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 third 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 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 call over to Mr. Robert Hortensio.

Thank you, operator. Good morning, everyone, and thanks for joining us for Select Medical's third quarter earnings conference call for 2020. Before I outline some of our operational metrics, let me start by reiterating one of the things I said on our last quarter's earnings call, which is how proud I am of the operational leadership and clinical excellence I have seen throughout our organization during these unusual times. We continue to have a group of clinicians and support staff focusing our organization on the priority of providing the highest quality care while keeping our patients and staff safe. We continue to learn, adapt, evolve, and innovate to address the changing needs in our businesses in today's unique environment. I couldn't be more pleased with both our operational and financial performance in the quarter. I also wanted to make it clear that our third quarter results did not include any additional grant income. In fact, we recorded a net reduction of $1.2 million of grant income in the quarter. Similar to the second quarter, we've included our third quarter monthly revenue, volume, and occupancy statistics in our 10-Q and earnings release, which illustrates a very as our operating divisions rebound from the lows we saw early in the COVID pandemic. Our critical illness recovery hospitals realized a significant increase in our year-over-year occupancy rates, growing from 67% in Q3 of 2019 to 71% for this past quarter. This volume growth coupled with strong expense management contributed to the 470 basis point improvement in our margins in the third quarter in this segment. Our rehabilitation hospitals have also experienced meaningful occupancy growth in the third quarter, growing from a 75% occupancy rate in Q3 of 2019 to an 82% occupancy rate this quarter, despite the fact that we have some markets that have not fully rebounded from pre-COVID levels. We continue to experience higher costs to treat patients, yet we've been able to manage 250 basis point margin improvement in the third quarter to 23.7%. While volumes continue to be our biggest challenge in our outpatient rehabilitation and concentra segments, we saw meaningful improvement in the third quarter in both segments. Our outpatient rehab business has seen a significant improvement from the height of the lockdown in April and May when we were seeing over 45% negative volume variance from the same period prior year. In September, our negative volume variance for our outpatient business was down to 1.6% compared to September of 2019. Concentra was also experiencing a similar volume improvement with their September volume variance down 4.3% from September 2019 and a high volume variance of 41.3% this past April. By all accounts, this was a terrific quarter for our company. Our inpatient business segments saw a double-digit growth in their combined revenue, and both our outpatient business segments made great strides in regaining previously volume norms. Overall, our net revenue for the third quarter was up 2.2% to $1.42 billion in the quarter. Net revenue in our critical illness recovery hospital segment in the third quarter increased 12.2% to $519 million compared to $463 million in the same quarter last year. Patient days were up 8.1% compared to the same quarter last year with over 279,000 patient days. Net revenue per patient day increased 4.1% to 1,845 per patient day in the third quarter. Case mix index was up from 1.26 in the third quarter last year to 1.31 in the most recent quarter. Net revenue in our rehabilitation hospital segment in the third quarter increased 8.5% to $188 million compared to $173 million in the same quarter last year. Patient days were up 7% compared to the same quarter last year, and net revenue per patient day increased 3% to $1,775 per day in the third quarter. Net revenue in our outpatient rehab segment in the third quarter declined 9.5% to $240 million compared to $265 million the same quarter last year. Patient days were down 10% compared to the same quarter last year with 1.98 million visits in the third quarter. Our net revenue per visit was $104 in the third quarter compared to $103 in the same quarter last year. Net revenue shortfalls to prior year's improvement each month during the quarter was September down only 2.5% compared to the same month last year. Volume trended along the same lines as revenue for the same monthly periods when compared to the same months last year, with visits down only 1.6% in September when compared to the same month last year. Net revenue in our concentra segment for the third quarter declined 7.1% to $392 million compared to $422 million in the same quarter last year. For the occupational health centers, patient visits were down 10.3% with 2.8 million visits in the quarter. Net revenue per visit in the centers was $221 in the third quarter compared to $120 in the same quarter last year. Total company adjusted EBITDA for the third quarter was up 16.7% to $213.2 million compared to $182.7 million in the same quarter last year. Our consolidated adjusted EBITDA margin was up with a 15% margin for the third quarter compared to 13.1% for the same quarter last year. EBITDA results for the third quarter included a net reduction of $1.2 million of grant income recognized from the provider relief funds. Our critical illness recovery hospital segment adjusted EBITDA for the third quarter increased 55.2% to $88.8 million compared to $57.2 million in the same quarter last year. Adjusted EBITDA margin for the segment was 17.1% in the third quarter compared to 12.4% in the same quarter last year. Adjusted EBITDA and margin growth were driven primarily by our net revenue growth, which was partially offset by increased operating expenses as a result of COVID. Our rehabilitation hospital segment adjusted EBITDA for the third quarter increased 21.4% to $44.6 million compared to $36.8 million in the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 23.7% in the third quarter compared to 21.2% in the same quarter last year. Adjusted EBITDA margin growth were driven primarily by our net revenue growth, which was partially offset by continued year-over-year shortfalls in our hospitals in New Jersey and South Florida, as well as higher operating expenses as a result of COVID. Our outpatient rehab segment adjusted EBITDA for the third quarter was $30.6 million compared to $40 million in the same quarter last year. Adjusted EBITDA margin was 12.8% in the third quarter compared to 15.1% in the same quarter last year. Adjusted EBITDA and margin decline continue to be adversely impacted by volume declines related to COVID. Our concentra adjusted EBITDA for the third quarter increased 3.7%. to $80.5 million compared to $77.7 million in the same quarter last year. Just the EBITDA margin was 20.6% in the third quarter compared to 18.4% in the same quarter last year. While we continued to experience volume shortfalls, we made significant reductions where possible in our operating expenses during the quarter, which drove improvement in both the Just the EBITDA and margin in the quarter compared to the same quarter last year. Earnings per fully diluted share were $0.57 in the third quarter, growing almost 148% over prior year same period earnings of $0.23. Addressed earnings per fully diluted share was $0.56 per diluted share for the third quarter compared to $0.33 in the same quarter last year. Adjusted earnings per fully diluted share excludes the non-operating gains in the related tax effects in the third quarter this year and the loss on retirement of debt and related costs in the third quarter last year. At this point, I'll turn it over to Marty Jackson for some additional financial details, and then we'll open the call up for questions.

