Select Medical Q3 2023 Earnings Report

Select Medical EPS Results

• Actual EPS: $0.46
• Consensus EPS: $0.38
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: N/A

Select Medical Revenue Results

• Actual Revenue: $1.67 billion
• Expected Revenue: $1.59 billion
• Beat/Miss: Beat by +$72.78 million
• YoY Revenue Growth: N/A

Select Medical Announcement Details

• Quarter: Q3 2023
• Date: 11/2/2023
• Time: N/A
• Conference Call Date: Friday, November 3, 2023
• Conference Call Time: 9:00AM ET

Select Medical (NYSE:SEM) is a leading provider of specialized healthcare services in the United States, operating through two primary business segments: Hospital Division and Outpatient Rehabilitation Division. The Hospital Division offers long-term acute care (LTAC) hospitals and inpatient rehabilitation facilities (IRFs) that serve patients recovering from complex illnesses, trauma or surgery. The Outpatient Rehabilitation Division delivers physical, occupational and speech therapy services through a network of clinic locations and home-based care programs.

Headquartered in Mechanicsburg, Pennsylvania, Select Medical was founded in 1996 and has grown through strategic partnerships, joint ventures and acquisitions. In 2013, the company completed the spin-off of its real estate assets into a separate publicly traded real estate investment trust, enabling Select Medical to focus on clinical operations while maintaining long-term facility relationships. Over the years, Select Medical has collaborated with leading health systems and academic medical centers to expand its post-acute care offerings.

Today, Select Medical’s combined network includes more than 130 hospitals and nearly 1,600 outpatient rehabilitation clinics across over 30 states. Its facilities provide specialized services such as ventilator weaning, stroke and neurological recovery, orthopedic and cardiac rehabilitation, and workplace injury recovery. The company’s outpatient clinics serve patients of all ages and conditions with evidence-based therapy programs designed to restore function and promote independence.

Under the leadership of President and CEO J. David Chernow, Select Medical has emphasized clinical quality, patient experience and operational efficiency. The executive team continues to pursue growth through targeted acquisitions, strategic alliances and the integration of new care models, with an ongoing commitment to serving the needs of patients, families and referral partners across the continuum of post-acute care.

Select Medical Q3 2023 Earnings Call Transcript

Key Takeaways

• Revenue up 6% and adjusted EBITDA up 27% YoY in Q3, driving margin expansion to 11.6% from 9.8%.
• Critical illness recovery division cut RN agency usage to 15% and delivered a 320% increase in adjusted EBITDA with a 10% reduction in labor costs.
• Company announced multiple growth projects including a new LTACH with Rush in Q2 2024 and several inpatient rehab hospital JVs through 2026.
• Concentra and outpatient rehab divisions both exceeded prior-year revenue and patient volumes, supported by acquisitions and de novo clinic openings.
• Full-year 2023 guidance was reiterated with revenue expected at $6.55B–$6.70B, adjusted EBITDA at $795M–$825M, EPS of $1.85–$2.02, and a $0.125/share dividend declared.

Presentation

[Operator]

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the third quarter, 2023 results in the company's business outlook. Speaking today are the company's Executive Chairman and its Co-founder, Robert Ortenzio, and the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation, statements regarding operating results, growth opportunities, and other statements that refer to Select Medical's plans, expectations, strategies, intentions, and beliefs.

[Operator]

These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Mr. Robert Ortenzio.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the third quarter of 2023. We have a lot to be positive about as Q3 was another strong quarter. We continued to sustain our improvement in labor costs within the Critical Illness division. Q3 was the sixth sequential quarter that we have seen a reduction in agency expenses. Our RN agency usage dropped to our target percentage of 15%, which is lower than our pre-pandemic levels. We also announced promotions within our executive management team that I believe will position the organization for continued long-term success. All four of our operating divisions exceeded prior year revenue and EBITDA. Overall, revenue grew 6%, and adjusted EBITDA grew by 27% compared to prior year Q3.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

