Select Medical Q1 2024 Earnings Call Transcript

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May 3, 2024

There are 8 speakers on the call.

Operator

Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Q1 2024 results and the company's business outlook. Speaking today are the company's Chief Executive Chairman and 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. 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.

Operator

At this time, I will turn the call over to Mr. Robert Ortenzio.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the Q1 of 2024. I'll first provide some updates on the progress we have made regarding our previously announced plan to pursue the separation of Select Medical's wholly owned occupational health services business Concentra. On February 27, we announced that we had received as expected a favorable private letter ruling opinion from the Internal Revenue Service confirming the tax free status of the potential transaction.

Speaker 1

On March 18, we announced that Concentra had confidentially submitted a draft registration statement on Form S-one with the SEC relating to the proposed initial public offering of its stock. The IPO is expected to occur after the SEC completes its review process and subject to market and other conditions. We're pleased so far with the progress and expect the separation to be completed by the end of 2024. Overall, we had a very strong first quarter start off 2024 led by both our hospital divisions generating very impressive results. Adjusted EBITDA grew 22% and revenue grew 7% compared to Q1 of the prior year with all 4 operating divisions exceeding prior year revenue.

Speaker 1

For the quarter, total company adjusted EBITDA was $261,900,000 compared to $214,100,000 in the prior year. Our consolidated adjusted EBITDA margin was 14.6 percent for Q1 compared to 12.9 percent in the prior year. The Q1 results of our critical illness recovery hospital division far exceeded our expectations. Adjusted EBITDA of $115,900,000 was 51% higher than Q1 of the prior year with increases in revenue and census, along with a 6% reduction in salary, wages and benefits to revenue ratio. Marty Jackson provides some additional detail regarding CRH's continued progress with labor within his commentary.

Speaker 1

On April 9, we opened a critical illness recovery hospital for a distinct part rehabilitation unit in Chicago with Rush University System, adding 44 critical wellness and 56 rehab beds. There is also a strong pipeline for additional growth opportunities under consideration. On the inpatient rehab development front, we are on target to open a 48 bed hospital in Jacksonville, Florida in Q3 2024 with our partner, UF Health Jacksonville. In the first half of twenty twenty five, we're opening our 4th rehab hospital with Cleveland Clinic, consisting of 32 beds and we are slated to open our 3rd hospital in Central Pennsylvania in partnership with UPMC. This will be a 20 bed rehabilitation hospital and will serve the expanding needs of the region.

Speaker 1

In February, it was announced that Select Medical and Banner Health are breaking ground on a 4th rehabilitation hospital as part of our joint venture. This will be a 56 bed hospital in Tucson, Arizona with a planned opening in the latter part of 2025. Also in the latter part of 2025, we are expanding our Riverside Hospital in Virginia by 10 beds. Moving on to 2026, we're opening a new 60 bed rehab hospital in Southern New Jersey, the Bacharach Institute For Rehab in partnership with AtlantiCare and are scheduled to open a new freestanding 63 bed rehab hospital in Ozark, Missouri with Cox Health System. Overall, we are very pleased with development results in the pipeline for our specialty hospital divisions.

Speaker 1

Between specific projects just mentioned as well as some other smaller expansions in distinct part units, we plan to add 537 additional beds to our operations from Q2222024 to 2026. The additional beds consist of 467 rehab beds, which includes 54 non consolidating beds and 70 LTACH beds. We also have a lot of activity in regards to development in our Concentra and outpatient divisions. Concentra acquired a 4 center occupational medicine practice in Hampton Roads, Virginia market on February 24 and a second de novo clinic in Fort Myers, Florida opened in March. We currently have 6 signed leases for de novos slated to open throughout the remainder of 2024 and Q1 of 2025.

Speaker 1

Concentra continues to maintain a strong pipeline of potential acquisition opportunities in various de novo sites under evaluation. This quarter, our outpatient rehab division added 5 clinics via 4 de novos and 1 acquisition. This offset the closure of 14 underperforming clinics and the forwarding of 2 clinics into existing operations upon lease expiration. The pipeline for future growth remains strong with 20 executed leases for de novo clinics scheduled to open later this year. Many other acquisitions and de novo opportunities are currently under consideration.

