Select Medical Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 2, 2024

There are 4 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 Q2 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. 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 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 conference over to Mr. Robert Ortenzio.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for Q2 2024. Before I address our Q2 results, I wanted to highlight a few items. First, we successfully completed Concentra's initial public offering on July 26.

Speaker 1

The extraordinary efforts of many of our Concentra and Select colleagues throughout the process have been greatly appreciated. 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 percent 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.

Speaker 1

In connection with the planned separation, Concentra entered into financing arrangements, which included a new senior credit facility consisting of $850,000,000 7 year term loan, a $400,000,000 5 year revolving facility, which was undrawn at closing and $650,000,000 of 6.875 senior notes through 2,032. 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 holding hosting their first conference call later this morning at 10:30 Eastern Time where they will provide more detailed information regarding their performance and insight into their business. On another positive note, U. S.

Speaker 1

News and World Report recently issued its annual best hospitals list. I'm pleased to share with you that 6 select medical rehabilitation hospitals at 12 locations have been placed among the top in the nation for 2024, 2025. They are at number 4 Kessler Institute For Rehabilitation number 14, Banner Rehabilitation Hospital number 20, Baylor Scott and White Institute For Rehabilitation, Dallas number 23, California Rehabilitation Institute in Los Angeles number 24, Cleveland Clinic Rehabilitation Hospital and Number 38, Ohio Health 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 4th year in a row for Baylor Scott and White Dallas and OhioHealth. This recognition spotlights the commitment of each hospital providing the highest quality of care to patients and their families every day.

Speaker 1

It also demonstrates the dedication of every team member to our culture of delivering an exceptional patient experience. On the development front, we opened a new critical illness recovery hospital with a distinct rehabilitation 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 20252026 in the inpatient rehabilitation division.

Speaker 1

To recap, in 2025, we're opening our 4th rehab hospital with Cleveland Clinic in Fair Hill, our second hospital with UPMC in Central Pennsylvania and our 4th rehab hospital as part of our joint venture with Banner in Tucson, Arizona. In 2026, we're planning to open 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 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 4 49 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 LTAC beds.

Speaker 1

There are also many other opportunities under evaluation that would further increase our select specialty hospital footprint. This quarter, our outpatient rehab division added 15 clinics via 8 de novos and 3 acquisitions, a total of 7 clinics. This is offset by the closure of 5 underperforming clinics and the fold in of 7 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. Moving on to the 2nd quarter results.

Speaker 1

We continued 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 2nd 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 4 divisions exceeding prior year revenue. For the quarter, total company adjusted EBITDA was $226,300,000 compared to $219,500,000 in the prior year. Our consolidated adjusted EBITDA margin was 12.9% for Q2 compared to 13.1% in the prior year.

Speaker 1

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 same quarter prior year. Critical illness incurred $3,600,000 of startup losses related to new hospitals this quarter compared to $5,100,000 in the same quarter prior year. Current quarter startup losses primarily relate to the opening of Brock Specialty Hospital in April. And while our occupancy was slightly down from same quarter last year at 67%, down from 68%, our average daily census increased 1%. Our rate per day increased by 4%.

Speaker 1

Our adjusted EBITDA margin was 11.9% for the quarter compared to 11.4% in prior year Q2. Critical illness experienced a 1% reduction in their salary, wage 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 same quarter prior year. Orientation hours decreased 12% to prior year from prior year Q2. Nursing sign on incentive bonuses decreased 18% from prior year Q2.

Speaker 1

On the regulatory front, yesterday afternoon, CMS issued the finest LTAC rules for fiscal year 2024, which will be effective October 1 this year. 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 LTCH DRG relative weight and expected length of stay were also updated in the final rule. As previously mentioned, our inpatient rehab hospital division had a very strong quarter with 11% increase in revenue and 13% increase in adjusted EBITDA compared to Q2 prior year.

Speaker 1

Inpatient rehab incurred $3,000,000 of start up losses this quarter, primarily related to the opening of Rush Specialty Hospital unit in April compared to no start up losses in the prior year. 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.

Speaker 1

The final rule includes a 1.97% increase in standard federal payment rate, which is higher than the 1.79% included in the proposed rule. The high cost outlier threshold increased $16.20 which is slightly less than the $17.35 increase in the proposed rule. The CMG relative weight and average length of stay values were also updated in the final rule. Concentra experienced an increase of 2% 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 visit.

Speaker 1

Consistent with the Q1, 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 have 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. Concentrix adjusted EBITDA margin was 21.3% for the quarter compared to 21.5% in the same quarter prior year.

Speaker 1

Our patient 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.

Speaker 1

Earnings per share and adjusted earnings per share were $0.60 for the 2nd quarter compared to $0.61 per share in the same quarter prior year. In regards to our allocation deployment of capital, our Board of Directors declared a cash dividend, 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.