We received $8.1 million of CARES Act grant income in the prior year, which was a headwind heading into Q3 when comparing current to prior year performance. For the quarter, total company adjusted EBITDA was $193.8 million, compared to $153.1 million in the prior year. Our consolidated adjusted EBITDA margin was 11.6% for Q3, compared to 9.8% in the prior year. Our Critical Illness Recovery Hospital division experienced the most significant increase in performance compared to prior year, with a 7% increase in net revenue, a 320% increase in adjusted EBITDA, along with a 10% reduction in their salary, wages, and benefit to revenue ratio.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Consistent with prior quarters, Martin Jackson will provide additional detail regarding this division's continued progress with labor within his commentary. Critical Illness incurred $5 million of startup losses related to new hospitals this quarter, compared to $707,000 in the same quarter prior year. As previously mentioned, we have an agreement to open a critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with our joint venture partner, Rush University System for Health, in Q2 of 2024. We also have hospital expansions in the works that are expected to be completed in 2025, including Orlando North, which will include a 48-bed rehab distinct unit. There's also a strong pipeline of additional opportunities for growth that are under consideration.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

On the inpatient rehab development front, on September 1, we entered into a joint venture with CHS and purchased a majority interest in a 36-bed inpatient rehab hospital in Fort Wayne, Indiana. We've reached agreement with our joint venture partner at University of Florida Health Shands, to open a 48-bed inpatient rehab hospital in Jacksonville, Florida, projected to open in Q3 of 2024, where we will have a majority interest. We are also planning to open a fourth inpatient rehab hospital, 32 beds, with our joint venture partner, the Cleveland Clinic, that is projected to open in the first half of 2025. As previously noted, we have partnered with AtlantiCare to build a new inpatient rehab hospital in Southern New Jersey. Contingent upon regulatory approval, the hospital will be called the Bacharach Institute for Rehab and is slated to open in either 2025 or 2026.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

The pipeline for growth is strong, and we anticipate strong performance throughout the remainder of the year. Concentra continued their exceptional performance, exceeding prior year revenue, EBITDA, and patient volume. During the quarter, Concentra continued to make progress on various ongoing transactions and bolster its pipeline for future acquisitions and de novos. Concentra acquired three occupational medicine practices, with two located in Delaware and one in Northeast Maryland, that closed on October 13th. In addition to acquisition efforts, three de novos in Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida, opened in October 2023. We have three signed leases for de novos, slated to open in 2024. There is a strong pipeline of acquisitions and other de novos that we continue to evaluate. This quarter, our Outpatient Rehab Division also surpassed prior year revenue, EBITDA, and patient volumes.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

The division added 16 clinics this quarter via acquisitions in de novos. The pipeline for additional growth remains strong, with 22 executed leases for de novo clinics, of which 11 are scheduled to open in Q4 of 2023, with the remainder to be opened in 2024. There are also many additional opportunities for acquisitions in de novos development that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our Critical Illness Recovery Hospital division experienced increases of 7% in net revenue and 320% of Adjusted EBITDA for another successful quarter. While our occupancy was down from last year at 64%, down from 67%, an increase in our case mix index and a decrease in threshold days contributed to an increase in our revenue per patient day.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Our Adjusted EBITDA margin was 8.2% for the quarter, compared to 2.1% in the prior year Q3. Our positive reductions in labor contributed to the significant improvement in EBITDA margin, with a 10% reduction in our salary, wage, and benefit to revenue ratio. Nursing agency rates decreased 9%, and nursing agency utilization decreased 30% when compared to prior year Q3. Orientation hours decreased 4% compared to prior year Q3, but increased 19% compared to Q2 2023 as we continue to add full-time nurses. Nursing sign-on and incentive bonuses dollars decreased 49% from prior year Q3, but remained consistent with prior sequential quarter. Our Inpatient Rehab Hospital division experienced an 8% increase in net revenue and adjusted EBITDA. Patient volumes increased 3%, and our rate per patient day increased by 5%.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Our occupancy was 84%, compared to 85% prior year. The Adjusted EBITDA margin for inpatient rehab was 22% for Q3, which was consistent with prior year. Concentra experienced an increase of 7% in net revenue, driven primarily by rate. Our work comp net revenue per visit increased 3%, and our employer services rates increased by 7%. Concentra's Adjusted EBITDA increased by 10%, with margin increasing to 20.9% for the quarter, compared to 20.2% in the same quarter last year. Our Outpatient Rehab division experienced an increase in 2% net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $103-$100 net revenue per visit.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