Speaker 1

Now I'll provide some further data points on the results of each of our operating divisions. As I mentioned, our critical illness recovery hospital division had a very strong quarter. Revenue increased 10% with a 51% increase in adjusted EBITDA compared to the same quarter prior year. Critical Wellness incurred $2,200,000 of start up losses related to new hospitals this quarter compared to $1,900,000 in the same quarter prior year. While our occupancy was slightly down from same quarter last year, average daily census increased 2%.

Speaker 1

Our rate per patient day increased 8%. The increase in rate was primarily driven by an increase in our case mix index. Medicaid supplement payments that were partially offset by an increase in taxes and favorable payer contract negotiations. Our adjusted EBITDA margin was 17.7% for the quarter compared to 12.9% in prior year Q1. Critical illness experienced a 6% reduction in their salary wages and benefit to revenue ratio compared to prior year Q1 with nurse agency utilization decreasing 20% and agency rates decreasing by 7% compared to same quarter prior year.

Speaker 1

Orientation hours decreased 9% compared to prior year Q1. Nursing sign on incentive bonus decreased 26% from prior year Q1. In April, CMS issued their LTAC proposed rule for 2025 and if adopted, would see an increase of 2.4% in the standard federal payment rate and an increase in the high cost outlier threshold. The final rule is expected in late July, early August after the required comment period. Our inpatient rehabilitation hospital vision also had a very strong quarter with a 15% increase in revenue and a 30% increase in adjusted EBITDA compared to Q1 prior year.

Speaker 1

Average daily census increased 7% and our rate per patient day increased 7%. Our occupancy of 87% was higher than prior year of 86%. Adjusted EBITDA margin for inpatient rehab was 23.1 percent for Q1, which was higher than prior year margin of 20.4%. In March, CMS issued the rehab proposal for fiscal year 2025, and if adopted, would see an increase of 1.8% in the standard federal payment rate. Final rule is expected in late July, early August after the required comment period.

Speaker 1

Concentra experienced an increase in 2% net revenues and 3% in adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate. Our workers' comp volume remained strong with an increase of 3% that was offset by a 6% decrease in employer based visits, which are reimbursed at lower rates. This led to an overall visit decline of 2% as the employer demands for drug screens and physicals trended downward. Our on-site revenue grew by 9% as Concentra added 11 new on-site clinics locations since Q1 of last year, and we are seeing higher revenue per site.

Speaker 1

Concentra's adjusted EBITDA margin was in line with prior year at 20.6%. Our outpatient rehab division experienced an increase of 2% in revenue with patient volumes increasing by 4%. Offsetting the volume increase was a decrease in net revenue per visit from $101 per visit to $99 Our volume continues to maintain an upward trend, while the rate decreases are primarily due to a decline in the outpatient Medicare fee schedule and payer mix shifts. The outpatient division's adjusted EBITDA decreased by 17% compared to prior year and the adjusted EBITDA margin went from 10.2% to 8.2%. In March, the President signed an appropriation bill that mitigated a 3.4% reduction in Medicare physician fee schedule that went into effect in January.

Speaker 1

The newly signed law includes a 1.68% increase in the fee schedule based conversion factor for the remainder of the year. The net result of this change is a 2% reduction in Medicare fee schedule for the year as opposed to the original 3.4% cut. Earnings per fully diluted share were $0.75 for the Q1 compared to $0.56 per share in the same quarter prior year. Adjusted earnings per fully diluted share were $0.77 for the Q1, which excludes consent for separation transaction costs, net of tax. In regards to our allocation and deployment of capital, Board of Directors declared a cash dividend $0.125 payable on May 30, 2024, stockholders of record as of the close of business on May 16, 2024.

Speaker 1

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 remarks. I'll turn it over to Maury Jackson for additional financial details before we open the call up for questions.

Speaker 2

Thanks, Bob. Good morning, everyone. I'll begin by providing some additional details on the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our SWNB as a percentage of revenue ratio exceeded our expectations of 52.9% this quarter, which is a decrease from 56.2% in Q1 of prior year. In the Q1 of this year, we saw a decrease in agency costs and utilization from prior year Q1.

Speaker 2

Compared to Q1 of 2023, RN agency costs decreased by 23% and utilization decreased to 14% from 18%. The hourly agency rate for RNs also decreased by 7% from $83 to $77 Nursing sign on and incentive bonuses dollars decreased by 26% from Q1 of prior year, down from down to $7,600,000 from $10,300,000 in the prior year same quarter. Finally, we saw a decrease of 9% in our new hire orientation hours. Moving on to our financials. In Q1, equity and earnings of unconsolidated subsidiaries were $10,400,000 as compared to $8,600,000 in the same quarter prior year.

