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spk03: 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.
spk01: 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.
spk04: 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.
spk03: At this time, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound or the hash key. Please stand by while we compile the Q&A roster. Your first question comes from Frank Morgan with RBC Capital Markets.
spk00: Good morning. Obviously, we appreciate the guidance for the fourth quarter, but I'm just in the details about the monthly trends so far this year. But just curious, Do you have any initial color on maybe how October trends are looking across your business? That would be my first question.
spk04: Yeah, Frank, we do. You know, October is trending nicely on the inpatient side. We're seeing a little bit north of an 8% growth on a year-over-year basis for both the LTACs and the IRFs, and we continue to see nice trends on the outpatient side.
spk00: Gotcha. And I guess in light of the trends that you're seeing, when we think about understanding you're not giving guidance for next year yet, but would it be fair to use, say, the second half of the year sort of as a starting point when we build our 2021 numbers? And then my last question is, when I think about this strong volume recovery you've seen, really what are you attributing that to? Is that just mostly COVID business or non-COVID business, just any color around what's driving that growth. Thanks.
spk04: Well, let us respond to the last part of your question. While we are seeing COVID patients, the majority of the increase is really part of this whole COVID pandemic that we've experienced and the relationships that we continue to improve with our referral sources. I think if you talk to our operators, they will tell you that our referral sources now understand that we can handle patients that are critically complex patients that are very, very ill. And so we've really seen that expand during this third quarter.
spk01: Yeah, and Frank, the way we think about next year, I mean, our budgeting process and our forecast projections internally that we're doing, You know, next year is a tough year to do because I think there's a lot of uncertainty out there. I mean, I could give you a number of alternate, you know, ideas about what it might look like. I mean, if we have a real acceleration of the pandemic, as some people are calling for, between now and the end of the year, I mean, will it carry over into the first quarter, the first half of next year? I guess it could, and In that scenario, we probably have a little bit of a different thinking on the businesses. But what we've seen is that while we're still in the pandemic, our outpatient businesses are recovering as people are, if I can use the term, learning to live with the virus. As the virus is around, we're going to continue to see strength as we've seen on the inpatient side of the business. If we have absolute lockdowns in some markets, then you're obviously going to see a bigger reduction on the outpatient. So my best guess is it's going to be somewhere in between. My judgment is that the pandemic will still be around through the first part of next year as we get closer to a vaccine. But on the other hand, it's hard to envision the absolute strict lockdowns that we saw back in March and April. So that's not a direct answer to your question, but that's just how we're thinking about our forecasts and projections that we're looking at for next year.
spk00: No, that's very helpful and very consistent with a lot of the operators you're seeing. Thank you.
spk03: Your next question comes from Justin Bowers with Deutsche Bank.
spk05: Hey, good morning, everyone. I'll just continue on Frank's question and ask it a little bit differently, but If we think about kind of the relationships that you guys have, have enhanced or established, and the LTAC business, you know, as a result of the pandemic, and, you know, if we go back to a quote, unquote, normalized environment, you know, next year, and we think about kind of 2019 is a starting point in the LTAC, you know, Is it fair to think about kind of growing like the base business or, you know, increasing the occupancy from that starting point given, you know, all that's transpired this year?
spk01: No, I'd probably encourage you to think about it a little differently. I would think of 2020 as the starting point and you could go, you know, flatter up or down on that. I mean, I do think, and I said this on our last call, that the position of our critical illness recovery hospitals in the continuum of care in most of our markets, I believe, will be enhanced and has been enhanced either with or without COVID. And I think that is just a reflection on the role that is played and the higher visibility of our type of critical illness recovery hospital in our local markets. We have deeper relationships than we have, and we have greater confidence in us by more referral sources than we had in 2019. And I do not think that that will change. Now, if there are fewer ICU patients in those hospitals, we may see less volume. I mean, I'm not saying that that's not possible. but I don't think that we're thinking about a return to the 2019. And, in fact, we are getting requests to accelerate some of our development efforts in some markets with our critical illness recovery hospitals as a result of, I think, a greater recognition of the important role that it plays in the continuum of the critically ill patients.
spk05: Oh, great. Well, you just answered my follow-up question as well in that response, so I'll move on. And just thinking about kind of use of capital and the balance sheet, I mean, the growth in the EBITDA, the cash generation, I mean, I'm looking at you guys kind of going out of sub-4 net leverage level almost sustainably in 2021. Is that, you know, is that kind of the trajectory we're on, and then, you know, how are you guys thinking about kind of capital over the next, like, say, 12 to 18 months?
