Select Medical Holdings Corporation

Good morning. Thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the second 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 second quarter earnings conference call for 2020. Before I outline some of our operational metrics, I want to provide you with some summary comments regarding the effects of COVID-19 pandemic on our operations. First, let me say how proud I am of the operational leadership and clinical excellence I have seen throughout our organizations these last several months. In these unusual times, it is gratifying to see such a dedicated group of clinicians and support staff come together throughout our organization to provide the highest quality care while keeping our patients and staff safe. We continue to adapt, evolve, and innovate as we navigate through the pandemic. As I mentioned on our last earnings call, the effect of the pandemic began to impact our company in mid-March. I also mentioned we thought April would represent the low point for our business and we would begin to see a rebound in the areas of our business hardest hit Thank you very much. Thank you very much. Having said that, we saw a significant rebound in this business segment in June as revenue increased over 24% for the month on the same period year-over-year basis. Our June occupancy rate of 78% is close to pre-COVID levels and exceeded June's last year occupancy of 73%. In our outpatient rehabilitation and concentra segments, Thank you very much. we saw meaningful improvement as states began to ease restrictions and hospitals and surgery centers began performing elective surgeries again. Volume and revenue shortfalls in June compared to prior year were 19.7% and 17.8% respectively, which was a significant improvement from April and May, and we experienced positive adjusted EBITDA in June. In our concentra segment, volumes and revenues were down year over year 39% and 33% respectively in the months of April and May, but only down in June 12.4% and 6.4% as restrictions eased and employers started to increase their workforce. Overall, our net revenue for the second quarter was down 9.4% to $1.23 billion in the quarter. We experienced meaningful declines in both our outpatient and concentra segments, which were partially offset by revenue growth in both our critical illness recovery and rehabilitation hospital segments. Net revenue in our critical illness recovery hospital segment in the second quarter increased 12.7% to $520 million compared to $461 million in the same quarter last year. Patient days were up 5.3% compared to the same quarter last year, with close to 277,000 patient days. Net revenue per patient day increased 7.4% to $1,867 per patient day in the second quarter. Occupancy in our critical illness recovery hospital segment was 72% in the second quarter compared to 69% in the same quarter last year. Net revenue in our rehabilitation hospital segment in the second quarter increased 5.2% Thank you for joining us. Occupancy in our rehab hospitals was 71% in the second quarter compared to 75% in the same quarter last year. Net revenue on our outpatient rehab segment in the second quarter decreased 36.2% to $167 million compared to $262 million in the same quarter last year. Patient visits declined 39.1% to 1.34 million visits in the second quarter. Thank you for joining us. for the same monthly periods when compared to the same months last year. Net revenue in our concentra segment for the second quarter decreased 24.5% to $312 million compared to $413 million in the same quarter last year. For the occupational health centers, patient visits were down 30.7% to 2.15 million visits in the quarter. Net revenue per visit in the centers was $124 in the second quarter compared to $121 in the same quarter last year. Similar to outpatient, net revenue declined for most significant during April, which was down 34.9% year over year, and May, which was down 30.7% year over year, with June showing improvement from those trends with net revenue down only 6.4% year over year. Total company adjusted EBITDA for the second quarter was down 4% to $178.8 million compared to $186.2 million the same quarter last year. Our consolidated adjusted EBITDA margin was up at 14.5% for the second quarter compared to 13.7% for the same quarter last year. We recorded $55 million in other operating income in the second quarter related to payments received under the provider relief funds. $54.2 million was recorded with our other activities, and $800,000 was recorded in the concentra segments. The adjusted EBITDA results for our critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation hospital segments do not include any recognition of these funds. Their respective portions of these funds recognized in the second quarter were included in other operating income. Our critical illness recovery hospital segment adjusted EBITDA increased 39.9% to $89.7 million compared to $64.1 million in the same quarter last year. Thank you for joining us. was 16.4% in the second quarter compared to 18.7% in the same quarter last year. The decline in adjusted EBITDA and margin were primarily driven by temporary admission restrictions in several bar hospitals in New Jersey and South Florida and higher operating expenses related to COVID. Our outpatient rehab incurred adjusted EBITDA loss of $6.3 million in the second quarter compared to $42.6 million Thank you very much. Adjusted EBITDA margin was 13.3% in the second quarter compared to 18.4% in the same quarter last year. Adjusted EBITDA was impacted by the significant decline in our volume during the quarter. We had adjusted EBITDA shortfalls to prior year results in both April and May, but adjusted EBITDA in June exceeded both April and May as well as June of last year. Earnings per fully diluted share increased over 18% to $0.39 for the second quarter compared to $0.33 for the same quarter last year. Adjusted earnings per fully diluted share was $0.38 per diluted share for the second quarter. Adjusted earnings per fully diluted share excludes the non-operating gain and its related tax effect in the second quarter of this year. I'll now turn the call over to Marty Jackson for some additional financial details Before we open the call up for questions.