Speaker 2

Net income attributable to non controlling interest was $20,300,000 compared to $14,500,000 in the same quarter prior year. Interest expense was $50,800,000 in the Q1. This compares to $48,600,000 in the same quarter prior year. The increase in interest expense was principally due to the increase in the borrowing spread on our term loan resulting from the amendment to our senior secured credit agreement. At the end of the quarter, we had $3,800,000,000 of debt outstanding and $93,000,000 of cash on the balance sheet.

Speaker 2

Our debt balance at the end of the quarter included $2,000,000,000 in term loans, $510,000,000 in revolving loans, dollars 1,200,000,000 in our 6.25 percent senior notes and $77,600,000 of other miscellaneous debt. During the Q1, we prepaid $79,000,000 on our term loans under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of 4.4 times. We estimate approximately $95,000,000 of our incremental borrowings in the quarter were related to the change held cyber incident. Our estimated net leverage would have been 4.3 times without the incremental borrowings related to the cyber incident.

Speaker 2

As of March 31, we had $202,400,000 of availability on our revolving loans. The interest rate on $2,000,000,000 of our term loans is capped at 1% sulfur plus 300 basis points through September 30, 2024. For the Q1, operating activities used $66,700,000 in cash flow. Our day sales outstanding was 58 days as of March 31, 'twenty four. This compares to 54 days at March 31, 2023 52 days at the end of fiscal year 2023.

Speaker 2

The increase in DSO was principally attributable to the Change Health Cyber incident. Investing activities used $57,700,000 of cash in the Q1. This includes $52,500,000 in purchases of property equipment and other assets and $5,200,000 in acquisition and investment activities. Financing activities provided $133,000,000 of cash in the Q1. This was primarily due to $230,000,000 net borrowings on our revolving line of credit and $8,700,000 in net borrowings on other debt less the $79,000,000 in term loan repayments, $16,000,000 in dividends of our common stock and $8,800,000 net payments and distributions to non controlling interests.

Speaker 2

As stated previously, we did not repurchase any shares under our Board authorized repurchase program this quarter. Last year, the Board approved a 2 year extension of the share repurchase program, which remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We updated our business outlook for 2024. We expect revenue to be in the range of $6,900,000,000 to $7,100,000,000 adjusted EBITDA to be in the range of $845,000,000 to $885,000,000 fully diluted earnings per share to be in the range of $1.95 to $2.19 and adjusted earnings per share to be in the range of $1.96 to $2.20 Capital expenditures are expected to be in the range of $225,000,000 to 2 $75,000,000 for 2024 for year 2024 and $123,000,000 of that is allocated towards maintenance, which is consistent with prior years. The balance of that would be in development.

Speaker 2

This concludes our prepared remarks. At this time, we would like to turn it back to the operator to open up the call

Operator

Our first question comes from Justin Bowers with DB. Your line is open.

Speaker 3

Hi, good morning, everyone. Bob, thank you for the comprehensive update on development activities. I missed Rush. Can you just give us an update on the new hospital with that system?

Speaker 1

Sure. We built a new hospital with in partnership with Rush, which is a new building on their campus, which is composed of both rehab hospital and LTACH hospital. The way the regulations work, it's technically an LTAC hospital with a distinct part rehab unit. But it opened, I think, this past month. And we're going through the 6 month qualification period for LTACH, but the rehab hospital is filling up nicely.

Speaker 3

Okay, great. Thank you. And then Marty, just pivoting to critical illness, can you just talk about the efforts you guys have done with labor? You had some really nice improvement there on the SWP ratio.

Speaker 2

Yes, Justin. Our operators have done a terrific job, reducing the reliance on agency nurses. Most of the nurses that we would like to have full time, we have hired, so orientation hours have gone down. So all in all, it's just been terrific. We've talked about potentially getting back to that 52%, 53% range, but we thought it would take us another year to get there.

Speaker 2

And again, the operators have done a terrific job on their staffing.

Speaker 3

Okay. And then in the prepared remarks, you said agency costs were down 23%. So that was roughly about $18,000,000 then during the quarter. Is that the right ballpark, 2018 or 2019?

