Select Medical Q2 2024 Earnings Report

Select Medical EPS Results

• Actual EPS: $0.60
• Consensus EPS: $0.61
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: $0.61

Select Medical Revenue Results

• Actual Revenue: $1.76 billion
• Expected Revenue: $1.74 billion
• Beat/Miss: Beat by +$15.14 million
• YoY Revenue Growth: +5.10%

Select Medical Announcement Details

• Quarter: Q2 2024
• Date: 8/1/2024
• Time: After Market Closes
• Conference Call Date: Friday, August 2, 2024
• 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 Q2 2024 Earnings Call Transcript

Key Takeaways

• Concentra completed an IPO on July 26 at $23.50/share, with Select Medical retaining ~82.2% interest and using net proceeds to pay down debt.
• Select Medical reported Q2 2024 revenue growth of 5% and adjusted EBITDA growth of 3%, driven by double-digit gains in its inpatient rehabilitation and critical illness recovery hospital divisions.
• The company has a robust specialty hospital development pipeline, planning to add 449 beds from 2024 through 2026 across multiple joint ventures, including new rehab hospitals with Cleveland Clinic and UPMC.
• The outpatient rehabilitation division saw a 12% decline in adjusted EBITDA and a margin drop to 9.1%, prompting initiatives to improve scheduling, productivity, and staffing efficiency.
• Management reaffirmed full-year 2024 guidance with revenue expected at $6.9–7.1 billion, adjusted EBITDA of $845–885 million, and adjusted EPS of $1.96–2.20.

Presentation

[Operator]

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

[Operator]

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 limitations 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. At this time, I will turn the conference 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 Second Quarter 2024. Before I address our second quarter results, I wanted to highlight a few items. First, we successfully completed Concentra's initial public offering on July 26. The extraordinary efforts of many of our Concentra Select colleagues throughout the process have been greatly appreciated.

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

Concentra issued 22,500,000 shares at an IPO share price of $23.50 and now trades under the symbol CON on the New York Stock Exchange. The underwriters of the IPO transaction have a 30-day option to purchase an additional 3,375,000 shares of Concentra common stock. Select Medical still owns 82.23% of Concentra stock, or 80.09%, if the underwriters exercise their full allotment. Select expects to distribute its remaining interest in Concentra to its shareholders within 12 months of the IPO, as required by the private letter ruling from the IRS.

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

In connection with the planned separation, Concentra entered into financing arrangements, which included a new senior credit facility consisting of $850 million seven-year term loan, a $400 million five-year revolving facility, which was undrawn at closing, and $650 million of 6.875% senior notes due 2032. The majority of the net proceeds from the Concentra IPO and related debt transactions were used by Select to pay down debt. Concentra will be hosting their first conference call later this morning at 10:30 A.M. Eastern Time, where they will provide more detailed information regarding their performance and insight into their business. On another positive note, U.S. News & World Report recently issued its annual best hospitals list. I'm pleased to share with you that six Select Medical rehabilitation hospitals at 12 locations have been placed among the top in the nation for 2024-2025.

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

They are at number four, Kessler Institute for Rehabilitation, number 14, Banner Rehabilitation Hospital, number 20, Baylor Scott & White Institute for Rehabilitation, Dallas, number 23, California Rehabilitation Institute in Los Angeles, number 24, Cleveland Clinic Rehabilitation Hospital, and number 38, OhioHealth Rehabilitation Hospital in Columbus. This marks the 32nd consecutive year that Kessler Institute has been named among the nation's best hospitals for rehabilitation, and the fourth year in a row for Baylor Scott & White, Dallas, and OhioHealth. This recognition spotlights the commitment of each hospital to providing the highest quality of care to patients and their families every day. It also demonstrates the dedication of every team member to our culture of delivering an exceptional patient experience.

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

On the development front, we opened a new critical illness recovery hospital with a distinct part rehabilitation unit in Chicago, with Rush University System adding 44 critical illness and 56 rehab beds on April 9. We are on target to open a 48-bed rehab hospital in Jacksonville, Florida, later this year with our partner, UF Health Jacksonville. The joint venture hospital and a hospital branded UF Health Rehabilitation Hospital North will be located in a new tower of UF Health. There are many other exciting development projects we have in the works for 2025 and 2026 in the inpatient rehabilitation division. To recap, in 2025, we're opening our fourth rehab hospital with Cleveland Clinic in Fairhill, our second hospital with UPMC in Central Pennsylvania, and our fourth rehab hospital as part of our joint venture with Banner in Tucson, Arizona.