Speaker 2

Thanks, Bob, and 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 SWNB 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 Q2 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%.

Speaker 2

The agency rate for RNs also decreased by 4% from $77 to $74 Nursing sign on incentive bonuses decreased, as Bob had mentioned, by 18% from Q2 of prior year and 16% from the Q1 of this year. Finally, we also saw a decrease of 12% in our orientation hours for new hires. We're very pleased with the continued progress we have made in regards to our labor costs. Moving on to our financials. In Q2, equity and earnings of unconsolidated subsidiaries were $6,300,000 This compares to 10 $500,000 in the same quarter prior year.

Speaker 2

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 $17,200,000 This compares to $13,600,000 in the same quarter prior year. This increase is due to improved performance in consolidated joint ventures. Interest expense was $37,100,000 in the 2nd quarter. This compares to $49,000,000 in the same quarter prior year.

Speaker 2

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 $3,600,000,000 of debt outstanding and $111,200,000 of cash on the balance sheet. Our debt balance at the end of the quarter includes $2,000,000,000 in term loans, dollars 345,000,000 in revolving loans, dollars 1,200,000,000 and 6.25 percent senior notes and $63,400,000 of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.13 times. As of June 30, we had $367,400,000 of availability on our revolving loans.

Speaker 2

The interest rate on the $2,000,000,000 of our term loans is capped at 1% sulfur plus 300 basis points through September 30, 2024.

Speaker 1

At the

Speaker 2

end of July, we utilized the proceeds from the IPO that Bob had mentioned and related debt transactions to pay off $300,000,000 that was outstanding on our revolver with the remainder allocated to prepay 1 point $64,000,000,000 of our term loan. At the end of July, our consolidated debt balance, which includes Concentra, is approximately $3,100,000,000 with approximately $1,500,000,000 residing at Concentra and $1,600,000,000 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 times to 3.3 times leverage on a consolidated basis with Select slightly below 3 times and Concentra at 3.5 times to 3.6 times leverage. For the 2nd quarter, operating activities provided $278,200,000 in cash flow.

Speaker 2

Our day sales outstanding or DSO was 56 days at June 30, 2024 compared to 52 days at June 30, 23 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 $54,100,000 of cash in the 2nd quarter, primarily due to $55,500,000 in purchases of property equipment and other assets, slightly offset by a sale of assets. Financing activities used 205 $500,000 of cash in the 2nd quarter.

Speaker 2

We had $165,000,000 in net payments on our revolving lines of credit, $16,300,000 in dividends on our common stock and $14,200,000 in net payments on other debt. As stated previously, we did not repurchase any shares under our Board authorized repurchase program this quarter. Last year, the Board approved 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 are reaffirming our business outlook. For 2024, expect revenues 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 dollars to $2.20 Capital expenditures are expected to be in the range of $225,000,000 to $275,000,000 for 2024 with the majority of those dollars towards development.

Speaker 2

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.

Speaker 1

Certainly.

Speaker 2

And

Operator

And our first question comes from the line of Ben Hendricks with RBC Capital Markets.

Speaker 1

Thank you very much. I just wanted to get a little more information on the LTACH margin. I appreciate the comments about the startup costs in the quarter. But just if there's any other one timers that would create 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.

Speaker 2

Yes, Ben. There was just I think we're 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 don't really see too much seasonality in there. If you're saying compared to Q1 versus Q2, we think it's really that's what we've been seeing during normal times.

Speaker 2

I mean Q1 is always our highest quarter. Q2, we see a drop in census.

Speaker 1

And 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 2nd quarter to be less just in terms of the pulmonary volumes. Great.

Speaker 1

Thanks guys. Appreciate it.

Speaker 2

Thanks, Ben.

Operator

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

Speaker 3

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 rate a little bit of rate lift to get back on a track where it's stable to improving margins?

Speaker 3

Or are there opportunities within the business to make adjustments that will drive that margin potential for margin stability and improvement over time?

Speaker 2

Yes. 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 got to we've really kind of focused on a couple of areas.

Speaker 2

One is clinical efficiencies, meaning seeing the number of patients that a therapist sees in a day. And then also we are really focused on scheduling, making sure the scheduling is efficient.

Speaker 3

Any thoughts about that? Go ahead. I'm sorry.

Speaker 2

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. And I think really when you take a look at the New Year, we expect to see some real benefit.

Speaker 3

Okay. 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, the main focus. What is that trending at now?

Speaker 2

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

Speaker 3

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

Speaker 2

It really is.

Speaker 3

Yes. Just the last question, trying to think through what's embedded in the guidance down to the EPS 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 Q4. 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?

Speaker 2

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

Speaker 3

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.

Speaker 2

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.

Speaker 1

Thanks, operator. And just to remind that there is a Concentra call that will be at 10:30 Eastern today. So you'll get a lot more granularity on the Arc 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.

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Earnings Conference Call
Select Medical Q2 2024
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