Speaker 2

Staffing costs were yes, that's right. They dropped from about $24,000,000 down to $18,000,000

Speaker 3

Okay. And then just one last one. You mentioned some Medicaid sub payments. Is there can you size that for us? And is there any

Speaker 2

It's about $4,000,000 to $5,000,000 net after taxes.

Speaker 3

Okay, got it. Thank you. I'll jump back in queue.

Speaker 2

Great. Thanks, Justin.

Operator

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

Speaker 4

Hey, thanks guys and congratulations on the quarter. I just wanted to ask about the $3,800,000,000 in debt ahead of the spin. We get a lot of questions about balance sheet allocation between SpinCo and RemainCo. I just want to get your latest thoughts there, considerations and how you're thinking about the balance. Thank you.

Speaker 2

Yes, Ben. What we have indicated publicly is that you can think about this in terms of both entities will ultimately have about 4 times of leverage on the balance sheet or on a gross basis, a little bit less on the net side.

Speaker 4

Thank you. And then also just we've heard one of your peers on the inpatient rehab side talk about strategies around the pre claim or the Review Choice demonstration and how their relationships are with fiscal intermediaries in the IRF business. Just wanted to get your thoughts on positioning around that if your footprint is impacted, how your relationships are with fiscal intermediaries and if you've given any thought to kind of how to approach the review choice? Thanks.

Speaker 1

Lee, obviously, I think our relationships are good, but good, bad relationships, it's all about how you fare through the audits. It does impact our platform and we've had an extremely good result with all the Review Choice demonstration audits. So it's not been an issue. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.

Speaker 5

Hi, this is Mia Munoz on for Kevin Fischbeck with Bank of America. My first question was just regarding how Q1 EBITDA was $40,000,000 above consensus, but you raised the midpoint of the EBITDA guidance by $10,000,000 So is it fair to say that Q1 results are just closer to your internal expectations compared to where consensus was? And what are the sources of the beat? And so why are you not also raising revenue guidance?

Speaker 2

Yes. I mean, our expectations well, first of all, the thought process for us was really the spread was rather large. What we did was we increased the lower limit by $15,000,000 and we're taking a look at the remaining 3 quarters. And to the extent that we continue to exceed like this, we'll make adjustments as those quarters as we see what those quarters are how we're performing.

Speaker 5

All right. And just a follow-up or I guess not really a follow-up, but really a different question on critical illness margins improving 480 bps year over year despite the Medicare reimbursement pressure. So what would you say would be the main drivers for that? And is there more room for improvement?

Speaker 2

Well, there's a couple of different drivers to that. It was really had some nice increases in volume. We had nice increases in Case Mix Index, which increased the rate. And then I'd say by far the largest impact came from controlling costs the salaries, wages and benefits side. You saw a nice drop in our SW and B as a percentage of revenue and that was a big driver of that improvement in margins.

Speaker 5

All right. Thank you so much.

Operator

Thank you. One moment for our next question. Our next question comes from A. J. Rice with UBS.

Operator

Your line is open.

Speaker 6

Hi, everybody. Just a fine point on the comments around the supplemental payment program. Is this the Q1 you've recognized that? And is that $4,000,000 an annualized number for that program? Or are you going to have $4,000,000 incremental every quarter this year?

Speaker 6

Okay. We have recognized before,

Speaker 2

AJ, But as they become more mature, we're able to recognize on a month to month basis, and that's what you're seeing there.

Speaker 6

And so the second, 3rd and 4th quarter will all have roughly about $4,000,000 benefit from this program?

Speaker 2

Yes. That number right there was a one time number.

Speaker 6

Okay. All right. And then on the I had a couple of business questions, but on this Concentra spin, I know you said reaffirm target is by the end of the year. Any sense of when those that silent filings going to flip to public and any plans on having that management team out on a road show and when might that occur?

Speaker 2

Yes. As you know, A. J, it's really it's fully dependent on SEC and the comments that we get and the length of time that that takes. So as we get further clarity, we'll be able to give you a much better timeframe.

Speaker 6

Okay. Obviously, a big win for the company in the quarter was on the labor front, as you said. I'm wondering just if you look I know the year to year comps are still really good on the contract labor. If you look sequentially, are you still from quarter to quarter seeing that come down? Or are you sort of now at a normalized level and you're just plays out at that level of contract utilization, etcetera?

