Select Medical Holdings Corporation

Good morning and thank you for joining us today for the Select Medical Holdings Corporation's Earnings Conference Call to discuss the first quarter 2021 results and the company's business outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Atencio, and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and 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 future financial performance of the company, including without limitation statements regarding operating results, growth of opportunities, and other statements that refers to the select plans, expectations, strategies, intentions, and beliefs. These forward-looking statements are based on the information available to the management of the 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 Robert Artesio.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's first quarter earnings conference call for 2021. I'd like to say we're very pleased with the results of this quarter. Our inpatient businesses, including our critical illness recovery hospitals and our inpatient rehabilitation hospitals, realized significant growth in revenue, EBITDA, and occupancy rates. Occupancy rates in both business segments grew 500 basis points on the same quarter year-over-year basis. Our concentric business segment has continued the trend we saw in Q4 with nice growth in revenue, EBITDA, and EBITDA margins. And while our outpatient rehabilitation business experienced double-digit negative variance in patient visits in both January and February, we saw a surge of visits in March, and this has continued through April. All in all, it was a stellar quarter for Select. In addition, You may have saw in our earnings press release that our Board of Directors has authorized a cash dividend of 12.5 cents for holders of our stock as of May 19th. As we've done over the past year, we have outlined our business segment monthly revenue, volume and occupancy statistics in our earnings press release and public filings. We will continue to outline this information as long as we believe it provides insight to the impact of COVID-19 on the company's financial performance. Overall, our net revenue for the first quarter increased 9.3% to $1.55 billion. Net revenue in our critical illness recovery hospital segment in the first quarter increased 18.9% to $595 million compared to $501 million in the same quarter last year. Patient days were up 8.4% compared to the same quarter last year with over 293,000 patient days. Occupancy? And our critical illness recovery hospital segment was 75% in the first quarter compared to 70% the same quarter last year. Net revenue per patient day increased 10.1% to $2,024 per patient day in the first quarter. We continue to see strong referrals and higher acuity patients, which is driving both volume and rate in our critical illness recovery hospitals. Case mix index in our critical illness recovery hospitals was 1.35 in the first quarter compared to 1.27 in the same quarter last year. Net revenue on our rehabilitation hospital segment in the first quarter increased 14.2% to $208 million compared to $182 million in the same quarter last year. Patient days increased 8.3% compared to the same quarter last year with over 102,000 patient days. Occupancy in our rehabilitation hospitals was 84% in the first quarter compared to 79% the same quarter last year. Net revenue per patient day increased 7% to $1,853 per day in the first quarter. Net revenue in our outpatient rehab segment for the first quarter declined 1.3% to $252 million compared to $255 million in the same quarter last year. Patient visits were down 1.1%, with 2.1 million visits in the quarter. Our net revenue per visit was $104 in both the first quarter this year and last year. We did have one fewer operational days in the first quarter this year compared to the same quarter last year. Our visits per operational day this quarter increased slightly compared to the same quarter last year. Net revenue in our concentra segment in the first quarter increased 6.1%, to $423 million compared to $399 million in the same quarter last year. For the centers, patient visits were down 2.8% at two point visits in the quarter. Net revenue per visit in the centers increased slightly to $125 in the first quarter compared to $123 in the same quarter last year. Patient visit volumes in our centers was down we realized increases in revenue from COVID screening and testing services offset in part by our sale of the Veterans Administration Community-Based Outpatient Clinics last year. I also want to highlight that we recorded $34 million in other operating income in the first quarter of this year. This included $16.1 million related to payments received under the CARES Act for incremental costs incurred as a result of COVID, The adjusted EBITDA results for our operating segments do not include any recognitions of these funds. They are included in our other activities. It also included $17.9 million related to the positive outcome of litigation with CMS. The adjusted EBITDA results for our critical illness recovery hospital segments included the recognition of this income. Total company adjusted EBITDA for the first quarter increased 37.9%. to $258.3 million compared to $187.3 million the same quarter last year. Our consolidated adjusted EBITDA margin was 16.7% for the first quarter compared to 13.2% for the same quarter last year. Our critical illness recovery hospital segment adjusted EBITDA increased 27.9% to $113.3 million compared to $88.6 million same quarter last year. adjusted EBITDA margin for the segment was 19% in the first quarter compared to 17.7 in the same quarter last year. Our rehab hospital segment adjusted EBITDA increased 31% to $50.5 million compared to $38.6 million the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 24.3% in the first quarter compared to 21.2% in the same quarter last year. Our outpatient rehab adjusted EBITDA was $26.3 million compared to $27.1 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 10.4% in the first quarter compared to 10.6% the same quarter last year. Our Concentra adjusted EBITDA increased 33.4% to $82 million compared to $61.5 million in the same quarter last year. Adjusted EBITDA margin was 19.4% in the first quarter, compared to 15.4% in the same quarter last year. Earnings per common share increased 105% to 82 cents for the first quarter, compared to 40 cents for the same quarter last year. Adjusted earnings per common share was $0.37 in the first quarter last year. Adjusted earnings per common share excludes the non-operating gain and its related tax effects for the first quarter last year. In April, both the inpatient rehab and long-term acute care hospital proposed rules for 2022 were posted by CMS. The proposed inpatient rehab rule, if adopted, would see an increase in the standard payment amount of 2.47%. and an increase in the high-cost outlier threshold. The proposed long-term acute care rule, if adopted, would see an increase in the standard federal rate of 2.45% and an increase in the high-cost outlier threshold. We expect these rules to be finalized in August after the required comment period. Additionally, the Medicare sequester relief bill extended temporary suspension of the 2% Medicare sequestration cut that was set to expire March 31, through the end of 2021. That concludes my remarks. I'll now turn the call over to Marty Jackson for some additional financial details before we open the call up for questions.