The volume increase, offset by rate decrease when compared to prior year, was consistent with what we saw in Q2. Organizational initiatives, initiatives focusing on improving clinical productivity via patient access contributed to additional volume, where the decline in rate was due to a decline in outpatient Medicare fee schedule, payer mix, and variable discounts. The outpatient division's Adjusted EBITDA increased by 3% compared to prior year, while their EBITDA margin remained consistent at 9%. Earnings per fully diluted share were $0.38 for the third quarter, compared to $0.21 per share in the same quarter prior year. Adjusted earnings per fully diluted share were $0.46. Adjusted earnings per share excludes the loss on early retirement of debt and its related cost and tax effects.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of $0.125, payable on November 28th, 2023, to shareholders of record as of the close of business on November 15th, 2023. This past quarter, we did not repurchase shares under our board-authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my prepared remarks. With that, I'll turn it over to Martin Jackson for some additional financial details before we open the call up for questions.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Great. Thank you, Bob, and good morning, everyone. Consistent with the past year, I would like to provide additional details with the progress we've continued to make regarding labor costs within the Critical Illness Recovery Hospital division. This past quarter, we had a sequential reduction from Q2 to Q3 in our RN agency costs and utilization, but had a slight increase in RN agency rate. The reductions we realized were 17% in RN agency costs, having $22.1 million versus $18.4 million this quarter, and a drop in RN utilization from 18%-15%. The agency rate increased by only 1% from $77-$78, and we experienced very little change in the rate throughout Q3.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

RN agency utilization during the quarter inched down from 15.6% in July, 15.5% in August, and 15.1% in September. The related costs were $6.2 million in July, $6.3 million in August, and $5.8 million in September. Nursing sign-on and incentive bonus dollars remained consistent with Q2 at $7.8 million, while we had a 19% increase in orientation hours, 143,000 hours compared to 120,000 hours, with a fluctuation during the quarter from 44,000 hours in July, 51,000 in August, and 48,000 in September. Moving on to our financials. In Q3, equity and earnings of unconsolidated subsidiaries were $11.6 million.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

This compares to $8.1 million in the same quarter last year. This increase in earnings was the result of increase in earnings in a few of our unconsolidated joint ventures. Net income attributable to non-controlling interest was $12.6 million, compared to $11 million in the same quarter prior year. And again, this—this increase was primarily due to the improved performance of our consolidated joint ventures. Interest expense was $50.3 million in the second quarter. This compares to $45.2 million in the same quarter prior year. The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q3 of 2022.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

At the end of the quarter, we had $3.7 billion of debt outstanding and $77.4 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $340 million in revolving loans, $1.2 billion in the 6.625% senior notes, and $75.8 million of other miscellaneous debt. We ended the quarter with net leverage for our Senior Secured Credit Agreement of 4.85 times. As of September 30th, we had $374 million of availability on our revolving loans. As we reported on the last call, we completed a refinancing transaction in the third quarter.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

We amended and extended our $2.1 billion senior secured term loans, along with increasing our revolving credit facility by $120 million, from $650 million to $770 million. Both the term loan and the revolver has been extended two years and will mature on March 6th, 2027, with an early springing maturity of 90 days prior to the senior notes maturity, triggered if more than $300 million of senior notes remains outstanding on May 15th, 2026. The refinanced term loan is priced at SOFR + 3%, with a step down of 25 basis points if our net leverage ratio falls below 4 times.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

The revolver has been priced at SOFR plus 2.5%, with a step down to 25 basis points if our net leverage, again, falls below four times. It's important to note that the 1% SOFR interest rate cap on $2 billion of our term loans will remain in place through September 30th, 2024. Our $1.2 billion in senior, in 6.25% senior notes, matures August 15th of 2026. During Q3, we recognized $14.7 million of loss on the early retirement of debt as a result of the amendment to the credit agreement. For the third quarter, operating activities provided $116 million in cash flow.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Our days sales outstanding, or DSO, was 52 days as of September 30th, 2023, compared to 53 days as of September 30th, 2022, at 52 days as of June 30th, 2023. Investing activities used $63 million of cash in the third quarter. This includes $50.2 million in purchases of property and equipment and $12.8 million in acquisition and investment activity. Financing activities used $77 million of cash in the third quarter. We had $25.1 million in net payments and distributions to non-controlling interests, $16.5 million in net payments on our term loans as a result of the refinancing, $16 million in dividends on our common stock, $9.5 million in share repurchases and $5 million in net payments on our revolving line of credit.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

