TomTom Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 3, 2023

There are 6 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 Q3 2023 results and 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. These forward looking statements are based on the information available to Select Medical today and the company assumes no obligation to update these statements as circumstances change.

Operator

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

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the Q3 of 2023. We have a lot to be positive about as Q3 was another strong quarter. We continue to sustain our improvement in labor costs within the critical illness division.

Speaker 1

Q3 was the 6th Sequential quarter that we have seen a reduction in agency expenses. 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 4 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.

Speaker 1

We received $8,100,000 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 $193,800,000 compared to $153,100,000 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 The most significant increase in performance compared to prior year with a 7% increase in net revenue, 320% increase in adjusted EBITDA along with a 10% reduction in their salary, wages and benefit to revenue ratio. Consistent with prior quarters, Marty Jackson will provide additional detail regarding this division's continued progress with labor within his commentary.

Speaker 1

Critical illness incurred $5,000,000 of start up 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 park 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 work that are expected to be completed in 2025, including Orlando North, which will include a 48 Bed Rehab Distinct Unit. There is also a strong pipeline of additional opportunities for growth that are under consideration. On the inpatient rehab development front, on September 1, we entered into a joint venture with CHS and purchased a majority interest in a 30 Bed inpatient rehab hospital in Fort Wayne, Indiana.

Speaker 1

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 4th inpatient rehab hospital, 32 beds, with our joint venture partner, the Cleveland Clinic, that is projected to open in the first half of twenty twenty five. 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, 2026. The pipeline for growth is strong and we anticipate strong performance throughout the remainder of the year.

Speaker 1

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. Incentra acquired 3 occupational medicine practices with 2 located in Delaware and 1 in Northeast Maryland that closed on October 13. In addition to acquisition efforts, 3 de novos in Norfolk, Virginia Columbus, Ohio and Fort Myers, Florida opened in October 2023. We have 3 signed leases for de novos slated to open in 2024.

Speaker 1

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. The division added 16 clinics this quarter via acquisitions of 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 open in 2024. There are also many additional opportunities for acquisitions in de novo's development that are under consideration.

Speaker 1

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 3 20 percent 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. 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.

Speaker 1

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 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%.

Speaker 1

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 7% net revenue driven primarily by rate. Our work comp net revenue per visit increased 3% and our employer services Rates increased by 7%. Incentra'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.

Speaker 1

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 net revenue per visit to $100 net revenue per visit. The volume increase offset by rate decrease when compared The prior year was consistent with what we saw in Q2. Organizational 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 the EBITDA margin remained consistent at 9%. Earnings per fully diluted share were $0.38 for the Q3 compared to $0.21 per share in the same quarter prior year.

Speaker 1

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. In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of $0.125 Payable on November 28, 2023, to shareholders of record as of the close of business on November 15, 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.

Speaker 1

With that, I'll turn it over to Marty Jackson from some additional financial details before we open the call up for questions. Great.

Speaker 2

Thank you, Bob, and good morning, everyone. Consistent with the past year, I would like to provide additional details The progress we continue 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, We had a slight increase in RN agency rate. The reductions we realized were 17% in RN agency costs, Having $22,100,000 versus $18,400,000 this quarter And a drop in RN utilization from 18% to 15%. The agency rate increased by only 1% from $77 to $78 We experienced very little change in the rate throughout Q3.

Speaker 2

Our in agency utilization during the quarter Inched down from 15.6 percent in July, 15.5% in August and 15.1% in September. And the related costs were $6,200,000 in July, dollars 6,300,000 in August and $5,800,000 in September. Nursing sign on and incentive bonus dollars remained consistent with Q2 at $7,800,000 while we had A 19% increase in orientation hours, 143,000 hours compared to 120 1,000 hours with the fluctuation during the quarter from 44,000 hours in July, 51 in August and 48 in September. Moving on to our financials. In Q3, equity and earnings of unconsolidated subsidiaries were $11,600,000 This compares to $8,100,000 in the same quarter last year.

Speaker 2

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 $12,600,000 compared to $11,000,000 in the same quarter prior year. And again, this increase was primarily due to the improved Performance of our consolidated joint ventures. Interest expense was $50,300,000 in the 2nd quarter. This compares to $45,200,000 in the same quarter prior year.

Speaker 2

The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q3 of 2022. At the end of the quarter, we had $3,700,000,000 of debt outstanding and $77,400,000 of cash on the balance sheet. Our debt balance at the end of the quarter included $2,100,000,000 in term loans, $340,000,000 in revolving loans, dollars 1,200,000,000 in the 6 point 6.25 percent senior notes and $75,800,000 of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.85 times. As of September 30, we had $374,000,000 of availability on our revolving loans.

Speaker 2

As we reported on the last call, we completed a refinancing transaction in the 3rd quarter. We amended and extended Our $2,100,000,000 senior secured term loans along with increasing our revolving credit facility by $120,000,000 from $650,000,000 to $770,000,000 Both the term loan and the revolver has been extended 2 years and will mature on March 6, 2027, with an early spring maturity of 90 days prior to the senior notes maturity triggered that more than $300,000,000 of senior notes remains outstanding on May 15, 2026. The refinanced term loan is priced at SOFR plus 3% with a step down of 25 basis points If our net leverage ratio falls below 4 times. The revolver has been priced at silver plus 2.5% with a step down at 25 basis points of our net leverage, again falls below 4 times. It's important to note that the 1% SOFR interest rate cap on $2,000,000,000 of our term loans will remain in place through September 30, 2024, our $1,200,000,000 in senior in 6.25% senior notes Matures August 15, 2026.