Thanks, Bob. Good morning, everyone. For the second quarter, our operating expenses, which include our cost of services in general and administrative expenses, were $1.12 billion and 90.5% of net operating revenues. For the same quarter last year, operating expenses were $1.18 billion and 86.8% of net operating revenue. Cost of services were $1.08 billion for the second quarter. This compares to $1.15 billion in the same quarter last year. As a percent of net revenue, cost of services was 87.8% for the second quarter. This compares to 84.5% in the same quarter last year. G&A expense was $33.5 million in the second quarter compared to $31.3 million in the same quarter last year. G&A as a percent of net revenue was 2.7% in the second quarter. This compares to 2.3% of net revenue for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $178.8 million and the adjusted EBITDA margin was 14.5% for the second quarter last year. This compares to the total adjusted EBITDA of $186.2 million and an adjusted EBITDA margin of 13.7% in the same quarter last year. We recorded $55 million in other operating income in the second quarter related to payments received under the provider relief funds. I would like to reiterate that with the exception of $800,000 of grant monies to Concentra, no grant monies were included in our segment reporting. Depreciation and amortization was $52.3 million in the second quarter. This compares to $55 million in the same quarter last year. We generated $8.3 million in equity and earnings of unconsolidated subsidiaries during the second quarter compared to $7.4 million in the same quarter last year. We also had non-operating gain of $300,000 in the second quarter this year. The decline was a result of a reduction in the variable interest rates as well as the refinancing activity we did during the second half of last year. We recorded income tax expense of $23.3 million in the second quarter this year. which represents an effective tax rate of 25.7%. This compares to the tax expense of $20.8 million and an effective tax rate of 25.8% in the same quarter last year. Net income attributable to non-controlling interests were $15.8 million in the second quarter. This compares to $15.2 million in the same quarter last year. Net income attributable to select medical holdings was $51.7 million in the second quarter and fully diluted earnings per share was 39 cents. Excluding the non-operating gain and its related tax effects, our adjusted earnings per share was 38 cents. At the end of the second quarter, we had $3.4 billion of debt outstanding and $510 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $1.2 billion in and six and a quarter senior notes and $77 million of other miscellaneous debt. Operating activities provided $642 million of cash flow in the second quarter, which included $317 million in Medicare advances and $100 million in provider relief funds, $55 million of which was recognized in operating income. Also contributing to operating cash flow in the quarter was a reduction in our accounts receivable balance, and increased accrued liabilities and taxes payable. Our accrued liability includes $33 million in deferred employer FICA tax allowed for under the CARES Act. Investing activities used $35.9 million of cash in the second quarter. The use of cash included $32 million in purchases of property and equipment and $5 million in acquisition and investment activity. This was offset in part by $1.2 million in proceeds from the sale of businesses during the quarter. Financing activities used $169.5 million in cash in the second quarter. This includes $165 million in net repayments on revolving loans and $2.6 million in net repayments of other debt during the quarter. Our total available liquidity at the end of the second quarter was over $1 billion, which is evenly split between cash on hand and revolver availability. 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.