spk04: Yeah, Justin, this is Marty. Certainly, as we indicated for the third quarter, we're at 3.66 times leverage right now. We'll go down, I would anticipate, to probably in that 3.5 range by the end of the year. And then next year, All of next year, we will be under four times. Now, as you probably know, the feds have changed how the payment for advanced payments is going to occur. We will be paying back some of that money next year. By our estimate, it's probably in that $280 million of the $318 million that's outstanding. We will still be below four times during that period of time.
spk01: And in terms of use of capital next year, I mean, we think we'll continue to grow and invest in our outpatient, not significant amounts of CapEx, but I think our plan is to continue to add clinics, either de novo or small acquisitions. We'll do some more development in the critical illness area. Consentra will continue to add clinics. I wouldn't look for any major use of capital in M&A in 2021. I think we'll continue to focus on our four platforms and driving margins and volumes and watching the pandemic to make any adjustments to the business that we need to. So I wouldn't look for anything major. And then obviously in 2022, Our plan is to make the final payment to bring in the minority interest in Concentra through the put-call mechanism. So our plan is to bring the balance of the minority interest in Concentra in early 2022.
spk04: And, Justin, along with the acquisition of the balance of the JV ownership, we anticipate that will be probably in the $600 million range. And as such, most of that, if not all of that, cash will be on the balance sheet.
spk05: Got it. All right, understood. Well, thanks a lot and well done. I think the results speak for themselves.
spk00: Thank you.
spk03: Your next question comes from Kevin Fishback, Bank of America.
spk06: Great, thanks. I guess I just wanted to see if we could follow up a little bit more on the, on the 2021, um, commentary. Um, you know, obviously a lot of, you know, puts and takes as far as, um, you know, the CARES money this year and sequestration in this year, um, you know, potentially being headwinds the next year, but then, you know, as you mentioned, the, the outpatient businesses is ramping up nicely. Um, I mean, do you think that you could actually grow EBITDA off of these levels from, from here, or is it still too hard to make that determination? into next year?
spk01: Yeah, I think that we could, given the right set of circumstances. I think that it is possible.
spk06: Okay. And you mentioned kind of a development pipeline on the critical illness recovery hospitals. I guess I haven't historically given a lot of credit to growth in that business. Can you talk about how you think about the long-term growth outlook on that business once we get to kind of a normalized COVID outlook?
spk01: As you might know, Kevin, we have a lot of partnerships around the country, joint venture partnerships that we've done over the last 10 years. Most of those were led with inpatient rehab partnerships. But as we've become more embedded in those systems, and they tend to be some of the largest systems in the country, and our goal is to expand offerings. And so we think that we have opportunities in markets where we already have a presence to add on additional service. And in those markets where we have rehab joint ventures, we're looking to take advantage of perhaps adding some – long-term acute care hospitals or our critical illness recovery hospitals in those markets. So we think that's an opportunity for us.
spk04: Kevin, I think there's also opportunities to expand beds with existing LTCHs that we have. So, you know, it's not just the new hospitals that Bob had mentioned, but it's also expansion of existing bed capacities.
spk06: And I guess when you guys did the IRF JVs, it took a little while to kind of get that going, and now it's going at a pretty nice clip. I mean, when do you think we might be able to kind of see that capacity start to show up in the numbers?
spk01: Yeah, well, you know, the numbers speak for themselves.
spk06: Okay, so there's no, like, timing as far as when, like, new hospitals might be coming online?
spk01: We don't announce them until we've actually signed them. You may have taken notice that recently we announced a new partnership with Rush University in Chicago. We think that's going to be a very big and very significant deal, and that includes both rehab, critical illness recovery hospital, and outpatient. So, you know, we have announced those, and I think our expectation is we will continue to announce those.
spk06: Okay. And then just maybe the last question, I think the IRF growth is likely to be quite strong. I got pretty good visibility of that. But I guess trying to understand how you think about the long-term growth on, again, post-normalized COVID, long-term growth rate for the outpatient rehab side and the concentric side. How should we think about those businesses' long-term growth opportunity? Thanks.
spk04: Yeah, I think on the outpatient side, I mean, we expect to continue to see, you know, in the six to seven percent top line growth on the outpatient on a post-COVID. I mean, we anticipate that we'll be able to bring back all the volume we had before. You saw that in September. We were at negative variance of 1.6 percent. So the operators have done a terrific job getting that volume back.
spk01: And we think that in a post-pandemic world, there'll be opportunities both on the concentric side and the outpatient side for us to add in markets where we currently have a presence and perhaps enter some new markets on both the concentric side and outpatient. So we think the future is very bright in both of those businesses.
spk06: Great. Thanks.