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

In 2026, we're planning to open a new 60-bed rehab hospital in Southern New Jersey, the Bacharach Institute for Rehabilitation in partnership with AtlantiCare, and are scheduled to open a new freestanding 63-bed rehab hospital in Ozark, Missouri, with CoxHealth. Overall, we are very pleased with the development results in the pipeline for our specialty hospital divisions. Between the specific projects just mentioned, as well as some other smaller expansions and new distinct part units in existing hospitals, we plan to add 449 additional beds to our operations from the remainder of 2024 through 2026. The additional beds consist of 423 rehab hospital beds, which includes 54 non-consolidating beds and 26 LTCH beds. There are also many other opportunities under evaluation that would further increase our Select Specialty Hospital footprint.

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

This quarter, our outpatient rehab division added 15 clinics via eight de novos and three acquisitions, a total of seven clinics. This is offset by the closure of 5 underperforming clinics and the fold-in of seven clinics into existing operations upon lease expiration. The pipeline for future growth remains strong, with 16 executed leases for de novo clinics scheduled to open later this year, along with one clinic acquisition in North Jersey.

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

Moving on to the second quarter results, we continue 2024 with another strong quarter. The hospital divisions continued to exceed our expectations, with the inpatient rehabilitation division returning double-digit growth in both revenue and Adjusted EBITDA for the second straight quarter this year. Overall, our consolidated Adjusted EBITDA grew 3%, and revenue grew by 5% compared to Q2 of the prior year, with all four divisions exceeding prior year revenue.

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

For the quarter, total company adjusted EBITDA was $226.3 million, compared to $219.5 million in the prior year. Our consolidated adjusted EBITDA margin was 12.9% for Q2, compared to 13.1% in the prior year. Our critical illness recovery hospital division continues to perform well, with a 5% increase in revenue and a 10% increase in adjusted EBITDA compared to the same quarter prior year.

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

Critical illness incurred $3.6 million of startup losses related to new hospitals this quarter, compared to $5.1 million the same quarter prior year. Current quarter startup losses primarily relate to the opening of Rush Specialty Hospital in April. While our occupancy was slightly down from the same quarter last year, at 67%, down from 68%, our average daily census increased 1%. Our rate per day increased by 4%. Our adjusted EBITDA margin was 11.9% for the quarter, compared to 11.4% in prior year Q2.

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

Critical illness experienced a 1% reduction in their salary wages and benefits to revenue ratio, compared to prior year Q2, with a 56.1% margin. Nursing agency utilization decreased 14%, and agency rates decreased by 4%, compared to the same quarter prior year. Orientation hours decreased 12% from prior year Q2. Nursing sign-on incentive bonuses decreased 18% from prior year Q2. On the regulatory front, yesterday afternoon, CMS issued the final LTCH rules for fiscal year 2024, which will be effective October 1 of this year.

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

The final rule includes a 2.6% increase in the federal base rate, which is higher than the proposed rule at 2.4%. The high-cost outlier threshold increased by $17,175 from $59,873 to $77,048, which was higher than the increase outlined in the proposed rule of $15,524. The MS-LTC-DRG relative weight and expected length of stays were also updated in the final rule.

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

As previously mentioned, our inpatient rehab hospital division had a very strong quarter, with an 11% increase in revenue and a 13% increase in adjusted EBITDA compared to Q2 prior year. Inpatient rehab incurred $3 million of startup losses this quarter, primarily related to the opening of Rush Specialty Hospital unit in April, compared to no startup losses in the prior year.

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

Average daily census increased 7%, and our rate per patient day increased 5%. Our occupancy of 84% was consistent with prior year. The adjusted EBITDA margin for inpatient rehab was 23.1% for Q2, which was higher than the prior year margin of 22.7%. This week, CMS issued the final inpatient rehab rules for fiscal 2025, which were effective October 1. The final rule includes a 1.97% increase in the standard federal payment rate, which is higher than the 1.79 included in the proposed rule.

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

The high-cost outlier threshold increased $1,620, which is slightly less than the $1,735 increase in the proposed rule. The CMG relative weights and average length of stay values were also updated in the final rule. Concentra experienced an increase of 2% in net revenues and 1% adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate, which was attributed to state fee schedule increases, along with a higher mix of workers' comp visits.

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

Consistent with the first quarter, Concentra's workers' comp volume remained strong, with an increase of 2%. It was offset by a 4% decrease in employer-based visits, which are reimbursed at lower rates. Demand for employer-based visits has normalized compared to the COVID years, where we experienced a significant churn in labor force. We expect a decrease in employer-based visits to level off in the near future.