Marty Jackson Thank you, Bob, and good morning, everyone. For the third quarter, Our operating expenses, which include our cost of services in general and administrative expense, was $1.2 billion and 85.4 percent of net operating revenue. For the same quarter last year, operating expenses were $1.2 billion and 87.4 percent of net operating revenue. Cost of services was $1.18 billion for both the third quarter of this year and the same quarter last year. As a percent of net revenue, cost of services were 82.9% for the third quarter compared to 84.9% in the same quarter last year. G&A expense was 35.5 million in the third quarter. This compares to 34.4 million in the same quarter last year. G&A as a percent of net revenue was 2.5% in both the third quarter of this year and the same quarter last year. As Bob mentioned, total adjusted EBITDA was 213.2% An adjusted EBITDA margin was 15 percent for the third quarter compared to total adjusted EBITDA of $182.7 million and an adjusted EBITDA margin of 13.1 percent the same quarter last year. The adjusted EBITDA results in the third quarter included a net reduction of $1.2 million in other operating income related to grant income recognized under the provider relief funds. As you may recall, we recorded $55 million in other operating income in the second quarter related to these grants. On September 19th, HHS released a post-payment notice on recording requirements associated with these payments, which we viewed as a change to the previously issued guidance and caused us to change our grant income recognition related to these payments. On October 22nd, HHS released another post-payment notice which again changed our view on grant income recognition of these payments, which will be reflected in the coming quarters. Depreciation and amortization was $50.1 million in the third quarter compared to $52.9 million in the same quarter last year. We generated $8.8 million in equity and earnings of unconsolidated subsidiaries during the third quarter compared to $7 million in the same quarter last year. We also had non-operating gains of $5.1 million in the third quarter this year. Interest expense was $34 million in the third quarter. This compares to $54.3 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 last year. We recorded income tax expense of $31.6 million in the third quarter this year, which represents an effective tax rate of 23.2 percent, compared to tax expense of $12.8 million and an effective tax rate of 22.6 percent in the same quarter last year. Net income attributable to non-controlling interests were $27.5 million in the third quarter compared to $13.3 million in the same quarter last year. The increase was in part due to the gain on the sale of the Concentra CBOC business, which we sold on September 1st, as well as improved performance in several of our inpatient rehab joint ventures for the quarter. Net income attributable to Select Medical was $76.9 million in the third quarter, and fully diluted earnings per share was 57 cents. Excluding the non-operating gains and the related tax effects, our adjusted earnings per share was 56 cents. At the end of the third quarter, we had $3.4 billion of debt outstanding and $640 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 six and a quarter senior notes, and $75 million of other miscellaneous debt. We ended the third quarter with net leverage for our senior secured credit agreement of 3.66 times. This reduction in net leverage will result in 25 basis point reduction in our borrowing spread on our credit facility debt to live or plus 2.25%. Operating activities provided $134.5 million of cash flow in the third quarter. Investing activities provided $18.4 million of cash in the third quarter. The provision of cash was driven by proceeds from the sale of businesses, $70.9 million offset by $34.8 million. $3 million in purchase of property and equipment, and $18.2 million in acquisition and investment activities during the quarter. Financing activities used $22.9 million of cash in the third quarter. Our total available liquidity at the end of the third quarter was over $1.1 billion, including $640 million of cash and close to $500 million in revolver availability under the Select and Concentra credit agreements. Additionally, in our earnings press release, we included our updated business outlook for the calendar year 2020. We expect net revenue to be in the range of $5.44 to $5.5 billion. We expect adjusted EBITDA to be in the range of $745 to $765 million. We expect fully diluted earnings per share to be in the range of $1.65 to $1.75. and adjusted earnings per share of $1.61 to $1.71, which excludes the non-operating gains on sale of businesses and the related tax effects. 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.