spk03: Your next question comes from Bill Sutherland with the Benchmark Company.
spk08: Hey, thanks. Good morning. Terrific job, guys. Bob, you mentioned that on rehab hospitals, I had in my notes that you might be opening a couple this quarter.
spk04: Yeah, Bill, we are. We've got a banner that opened up. We opened up one. They started taking patients, I think it was last month, and then we'll open up another hospital actually this week. So, yes, two-banner hospitals.
spk08: Will there be – should we think about startup expenses, Marty?
spk04: It's a non-consolidating bill, so you'll see that only through equity and earnings.
spk08: Okay. The pressure that you called out, Bob, in South Florida and New Jersey and rehab hospital – I'm sure that's got to be COVID-related. Do you sense it's just, well, is there any other color you want to provide or, you know, sort of your sense of their recovery?
spk01: Yeah, the operation in South Florida has recovered fully. That was a factor this past quarter, but what was mitigated toward the end of the quarter, and I would say that that market is back to being one of our strongest markets. The other one we called out was on New Jersey. It is recovering. I would say not fully back to the levels that it has been historically, but trending in the right direction. So I would characterize Florida as fully recovered and Jersey better, but a little ways to go, but not material. Okay. Thank you.
spk08: And then On the adjusted EBITDA margins, which are just spectacular given the backdrop, Marty, is that a good anchor for thinking about how 21 could, you know, there's so many puts and takes, but there's nothing, you know, specific to the quarter or the circumstances of, I don't know, I know length of stay is up in the hospitals, but I'm just kind of trying to figure out If there's anything here that's unusual that we can't extrapolate from.
spk04: Yeah, Bill, I'll tell you that most EBITDA margins are fine. The one I would really focus on is Concentra. You know, north of 20% margins we think is out of the norm. And they do have some, they were able to pick up some pretty high margin business during the third quarter. We anticipate that what we've talked about before is in that 17% to 18% range. We think that that's a good number for Concentra.
spk08: Okay. Okay. That's helpful. Thanks. And then finally, I'm curious, given all the shift in many sectors to more virtual types of care, and I know you've had to use that in outpatient rehab. I'm not sure about Concentra. Yeah. Do you think that's here to stay for your model, Bob? And does that permanently improve the cost structure?
spk04: You have, Bill, we did see significant increases in April and May for tele-rehab and tele-health, both on the outpatient side and on the concentric side. That has substantially diminished over the past couple of months. I think we were I think we were at 16, 17, 100 visits a day, and that's down in the 300 to 400 range now. So, you know, we think that what you really expect to see is people want to come in, they want to see the therapist. You know, in particular, physical therapy is a lot of physical manipulation.
spk08: Right. It's not a natural, you're right. Yes. Okay, gentlemen. Thanks very much. Thank you, Bill.
spk03: Your next question comes from AJ Rice with Credit Suisse.
spk07: Hey, guys. This is Rob Moon on for AJ Rice. Great quarter. I just wanted to ask quickly, I see in Q4 you kind of have a step down in EBITDA in your guide and a little bit of a step down in margin. Is most of that coming from concentra and the seasonality? And then also, it seems like in Q3, you've really held the line on the cost front just as a total company. Could you maybe discuss a few of the puts and takes or the cost initiatives that you've been able to implement and how sustainable some of those are going forward?
spk04: Sure. Sure. In answer to your first question, yes, the step down really is associated with the fourth quarter of Concentra. The margins always drop in the fourth quarter. It's just a seasonal issue. With regards to costs, a lot of that has to do with operators have just done a marvelous job managing expenses. One of the things when you take a look in particular on the inpatient side, When you see increased volume, occupancy rates are going up. You know, a lot of those incremental dollars, you'll see the, you know, because the fixed costs are covered, you're seeing some very, very nice expansion in the margins because of that. Number two is, it just seems, you know, when we take a look at salaries, wages, and benefits as a percentage of revenue, salaries, wages, and benefits were down,
spk07: significantly um and a lot of that again we think has to do with increased volume great um and then just as a follow-up i saw in the in the quarter you had uh 71 million from cash from asset business sales and i think this relates to the concentra department of veterans affair community-based outpatient clinic sale divesting some of these assets, is that also helping margins at all?
spk04: No, it really wasn't. I mean, the margins were fine in that business. It was just a small business that it's not really something that we were focused on expanding.
spk07: Gotcha. Understood. Thank you, guys. Appreciate the time.
spk02: Thank you.
spk03: There are no further questions at this time. I will turn the call back over to you.
spk02: Thank you. No concluding comments. Thanks for joining us, and we'll look forward to updating you next quarter.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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