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

Concentra's adjusted EBITDA margin was 21.3% for the quarter, compared to 21.5% in the same quarter prior year. Outpatient rehab division experienced an increase of 4% in revenue, with patient volumes increasing by 4% and net revenue per visit of $100, consistent with prior year. Our volume continues to maintain an upward trend, and net revenue per visit has stabilized, with improvements in commercial managed care rates, offset by a decrease in our Medicare rates. The outpatient division's adjusted EBITDA decreased 12% compared to prior year, and the adjusted EBITDA margin went from 10.8 to 9.1. Our outpatient team is focused on improving patient access, productivity, and staffing. Thus far, in Q3, we have seen positive results when compared to prior year Q3 performance.

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

Earnings per share and adjusted earnings per share were $0.60 for the second quarter, compared to $0.61 per share in the same quarter prior year. In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of $0.125, payable on August 30 to stockholders of record as of the close of business of August 14. This past quarter, we did not repurchase shares under our board-authorized share repurchase program, and we continue to evaluate stock repurchases, reduction of debt, and development opportunities. That concludes my prepared remarks. I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Thanks, Bob. Good morning, everyone. I'll begin by providing additional detail on the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our SW&B as a percentage of revenue ratio was in line with our expectations at 56.1% this quarter, which is a decrease from 56.7% in Q2 of prior year. In the second quarter of this year, we again saw a decrease in agency costs and utilization from prior year Q2. Compared to Q2 of 2023, RN agency costs decreased by 16%, and utilization decreased from 18% down to 16%. The agency rate for RNs also decreased by 4% from $77-$74. Nursing sign-on incentive bonuses decreased, as Bob had mentioned, by 18% from Q2 of prior year and 16% from the first quarter of this year.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Finally, we also saw a decrease of 12% in our orientation hours for new hires. We are very pleased with the continued priority of aid in regards to our labor costs. Moving on to our financials in Q2, equity and earnings of unconsolidated subsidiaries were $6.3 million. This compares to $10.5 million in the same quarter prior year. The decline in earnings was largely a result of a write-off of an impaired business we had a minority interest in. Net income attributable to non-controlling interest was $17.2 million. This compares to $13.6 million in the same quarter prior year. This increase is due to improved performance in our consolidated joint ventures. Interest expense was $37.1 million in the second quarter. This compares to $49 million in the same quarter prior year.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

The reduction in interest expense was principally due to the accelerated recognition of the gain of our interest rate hedge due to the prepayment of our term loan, which occurred in July as a result of the Concentra IPO. At the end of the quarter, we had $3.6 billion of debt outstanding and $111.2 million of cash on the balance sheet. Our debt balance at the end of the quarter includes $2 billion in term loans, $345 million in revolving loans, $1.2 billion in 6.25% senior notes, and $63.4 million of other miscellaneous debt.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

We ended the quarter with net leverage of our senior secured credit agreement of 4.13x. As of June 30, we had $367.4 million of availability on our revolving loans. The interest rate on the $2 billion of our term loans is capped at 1% SOFR, plus 300 basis points through September 30, 2024.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

At the end of July, we utilized the proceeds from the IPO that Bob had mentioned and related debt transactions to pay off $300 million that was outstanding on our revolver, with the remainder allocated to prepay $1.64 billion of our term loan. At the end of July, our consolidated debt balance, which includes Concentra, is approximately $3.1 billion, with approximately $1.5 billion residing at Concentra and $1.6 billion at Select. Our consolidated net leverage is now approximately 3.5 times, with Select leverage around 3.2 times, and Concentra approximately 3.8 times. We expect to finish this year at approximately 3.2-3.3 times leverage on a consolidated basis, with Select slightly below 3 times and Concentra at 3.5-3.6 times leverage. For the second quarter, operating activities provided $278.2 million in cash flow.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Our Day Sales Outstanding, or DSO, was 56 days at June 30, 2024, compared to 52 days at June 30, 2023, and 58 days at March 31, 2024. The improvement compared to Q1 is attributable to the reduction in claims processing backlog that was impacted by the Change Healthcare cyber incident. We continue to see a reduction in our DSO in Q3 as we move on from the cyber incident. Investing activities used $54.1 million of cash in the second quarter, primarily due to $55.5 million in purchases of property, equipment, and other assets, slightly offset by a sale of assets.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Financing activities used $205.5 million of cash in the second quarter. We had $165 million in net payments on our revolving lines of credit, $16.3 million in dividends on our common stock, and $14.2 million in net payments on other debt.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

As stated previously, we did not repurchase any shares under our board-authorized repurchase program this quarter. Last year, the board approved a two-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 are reaffirming our business outlook for 2024. We expect revenues to be in the range of $6.9 billion-$7.1 billion, adjusted EBITDA to be in the range of $845 million-$885 million, fully diluted earnings per share to be in the range of $1.95-$2.19, and adjusted earnings per share to be in the range of $1.96-$2.20. Capital expenditures are expected to be in the range of $225-$275 million for 2024, with the majority of those dollars towards development.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

This concludes our prepared remarks, and at this time, we would like to turn it back over to the operator to open the call up for questions.

