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 2021 results and the company's business outlook. Speaking today are the company's executive chairman and co-founder, Robert Ortendio, 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'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 Ortenzio. Hi, Ms. Ortenzio.

Thank you, Operator. Good morning, everyone, and thank you for joining us for Select Medical's third quarter earnings conference call for 2021. We are pleased with our clinical financial performance for the quarter. Our clinical teams continue to excel with high-quality, compassionate care for our patients during challenging times, and for that, I'm very grateful. Our business diversification we built over the last decade has helped us achieve the growth and stability we were targeting. Three of our four business segments realized double-digit top-line growth. Outpatient rehabilitation and occupational medicine saw over a 24% increase in same-quarter, year-over-year EBITDA growth. We continue to be active on the development front. As I mentioned during the second quarter conference call, we entered into new joint ventures with Ascension St. Thomas in Nashville. Construction is underway in a new 30-bed critical illness recovery hospital hospital within a hospital at the St. Thomas West Campus, which will be a satellite campus of our existing Flex Specialty Hospital in Nashville, and we expect it to open by the end of the year. We also entered into a new joint venture with Community Health Systems Northwest Hospital in Tucson and acquired Cura Health Tucson, a critical illness recovery hospital. We plan to relocate to our joint venture partner's Northwest Medical Center campus by the end of the year. Also during the third quarter, we entered into a new outpatient joint venture with Cedars-Sinai in Los Angeles, contributing our 26 outpatient clinics in that market to the joint venture. On October 1st, we closed on the acquisition of Acuity Healthcare, which operates five critical illness recovery hospitals through joint venture partnerships in New Jersey and West Virginia. We've been working with our new partners, integrating these hospitals into our portfolio of critical illness recovery hospitals. And... On November 1st, we entered into a new outpatient joint venture in Birmingham, Alabama with CHS Grandview, contributing select five outpatient clinics in the market. Our development pipeline remains strong as we continue to look for opportunities to expand our footprint and partner with leading healthcare institutions throughout the country. In addition, as we have included in our earnings press release yesterday, our board has declared a 12.5 cent per share dividend that will be payable on November 29th to shareholders of record November 16th. The board also increased the capacity of our authorized share repurchase program by $500 million to $1 billion and extended the program two years until December 31st, 2023. As we have done over the past year, we have outlined our business segment's monthly revenue, volume, and occupancy statistics in our earnings press release and public filings, including monthly results from 2019 to provide a data point for each of our business segments prior to the pandemic compared to where they are currently. We will continue to include this information as long as it provides meaningful insight to the impact of COVID-19 and the company's financial performance. Overall revenue for the third quarter grew 7.8% to $1.53 billion, and for year-to-date has increased 14.1% to $4.64 billion. Revenue in our critical illness recovery hospital segment in the third quarter increased 2.2% to $531 million compared to $519 million in the same quarter last year. Patient days were down 2.4% compared to the same quarter last year with 272,000 patient days in the quarter. Occupancy in our critical illness recovery hospital segment was 68% in the third quarter compared to 71% in the same quarter last year and 67% in the third quarter of 2019. We did increase our bed count on a year-over-year, same-quarter basis from 2020 to 2021 by 119%. This increase in beds was a result of the acquisition of our new Tucson hospital, which added 51 beds, and the balance of the beds, 68, came from bed relocations, bed additions, and temporary beds at nine of our hospitals. Revenue per patient day increased 4.7% to $1,931 per patient day in the third quarter. Revenue in our rehabilitation hospital segment in the third quarter increased 13% to $212 million compared to $88 million in the same quarter last year. Patient days increased 7.6% compared to the same quarter last year for almost 103,000 patient days. Occupancy in our rehab hospitals was 82% in both the third quarter this year and last year and 75% in the third quarter of 2019. Revenue per patient day increased 6% to $1,881 per day in the third quarter. Revenue in our outpatient rehab segment in the third quarter increased 14.4% to $275 million compared to $240 