As stated previously, we did not repurchase any shares under our board authorization of repurchase program this quarter. The board has approved a two-year extension of the share repurchase program, which will now remain in effect until December 31st, 2025, unless further extended or earlier terminated by the board. We maintain our business outlook for 2023, with expected revenue to be in the range of $6.655 billion-$6.7 billion, expected Adjusted EBITDA in the range of $795 million-$825 million, and fully diluted earnings per share to be in the range of $1.77-$1.94.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Select Medical expects adjusted earnings per share, which was revised to exclude the actual tax-affected loss on early retirement of debt, to be in the range of $1.85-$2.02. Adjusted earnings per share, excluding the loss on retirement of debt and its related costs and tax effect. Capital expenditures are expected to be in the range of $190 million-$210 million for 2023. This concludes our prepared remarks. At this time, we'd like to turn it back over to the operator to open the call up for questions.

[Operator]

Thank you. If you'd like to ask a question, please press star one, one. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. Our first question comes from Justin Bowers with DB. Your line is open.

[Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank]

Hi, good morning, everyone. Bob, I may have missed this in the prepared remarks, but is there additional LTAC capacity coming online the rest of this year or into 2024, and or any deals that you announced in the quarter?

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

... Well, we have RUSH next year, which is the combined rehab and critical illness post-acute building. That will be next year. I don't know that we have any other critical illness openings next year that we've, that we've announced. I mean, it's possible. You know, Orlando will be 2025. But, you know, while we, we typically don't announce those deals until they're signed, I mean, it, it is possible that we could do a, a critical illness if it's a hospital within a hospital, that we would sign between now and, you know, the end of the year and could be potentially in service next year, but we, we haven't announced any.

[Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank]

Got it. And then with respect to, you know, the guide and the rest of the year, what are some of the swing factors in the guide, the big swing factors as you look into 4Q?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, Justin, as you know, we provide guidance on an annual basis. From that perspective, you know, we're gonna keep the guidance that we have provided. You know, I know you guys do it on a quarterly basis and we anticipated that, you know, we would have the quarter that we did in Q3, and for the balance of the year, you know, we think the guidance that's out there on an annual basis is a good guide for the street.

[Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank]

Okay, got it. And then in terms of, you know, SWB and sort of the targets that you've laid out for the next several years, returning to normalization with critical illness, like, how are you thinking about that? Any sort of updated thinking around what that trajectory may look like over the next couple of years?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, Justin, I mean, our expectation is that, you know, by the end of 2025, when all of the contracts, all of the payer contracts are renegotiated, we anticipate we should return to somewhere in the range of 52%, SWB as a percentage of revenue.

[Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank]

Okay. Would that sort of look like a linear sort of progression from now until then, or is that a reasonable assumption?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, I mean, I can't tell you that I specifically know when the contracts will be renegotiated. You know, I'm not so sure that if we've got, you know, two-thirds left in the last two years, whether those are linear or not. But I think when you get to the end of 2025, you can assume that our expectation is we'll be in that 52% range.

[Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank]

Okay. All right, appreciate it. I'll jump back in queue.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Thanks.

[Operator]

Thank you. Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.

[Michael Murray, Equity Research Associate at RBC Capital Markets]

Hi, this is Michael Murray on for Ben. Just focusing on LTACs. The sequential decline in EBITDA was steeper than what we were modeling. Agency labor continued to improve, though occupancy declined 400 bps sequentially, which seems larger than the typical sequential decline that you would see even pre-pandemic. Can you shed some light on some of the inner workings there? What drove the lower occupancy levels?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, I think one of the things you really have to do is you've got to take a look and add back that $5 million of startup losses. So if you take a look at those margins, if you added that back, you'd have basically a 90 basis point improvement in the margins, right?