Marty Jackson Thanks, Bob, and good morning, everyone. For the first quarter, our operating expenses, which include our cost of services and general and administrative expenses, were $1.33 billion, or 85.9 percent of net revenue. For the same quarter last year, operating expenses were $1.23 billion and 87.3 percent of net revenues. Cost of services were $1.29 billion for the first quarter. This compares to $1.2 billion in the same quarter last year. As a percent of net revenue, cost of services were 83.6 percent for the first quarter. This compares to 84.9 percent in the same quarter last year. G&A expense was $35.4 million in the first quarter. This compares to $33.8 million in the same quarter last year. G&A as a percent of net revenue was 2.3% in the first quarter. This compares to 2.4% of net revenue for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $258.3 million and the adjusted EBITDA margin was 16.7% for the first quarter. This compares to total adjusted EBITDA of $187.3 million, and adjusted EBITDA margin of 13.2% in the same quarter last year. Depreciation and amortization was $49.6 million in the first quarter. This compares to $51.8 million in the same quarter last year. We generated $9.9 million in equity and earnings during the first quarter. This compares to $2.6 million in the same quarter last year. We also had a non-operating gain of $7.2 million in the first quarter last year. Interest expense was $34.4 million in the first quarter. This compares to $46.1 million in the same quarter last year. We recorded income tax expense of $45.1 million in the first quarter this year, which represents an effective tax rate of 24.7 percent. This compares to the tax expense of $21.9 million and an effective rate of 23.7 percent in the same quarter last year. Net income attributable to non-controlling interests were $26.7 million in the first quarter, as compared to $17.3 million in the same quarter last year. Net income attributable to select medical holdings was $110.5 million in the first quarter, and earnings per common share was 82 cents. At the end of the first quarter, we had $3.4 billion of debt outstanding and over $750 million of cash on the balance sheet. Our debt balances at the end of the quarter included $2.1 billion in term loans, $1.2 billion in 6.25 percent senior notes, and $75 million of other miscellaneous debt. Net leverage based on our credit agreement EBITDA dropped to 3.02 times at the end of the first quarter, This is down from 3.48 times at the end of the year and 4.76 times at the end of the first quarter last year. Operating activities provided $239.9 million of cash flow in the first quarter. This compares to $44.1 million in the same quarter last year. Our day sales outstanding, or DSO, was 56 days at the end of March. This compares to 56 days at the end of December of 2020 and 53 days at March 31st of 2020. Investing activities used $52.6 million of cash in the first quarter. The use of cash included $39.7 million in the purchase of property and equipment and $12.9 million in acquisition and investment activities in the first quarter. Financing activities used $14.1 million of cash in the first quarter. This includes $13.7 million in payments and distributions to non-controlling interest of $400,000 in net repayments of other debts in the quarter. Our total available liquidity at the end of the first quarter was $1.25 billion, which includes $75 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 provided updated business outlook for calendar year 2021. For the full year 2021, we now expect revenue in the range of $5.7 to $5.9 billion, expected adjusted EBITDA to be in the range of $870 to $900 million, and expected earnings per common share to be in the range of $2.41 to $2.58. This concludes our prepared remarks, and at this time, we'd like to turn it back to the operator to open up the call for questions.