Speaker 2

During Q3, we recognized 14 For the Q3, operating activities provided $116,000,000 in cash flow. Our day sales outstanding, or DSO, was 52 days September 30, 'twenty three compared to 53 days of September 30, 'twenty two and 52 days and June 30, 23. Investing activities used $63,000,000 of cash in the 3rd quarter. This includes $50,200,000 in purchases of property and equipment and $12,800,000 in acquisition and investment activity. Financing activities used $77,000,000 of cash in the 3rd quarter.

Speaker 2

We had $25,100,000 in net payments Contributions to non controlling interest, dollars 16,500,000 in net payments on our term loans as a result of the refinancing, $16,000,000 in dividends on our common stock, dollars 9,500,000 in share repurchases and $5,000,000 in net payments on our revolving line of credit. As stated previously, we did not repurchase any shares under our board authorization of repurchase program this quarter. The Board has approved a 2 year extension of the share repurchase program, which will now remain in effect until December 31, 2025 unless further extended or earlier terminated by the Board. We maintain our business outlook For 2023, we'd expect revenue to be in the range of $6,550,000,000 to $6,700,000,000 Expected adjusted EBITDA in the range of $795,000,000 to $825,000,000 and fully diluted 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 to $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 $190,000,000 to $210,000,000 for 2023.

Speaker 2

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

Speaker 3

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

Speaker 1

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 on this openings next year that we've announced? I mean, it's possible. Orlando will be 2025. But while we typically don't announce Those deals until they're signed, I mean, it is possible that we could do a critical illness if it's a hospital within a hospital that we would sign Between now and the end of the year and could be potentially in service next year, but we haven't announced any.

Speaker 3

Got it. And then with respect to 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?

Speaker 2

Yes. Justin, as you know, we provide guidance on an annual basis. And from that perspective, We're going to keep the guidance that we have provided. I know you guys do it on a quarterly basis and We anticipated that we would have the quarter that we did in Q3 and for the balance of the year. We think the guidance that's out there on an annual basis is a good time for the Street.

Speaker 3

Okay, got it. And then in terms of SWB and sort of the targets that you've laid out over the The next several years returning to normalization within 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?

Speaker 2

Yes, Justin. I mean, our expectation is that 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% SWNB as a percentage of revenue.

Speaker 3

Okay. And would that sort of look like A linear sort of progression from now until then or is that a reasonable assumption?

Speaker 2

Yes. I mean, I can't tell you that I specifically know When the contracts will be renegotiated? I'm not so sure that the if we've got 2 thirds left In the last 2 years, whether those are linear or not. But I think when you get to the end of 25%, you can assume that our expectation is we'll be in that 52% range.

Speaker 3

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

Speaker 1

Thanks. Thank

Operator

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

Speaker 4

Hi, this is Michael Murray on for Ben. Just focusing on LTACHs, 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?

Speaker 2

Yes. I think one of the things you really have to do is you've got to take a look and add back that $5,000,000 of startup losses. So if you take a look at those margins, if you added that back, you'd have basically 90 basis point improvement in

Speaker 4

Are you talking sequentially?

Speaker 2

Well, you realize that when you take a look at Historically for us, I mean, if you compare Q3 of 2022, sequentially it's 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?

Speaker 4

Yes. The 400 BIP sequential decline, even that seems at a higher magnitude than even pre pandemic levels. So what we're driving, what drove the lower occupancy levels?

Speaker 2

Yes. I think that We'll have to I think what we're going to have to do is talk offline on this and we'll go through the details. I'm not sure that we fully understand that there's a difference you're saying. Next question?

Operator

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

Speaker 3

Thanks. Hello, guys.

Speaker 5

I was wondering The you've had some good progress in outpatient with despite the rate Headwind, what are do you have some like goalposts out there that you think You can move the productivity and margins too 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 We're heading in the following year.

Speaker 2

So Bill, I'm assuming you've got 2 questions there. 1 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 going to see an increase of Probably over the next year, somewhere in that 2% range.

Speaker 5

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

Speaker 2

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

Speaker 1

Right.

Speaker 5

Oh! So 2% is the blended Marty is what

Speaker 2

you're saying? That's correct.

Speaker 5

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

Speaker 2

Yes, that would be net adds. Net adds, yes.

Speaker 5

Okay. Are you okay, that's good enough there. And then On Concentra,

Speaker 3

I noticed visits have been

Speaker 5

just up a hair year over year and quarter on quarter. I just want to understand kind of what's going on behind that number a little bit better?

Speaker 2

Yes. What we saw though 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.

Speaker 5

Is that just something that's Something kind of occurring this year or is there a longer tail to that do you think?

Speaker 2

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

Speaker 5

Well, otherwise, looks like a very nice quarter. Thanks guys. Appreciate the help.

Speaker 2

Thanks. 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.

Speaker 1

Thank you, operator. No closing remarks. Thanks 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.

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