Select Medical Holdings Corporation

Good morning and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2020 results and the company's business outlook. Speaking today are the company's executive chairman and co-founder, Robert Ortenzio, and the company's executive vice president and chief financial officer, 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 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 call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's first quarter earnings conference call for 2020. Before I outline some of our operational metrics, I want to provide you with a summary comments regarding the effects of the COVID-19 pandemic on our operations. As a company, the past two months have proven to be some of the most challenging times we've faced both clinically and operationally. During this unprecedented period, our ability to learn, collaborate, and adapt has been put to the test. I'm proud to say that our team has risen to the occasion and I could not be more proud of the work they have done in the face of this health crisis. Our teams have shown tremendous leadership, passion, and courage in maintaining the highest quality and safest patient care environment. The level of resourcefulness, hypervigilance, and innovation is unmatched. For the past two months, we have had daily virtual huddles led by our Chief Medical and Chief Quality Officer, Dr. Buddy Hammerman, and attended by operational, clinical, and functional leaders from across our organization. These huddles, which began on March 3rd, cover 15 areas to ensure we are informed and responsive in meeting the quickly changing and critical needs of our patients and employees across all lines of business. Among other indicators, we review COVID incidents by region, clinical review of COVID infections, availability and sourcing of PPE and ventilator equipment, patient management strategies, decisions in preparation for treating COVID-19 patients, communication strategies, and staff contingency planning. In broader terms, this pandemic has also cast new light on the role of our critical illness recovery hospitals in the continuum of care. In addition to uniting with our joint venture partners and host hospitals to combat this virus, Newly established coordinated efforts between critical illness recovery hospitals and other short-term acute care hospitals has been occurring daily to maximize the effectiveness of patient care and decompress short-term acute care hospital ICU beds. Select Medical currently has 62 of our specialty hospitals providing care for over 350 COVID-19 patients. On the outpatient front, including both outpatient rehab and occupational medicine, We expanded our telemedicine and telerehab services across our network. This allowed patients to continue their care in the safety of their own home. We now have over 2,000 of our clinicians that are capable of providing telehealth services across the United States. We've seen the volume for these services grow significantly over the past several weeks with the government lockdown as well as increased acceptance by payers and governmental regulators. Our ability to collectively answer this historic calling is anchored in our culture, operational leadership, clinical excellence, and an incredibly dedicated and selfless frontline of clinicians who have been exceptional in this pandemic. The effects of the pandemic began to hit Select Medical in mid-March. As COVID-19 has spread in many markets we operate, we have admitted patients with COVID-19 and have faced the challenging task of modifying our standard operating procedures to account for the high transmission rate of the virus as well as other critical needs of these patients. More specifically, we had to isolate the COVID patients from our general patient population and enhance staffing provisions for this acutely ill patient subset. We developed innovative pathways to treat COVID patients with active disease while maintaining a safe segregated space for the care of our non-COVID population. The pandemic has caused, and will continue to cause, disruption in our operations. In our critical illness recovery and rehab hospitals, we have, in some cases, added or reduced the number of beds, created isolated units and spaces, a temporary increase of restrictions on admissions, eliminated visitation of family, incurred additional costs and increases in the use of contract labor. In our outpatient rehabilitation and concentra segment, volumes have been negatively impacted by a number of issues. This includes state governments implementing mandatory closures of non-essential or non-life-sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel and closure of schools, state mandated suspension of elective surgeries at hospitals and outpatient surgery facilities, reduction of physician office visits, and the unprecedented reduction of the U.S. workforce by 30 million workers all have had significant effects on our patient visit volumes. In our press release, we provided the typical financial information statistics that we always do, but decided it was very important to provide the reader with a more detailed analysis of the financials by bifurcating our operating results on a pre- and post-COVID basis for the first quarter. We believe separate analysis of the quarter to date through February and the month of March provides our investors with greater insight into the financial impact of COVID on our company by business segment. Overall, our net revenue for the first quarter increased 6.8% to $1.4 