[Operator]

Certainly. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Ben Hendrix with RBC Capital Markets.

[Ben Hendrix, VP at RBC Capital Markets]

Thank you very much. I just wanted to get a little more information on the LTAC margin. I appreciate the comments about the startup costs in the quarter, but just if there's any other one-timers that would explain that sequential phasing from 1Q to 2Q, whether they're seasonal aspects or anything one-time in that sequential decline? Thank you.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Yeah, Ben, I think we were only talking about a 1% drop of occupancy on a year-over-year basis. So it's relatively the same for us. I mean, the seasonality, we didn't really see too much seasonality in there. If you're saying compared to Q1 versus Q2, we think that's what we've been seeing during normal times. I mean, Q1 is always our highest quarter. Q2, we see a drop in census.

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

The other thing I would add is Q1 of this year was an extraordinary year in terms of volume. We just saw ICUs at our acute care hospital referral sources to be really just exceptionally high in Q1. So that explains the sequential, your question on the sequential differences. We expect the second quarter to be less just in terms of the pulmonary volumes.

[Ben Hendrix, VP at RBC Capital Markets]

Great. Thanks, guys. Appreciate it.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Thanks, Ben.

[Operator]

Thank you. One moment, please, for our next question. Our next question comes from the line of A.J. Rice with UBS.

[AJ Rice, Managing Director at UBS]

Hi, everybody. Maybe just a couple of questions. On the outpatient rehab business, obviously, the revenue, the visits seem pretty standard, normal trend. I just wonder on the margin side of that, it sounds like you're looking at some efficiencies, looking at things there. Is it really you need a little bit of rate lift to get back on a track where it's stable to improving margins, or are there opportunities within the business to make adjustments that will drive that potential for margin stability and improvement over time?

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Yeah, A.J., this is Marty. Certainly, rate would have a positive impact on margin, but that's not really the only thing. I mean, we've really kind of focused on a couple of areas. One is clinical efficiencies, meaning seeing therapists, the number of patients a therapist sees in a day. And then also, we are really focused on scheduling, making sure the scheduling is efficient.

[AJ Rice, Managing Director at UBS]

Any thoughts on that?

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

So we have.

[AJ Rice, Managing Director at UBS]

Oh, go ahead. I'm sorry.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

We think that that will probably take us. We've been working on this. We think that over the next two quarters, in particular, starting off into the new year, we anticipate that some things that we're doing will help, such as some. We're looking at scheduling modules that should help us improve our scheduling efficiency. I think, really, when you take a look at the new year, we expect to see some real benefit.

[AJ Rice, Managing Director at UBS]

Okay. Well, I appreciate all the comments about contract labor and bonus payments and everything. I guess when you peel all that back, maybe you said this, but I didn't hear it. The underlying wage rates you're seeing with your permanent or labor costs, however you want to describe it, with your permanent staff in the critical illness hospitals, I guess, is the main focus. What is that trending at now?

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Yeah. Right now, A.J., we're seeing that in the 3%-3.5% range.

[AJ Rice, Managing Director at UBS]

Okay. So that's sort of back to pre-pandemic levels then, right?

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

It really is.

[AJ Rice, Managing Director at UBS]

Yeah. Just the last question. Trying to think through what's embedded in the guidance down to the EBITDA line. You mentioned that you've got a sort of reset on some of the protections you had on interest rates starting going into the fourth quarter. Are you assuming in that guidance a step up in borrowing costs? I guess, what are you assuming for borrowing costs or interest expense in Q3 and Q4 in that guidance that you're sharing today?

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Yes, we are. We have included, in particular, in the fourth quarter, in essence, borrowing costs will go from the 300 basis points spread plus 1% SOFR, 4%. Today, SOFR is running in that 5.3% range. So that will certainly have a negative impact in the fourth quarter.

[AJ Rice, Managing Director at UBS]

Okay. All right. So that's roughly the order of magnitude of the impact on that particular tranche of debt. That makes sense. All right. Thanks a lot.

[Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical]

Thank you, A.J.

[Operator]

Thank you. I am showing no further questions. So with that, I hand the call back over to management for any closing remarks.

[Ben Hendrix, VP at RBC Capital Markets]

Thanks, operator. And just to remind that there is a Concentra call that'll be at 10:30 A.M. Eastern today, so you'll get a lot more granularity on our Concentra division. With that, I'll end the call. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

Participants

Executives

• Robert Ortenzio, Executive Chairman and Co-Founder

Analysts

• AJ Rice, Managing Director at UBS
• Ben Hendrix, VP at RBC Capital Markets
• Martin Jackson, Senior Executive Vice President of Strategic Finance and Operations at Select Medical