[Michael Murray, Equity Research Associate at RBC Capital Markets]

Are you talking sequentially?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Well, you realize that, you know, when you take a look at historically for us, I mean, if you compare Q3 of 2022, sequentially is really irrelevant because of the seasonality in the business. So what you really have to do is take a look at it on a same quarter year-over-year basis. I mean, we normally have a dip in occupancy rate in Q3.

[Michael Murray, Equity Research Associate at RBC Capital Markets]

Yeah, the 400 bps sequential decline, even that seems at a higher magnitude than even pre-pandemic levels. So what drove the lower occupancy levels?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, I think that, you know, we'll have to... I think what we're gonna have to do is talk offline on this, and we'll go through the details. You know, I'm not sure that we fully understand that there's a difference here, you were saying.... Next question.

[Operator]

Thank you. Our next question comes from William Sutherland with The Benchmark Company. Your line is open.

[William Sutherland, Director of Research at The Benchmark Company]

Thanks, well, guys. I was wondering, you've had some good progress in outpatient, with despite the rate headwind. Do you have some, like, goalposts out there that you think you can, you know, move the productivity and margins to for outpatient? I'm just trying to get a sense of kind of where that business can run now. And maybe you have some color or some insight on where you think rates are heading in the following year.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

So Bill, I'm assuming you've got two questions there. One is improvement of clinical productivity, and we do see some continued improvement in that area. And then with regards to rates, I think our expectation is we're gonna see an increase of probably, you know, over the next year, you know, somewhere in that 2% range.

[William Sutherland, Director of Research at The Benchmark Company]

Okay. So, that'll be a nice switch. And then you'll be doing your commercial. I mean, your commercial is gonna be, I assume, in the same positive trend that you've been able to negotiate?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah, commercial, commercial should be higher than that 2% that I mentioned, Bill, but then we have the offset with regards to Medicare.

[William Sutherland, Director of Research at The Benchmark Company]

Right. Oh, so 2% is the blended, Martin, is what you're saying, is what you're saying?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

That, that's correct.

[William Sutherland, Director of Research at The Benchmark Company]

Okay. Are you all, in the course of, you know, just improving the whole network of clinics, at, you know, pruning as you add? Like, when you talk about the adds each quarter, those- that's not net adds, is it?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yes, that would be net adds.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Net adds, yeah.

[William Sutherland, Director of Research at The Benchmark Company]

Okay. Okay, that's good enough there. And then, on Concentra, I know those visits were up just a hair year-over-year and quarter-over-quarter. I just wanted to understand kind of what's going on behind that number a little bit better.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Yeah. What we saw, Bill, is we saw a change in the mix. So we saw employer service volume down a bit, but workers' comp up, so that had a nice impact on the rate.

[William Sutherland, Director of Research at The Benchmark Company]

Mm-hmm. Is that just something that's something kind of occurring this year, or is there a longer tail to that, do you think?

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

I think that we saw a significant increase in prior periods due to additional employment. And so as that becomes more normalized, I think that's what you saw this particular quarter, or this particular year actually.

[William Sutherland, Director of Research at The Benchmark Company]

Mm-hmm. Okay. Well, otherwise, looks like a very nice quarter. Thanks, guys. Appreciate the help.

[Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical]

Great.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Thanks.

[Operator]

Thank you. That concludes the question and answer session. I'd like to turn the call back over to Robert Ortenzio for closing remarks.

[Robert Ortenzio, Executive Chairman and Co-Founder at Select Medical]

Thank you, operator. No closing remarks. Thank you for your participation, and we'll look forward to updating you next quarter.

[Operator]

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.

Participants

Executives

• Robert Ortenzio, Executive Chairman and Co-Founder

Analysts

• Justin Bowers, Biopharma Services Senior Equity Research Analyst at Deutsche Bank
• Martin Jackson, Senior EVP of Strategic Finance and Operations at Select Medical
• Michael Murray, Equity Research Associate at RBC Capital Markets
• William Sutherland, Director of Research at The Benchmark Company