Speaker 6

And then is there any comment on where your wage rates are trending for your permanent workforce in the critical illness division?

Speaker 2

Yes. A. J, with regards to the RN rates, we think that we're probably at the low end of the range right now. We do believe that there will probably be seasonality in those rates. But all in all, I think it's within a couple of pots of each other.

Speaker 2

I think on the our full time employee rates are in that 3% to 4% range on an annual basis.

Speaker 6

Okay. And then maybe last question. On the I think you previously said one of the issues or challenges in the proposed rule or the rule last year was the LTACH outlier threshold increase. You obviously had a very good quarter in this LTAC business this quarter. Are you seeing any impact on margins or volumes from that?

Speaker 6

And any early comment on the proposal for next year and how that might impact you?

Speaker 1

Well, the A. J, we normally don't say much about the proposed rule. What it's in a comment period, we'll be submitting comments. I will say that the continued increase in the fixed loss threshold amount is tougher on the providers that have the higher acuity, longer stay patients. And we just continue to navigate that and continue to tweak our operations in order to accommodate for the changes that are and the directions that the policymakers are trying to push us.

Speaker 1

So as you saw in Q1 with the LTACs that volume and expenses, net salary, wages and benefit and rate through acuity can really carry the day. So we obviously feel good about their performance and can continue to do that. And our business on that side of the business on the critical illness is better as the acute care hospitals have higher occupancies in their ICUs. So that's what really is the main thing that drives that business.

Speaker 6

Okay. All right. Thanks so much.

Operator

Thank you. One moment for our next question. Our next question comes from Bill Sutherland with The Benchmark Company. Your line is open.

Speaker 7

Thanks. Good morning, everybody. I wanted to see if there was any more color you could provide about the trend in the employer demand for Concentra, the lower levels of screens and physicals?

Speaker 2

Yes, Bill. The demand there really has to do with employment. And as you know, I mean during 2022 2023, there was much higher demand just because there was a lot more hiring going on. As hiring goes back to normal, you're going to see those drop. And that's something that we expected to see.

Speaker 2

I think the other point that I'll make there is that those the types of those, the types of activities that Concentra does for employment hiring are really the lower end of the range, things like drug testing, which are in the $40 range or physicals, which are much lower than what the unit pricing is on workers' comp.

Speaker 7

Yes. I guess the positive mix is good. So I guess what you're saying, Marty, is that sequentially, this is going to probably just flatten out. It's just a year over year thing right now.

Speaker 1

I think you could think about it that way.

Operator

Mean, I

Speaker 1

don't think that it's not really a concerning issue at this point.

Speaker 7

Okay. Back to LTACH for a sec. The CMI increase was impressive. Is that part of the seasonality of 1Q or is that something that feels sustainable?

Speaker 2

Yes. Q1 typically has a higher CMI than normal, but the increase that we saw was based on a year over year same quarter basis. So we felt pretty we felt very good about that.

Speaker 7

Yes. I guess that goes back to your comment, Bob, about ICU capacity and so forth.

Speaker 1

Well, yes. And as you see in the Q1, you're just going to have more of those respiratory cases. The winter months bring those and you're going to see more volume in the ICUs and consequently, you're going to see more volume to the LTACs.

Speaker 7

Okay. That's all I got. Thanks everybody.

Speaker 1

Great.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Robert Ortenzio for closing remarks.

Speaker 1

Thank you everybody for joining us and for your questions.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Management received a favorable IRS private letter ruling and confidentially filed a Form S-1 for Concentra’s tax-free spin-off, targeting an IPO by year-end 2024.
  • Company-wide Q1 2024 results saw revenue grow 7% and adjusted EBITDA rise 22% to $261.9 million, with all four divisions surpassing prior-year revenue.
  • Critical illness recovery hospitals delivered a 51% increase in adjusted EBITDA and improved margins to 17.7% through higher census, an 8% rate increase, and a 6% reduction in salary, wages, and benefits ratio.
  • Outpatient rehabilitation revenue grew only 2% while adjusted EBITDA fell 17%, with margins squeezed to 8.2% due to a Medicare fee schedule decline and unfavorable payer mix.
  • 2024 guidance was maintained, projecting revenue of $6.9–$7.1 billion, adjusted EBITDA of $845–$885 million, and EPS of $1.95–$2.19 per share.
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Earnings Conference Call
Select Medical Q1 2024
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