 million increase in Medicaid supplemental payments within its outpatient and other revenue category.

Detailed Financial Analysis

Encompass Health demonstrated improved operational efficiency in the second quarter. Salaries and benefits expenses, while increasing in absolute terms to $767.7 million from $700.5 million, decreased as a percentage of revenue to 52.7% from 53.8% in Q2 2024. This improvement in labor cost management contributed significantly to the expansion of adjusted EBITDA margins.

The detailed breakdown of adjusted EBITDA components shows this efficiency gain:

The company’s adjusted free cash flow for the first six months of 2025 reached $408.3 million, a substantial 31.7% increase from $310.1 million in the comparable period of 2024. This improvement was primarily driven by the $87.4 million increase in adjusted EBITDA, along with lower cash tax payments and maintenance capital expenditures.

The following waterfall chart illustrates the components driving the year-to-date adjusted free cash flow growth:

Encompass Health maintains a solid balance sheet with a debt to adjusted EBITDA ratio of 2.1x as of June 30, 2025. The company’s debt maturity profile remains well-structured, with no significant maturities until 2028, providing financial flexibility to support its growth initiatives.

Strategic Initiatives & Development

Encompass Health continues to execute on its expansion strategy through both new hospital development and additions to existing facilities. As of June 30, 2025, the company operated 168 inpatient rehabilitation hospitals across 38 states and Puerto Rico, with 67 of these being joint ventures.

The company’s geographic footprint and development pipeline are illustrated in this map:

In Q2 2025, Encompass Health opened a new joint venture hospital in Fort Myers, Florida, and added 26 beds to existing hospitals. The company also announced three new de novo hospitals in St. George, Utah; Apollo Beach, Florida; and North Las Vegas, Nevada.

The following slide details the company’s development activity:

Encompass Health remains committed to its 2023-2027 growth targets, which include opening 6-10 de novo hospitals per year, adding 80-120 beds annually to existing facilities, and achieving a 6-8% compound annual growth rate in discharges.

Updated Guidance & Outlook

Based on the strong performance in the first half of 2025, Encompass Health has raised its full-year guidance. The company now expects net operating revenue of $5,880-$5,980 million (up from $5,850-$5,925 million), adjusted EBITDA of $1,220-$1,250 million (up from $1,185-$1,220 million), and adjusted earnings per share of $5.12-$5.34 (up from $4.85-$5.10).

The updated guidance is detailed in the following slide:

Key considerations for the updated 2025 guidance include a Medicare pricing increase of 3.3% for Q3 and approximately 2.7% for Q4, managed care pricing increases of approximately 3.0%, and salaries, wages, and benefits per full-time equivalent increases of 3.25% to 3.75%.

The company’s guidance also factors in the planned opening of 8 new hospitals and the addition of 100-120 beds to existing hospitals, with net pre-opening and ramp-up costs estimated at $18-$22 million.

This updated outlook builds on the momentum from Q1 2025, when Encompass Health reported an EPS of $1.37, exceeding analyst expectations of $1.20. Following those Q1 results, the company’s stock had surged 9.4% to $111.87. As of the close of trading on August 4, 2025, Encompass Health’s stock stood at $108.53, up 0.89% for the day, and has traded between $82.74 and $123.13 over the past 52 weeks.

The company’s consistent growth trajectory, strategic expansion initiatives, and strong financial performance position it well to continue delivering value to shareholders through both its quarterly dividend (currently $0.19 per share) and its share repurchase program, which had approximately $433 million remaining under the current authorization as of June 30, 2025.

Full presentation:

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