billion in the quarter. Quarter to date through February, net revenue was up 12.3% over prior quarter. Thank you for joining us. Patient days were up 4.8% compared to the same quarter last year with over 270,000 patient days. Net revenue per patient day increased 4.5% to $1,839 per patient day in the first quarter. Occupancy in our critical illness recovery hospital segment was 70% in the first quarter compared to 71% in the same quarter last year. Net revenue was up 11.2% in the quarter to date through February period but only up 6% in the March period compared to last year. Net revenue in our rehabilitation hospital segment in the first quarter increased 17.8% to $182 million compared to $155 million in last year. Patient days increased 14.2% compared to the same quarter last year with over 94,000 patient days. Net revenue per patient day increased 6.1% to $1,732 per day in the first quarter. Occupancy in our rehab hospitals was 79% in the first quarter compared to 76% in the same quarter last year. Net revenue was up 24% in the quarter to date through February period, but only up 6.8% in the March period compared to last year. Net revenue in our outpatient rehab segment in the first quarter increased 3.4% to $255 million compared to $247 million in the same quarter last year. Patient visits were up 3.3% with over 2.1 million visits in the first quarter. Our net revenue per visit was $104 in the first quarter compared to $103 in the same quarter last year. Net revenue was up 10.8% in the quarter to date through February period Thank you very much. increased 0.6% to $399 million compared to $396 million in the same quarter last year. For the centers, patient visits were down 1.2% at 2.9 million visits in the quarter. Net revenue per visit in the centers was $123 in the first quarter compared to $124 in the same quarter last year. Net revenue was up 5.8% in the quarter to date through February period but then declined 9.4% in the March period when compared to last year. Incentives volumes trended along with revenue as patient visits were up 4.9% in the quarter to date through February period but then down 12.6% in the March period when compared to last year. Total company adjusted EBITDA in the first quarter increased 10.1% to $187.3 million compared to $170 million in the same quarter last year. Our consolidated adjusted EBITDA margin was 13.2% for the first quarter compared to 12.8% for the same quarter last year. The quarter to date through February's adjusted EBITDA was up 32.5% over the prior year with all four of our business segments showing double-digit growth in the January-February period compared to the same period last year. However, in March, overall adjusted EBITDA was down 22.3% Thank you for joining us. and up 10.2% in the March period when compared to last year. Adjusted EBITDA margins were 17.2% in the combined January-February period this year and 18.6% in the March period. A rehabilitation hospital segment adjusted EBITDA increased 49.5% to $38.6 million compared to $25.8 million the same quarter last year. Adjusted EBITDA margin for the... High Hospital Segment was 21.2% in the first quarter compared to 16.7% in the same quarter last year. The first quarter last year included adjusted EBITDA startup losses of $2.8 million. The quarter to date through February adjusted EBITDA was up 72.5% and up 12.5% in the March period when compared to last year. adjusted EBITDA margins were 22.4% in the combined January-February period this year and 18.6% in the March period. Outpatient rehab adjusted EBITDA was $27.1 million compared to $29 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 10.6% in the first quarter compared to 11.7% in the same quarter last year. Justin Ibita was up 33.6% in the quarter to date through February period, but declined at 65.4% in the March period when compared to last year. Justin Ibita margins were 12.9% in the combined January-February period this year, but only 5.3% in the March period. Our consent for Justin Ibita was $61.5 million compared to 66%. Thank you for joining us. in the March period. Earnings per fully diluted share increased over 33% to $0.40 for the first quarter compared to $0.30 for the same quarter last year. Adjusted earnings per fully diluted share was $0.37 for fully diluted share for the first quarter compared to $0.27 in the same quarter last year. Adjusted earnings per fully diluted share excludes the non-operating gain and its related tax effects in both the first quarter this year and last year. While the broader implications of the COVID-19 pandemic on our operational results and overall financial performance remain uncertain, we have seen reason for optimism as states begin to reopen the economy, including elective surgeries. On April 16th, the proposed inpatient rehab rules for fiscal 2021 were posted by CMS. The proposed rule, if adopted, would see an increase in the standard payment amount of 2.2%, as well as a reduction in the high-cost outlier. We expect the rule to be finalized in early August after the required comment period. In response to the COVID pandemic, both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements in our critical illness recovery hospitals and to suspend certain regulations that govern admissions into rehabilitation hospitals in order to facilitate the transfer of patients from general acute care hospitals into specialty hospital settings. That concludes my remarks. I'll now turn it over to Martin Jackson for some additional financial details before we open the call up for questions.

Thanks, Bob. Good morning, everyone. Before I provide financial details for the quarter, I wanted to highlight some of Bob's comments. The first quarter for Select was really the tale of two periods, the pre- and post-COVID periods. We had nice revenue growth, double-digit adjusted EBITDA growth, excuse me, and even our margin expansion in all four of our business segments in the quarter to date through February. Then in March, we saw the stay-at-home requirements of most states being mandated, along with the suspension of elective surgeries, which had a significant negative impact on our outpatient occupational medicine businesses. Our operators have done a terrific job making the appropriate changes to right-size our costs, but the key area they are spending most of their time on now is regaining volume. Volume is the primary driver to get us back to pre-COVID status. Moving to the financial details, for the first quarter, our operating expenses, which include our cost of services in general and administrative expense, was $1.23 billion and 87.3% of net operating revenue. For the same quarter last year, operating expenses were $1.16 billion and 87.7%. of net operating revenues. Cost of services was $1.2 billion for the first quarter compared to $1.13 billion in the same quarter last year. As a percent of net revenue, cost of services were 84.9% for the first quarter. This compares to 85.5% in the same quarter last year. G&A expense was $33.8 million in the first quarter. This compares to $28.7 million in the same quarter last year. G&A as a percent of net revenue was 2.4% in the first quarter compared to 2.2% of net revenue for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $187.3 million and adjusted EBITDA margins were 13.2% for the first quarter. This compares to total adjusted EBITDA of $170.1 million and adjusted EBITDA margin of 12.8% in the same quarter last year. Depreciation and amortization was $51.8 million in the first quarter. This compares to $52.1 million in the same quarter last year. We generated $2.6 million in equity and earnings of unconsolidated subsidiaries during the first quarter. This compares to $4.4 million in the same quarter last year. The reduction in equity and earnings was the result of a decline in performance of the other healthcare-related businesses in which we own a minority interest. We had a non-operating gain of $7.2 million in the first quarter of this year and a $6.5 million non-operating gain in the first quarter last year. Interest expense was $46.1 million in the first quarter. This compares to $50.8 million in the same quarter last year. The decline was the result of a reduction in variable interest rates as well as the refinancing activity we did during the second half of last year. We recorded income tax expense of $21.9 million in the first quarter this year, which represents an effective tax rate of 23.7%, compared to tax expense of $18.5 million and an effective tax rate of 25.7% in the same quarter last year. Net income attributable to non-controlling interests was $17.3 million in the first quarter. This compares to $12.5 million in the same quarter last year. Net income attributable to select medical holdings was $53.1 million in the first quarter, and fully diluted earnings per share was $0.40. Excluding the non-operating gain and its related tax effects, our adjusted earnings per share was $0.37. At the end of the first quarter, we had $3.57 billion of debt outstanding and $73.2 million of cash on the balance sheet. Our debt balance at the end of the quarter includes $2.1 billion in term loans, $165 million in revolving loans, $1.2 billion in 6.25% senior notes, and $78 million of other miscellaneous debt. Operating activities provided $44.1 million of cash flow for the first quarter. This compares to $41.8 million in the same quarter last year. Our Days Outstanding or DSO was 53 days at March 31st, 2020. This compares to 51 days at December 31st, 2019 and 53 days at March 31st, 2019. Investing activities used $44.7 million of cash in the first quarter. The use of cash included $39.2 million in purchases of property and equipment, and $16.7 million acquisition and investment activities. This is offset in part by $11.2 million in proceeds from the sale of business during the quarter. I will also point out, until we have a better handle on the timing of the recovery from the pandemic, we have slowed down cash outflows to primarily be maintenance capex. Financing activities used $262.1 million of cash in the first quarter. This includes $366.2 million to purchase shares in Concentra from our minority partners, which select and now own 68.8% of the voting interest in Concentra. The use of cash also included $39.8 million in prepayment of term loans, $8.7 million to repurchase common stock, and $10.8 million in net payments and distributions to non-controlling interests. This was all set in part by net borrowings of $165 million on revolving loans during the quarter. As a result of the developments and uncertainty surrounding the impact in our operations of COVID, we have previously withdrawn our business outlook for the year on April 3, 2020. Beginning the second week of April, we started receiving grant dollars related to the $100 billion set aside as part of the CARES Act for hospitals and health care providers. Our understanding is the Department of Health and Human Services has distributed $50 billion of the $100 billion fund. Select and its consolidated subsidiaries have received $93.7 million related to those grant dollars beginning April 10th. We also received an additional $10.1 million in entities we manage where we are a minority partner. These funds are designated to reimburse providers for lost revenue and incremental healthcare-related expenses in dealing with the COVID pandemic. We also applied for and began receiving advance payments under the Medicare Accelerated and Advanced Payments Program. Beginning April 9th, We received a total of $316.1 million in advance payments from our Medicare fiscal intermediaries. These funds are designated as advances and are scheduled to be repaid beginning 121 days after receipt and no later than 210 days after receipt of funds. We also received an additional $25.6 million in advance payments in entities we manage where we are our minority partner. In addition, we've begun deferring the employer portion of Social Security taxes allowed for under the CARES Act. These payments may be deferred through 2020 and must be repaid 50% by December 31st, 2021, and the balance by December 31st, 2022. We estimate this amount to be in the range of $90 to $100 million through 2020. We have taken these actions and additional measures to help improve our liquidity position, including deferring or suspending discretionary capital expenditures, reducing compensation and furloughing employees in some areas of the organization, and negotiating with landlords to receive rent deferrals at certain facilities where we have temporarily closed. Another point I'd like to make is that the refinancings we executed on the latter part of last year has provided us with additional liquidity. Between cash on hand and our credit facility revolvers, we have close to $1 billion of available liquidity today. This concludes our prepared remarks, and at this time we'd like to turn it back over to the operator to open up the call for questions.