million in the same quarter last year. Patient visits were up 18.3%, with 2.3 million visits in the quarter compared to 2 million visits in the same quarter last year and 2.2 million visits in the third quarter of 2019. Our revenue per visit was $102 in the third quarter compared to $104 per visit last in the same quarter last year. This reduction in rate is due to a change in our payer mix caused by the pandemic and the related lockdowns in the third quarter last year, which is now normalized to a payer mix consistent with our experience prior to the onset of the pandemic. Revenue in our concentra segment in the third quarter increased 12.8% to $442 million compared to $392 million in the same quarter last year. For the centers, Patient visits were up 14% to 3.22 million visits compared to 2.83 million visits in the same quarter last year and 3.15 million visits in the third quarter of 2019. Revenue per visit in the centers increased $124 in the third quarter compared to $121 in the same quarter last year. Total company adjusted EBITDA for the third quarter declined 2.2% to $208.6 million compared to $213.2 million in the same quarter last year. Our consolidated adjusted EBITDA margin was 13.6% for the third quarter compared to 15% for the same quarter last year. We did incur one-time expenses during the quarter, totaling $6.5 million. These included a write-down of PPE supplies, integration of costs of our Tucson acquisition, and costs associated with forced relocation of one of our hospitals. In addition, Q3 of 2020 included $3.2 million of EBITDA associated with the CBOC business, which we sold in August of 2020. Our critical illness recovery hospital segment adjusted EBITDA was $57.2 million in the third quarter compared to $88.8 million in the same quarter last year. Adjusted EBITDA margin for this segment was 10.8% in the third quarter compared to 17.1% in the same quarter last year. We continue to experience significantly higher nursing costs, which is being driven by an increase of both hours and rates of agency staffing. Salary wages and benefits increased by 560 basis points on the same quarter year-over-year basis. Our rehabilitation hospital segment adjusted EBITDA declined 1.3% to $44.1 million in the third quarter compared to $44.6 million in the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 20.7% in the third quarter compared to 23.7% in the same quarter last year. We've also experienced increased labor costs of clinicians in our rehab hospitals. Salary wages and benefits increased on a same-quarter, year-over-year basis by 140 basis points. Our outpatient rehabilitation adjusted EBITDA increased 26.6% to $38.8 million in the third quarter compared to $30.6 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 14.1% in the third quarter compared to 12.8% in the same quarter last year. The increase in EBITDA is primarily driven by increases in patient visit volumes. Our Consentra adjusted EBITDA increased 23.9% to $99.8 million in the third quarter compared to $80.5 million in the same quarter last year. Consentra recognized $1.6 million of CARES Act payments in the third quarter this year compared to $400,000 in the same quarter last year. Adjusted EBITDA margin was 22.6% in third quarter compared to 20.6% in the same quarter last year. The increase in EBITDA is driven by both increased patient volumes as well as COVID screening and testing services provided by our centers to on-site clinics located at employer work sites. Earnings per common share was $0.57 in both the third quarter this year and same quarter last year. Adjusted earnings per common share was $0.56 in the third quarter last year, which excluded non-operating gains and their related tax impacts. I'll now turn it over to Marty Jackson for some additional financial details before opening the call up for questions.

Thanks, Bob, and good morning, everyone. For the third quarter, our operating expenses, which include our cost of services and general and administrative expense, were $1.34 billion, or 87.1% of revenue. For the same quarter last year, operating expenses were $1.22 billion, and 85.4% of revenue. The increase in our operating expenses as a percent of revenue was primarily driven by the increased staffing costs in our critical illness recovery hospitals and rehabilitation hospital segments. Cost of services were $1.3 billion for the third quarter. This compares to $1.18 billion in the same quarter last year. As a percent of revenue, cost of services were 84.6 percent for the third quarter. This compares to 82.9 percent in the same quarter last year. G&A expense was $37.9 million in the third quarter. This compares to $35.5 million in the same quarter last year. G&A as a percent of revenue was 2.5% in both the third quarter this year and the same quarter last year. As Bob mentioned, total adjusted EBITDA was $208.6 million, and the adjusted EBITDA margin was 13.6% for the third quarter, which compares to total adjusted EBITDA of $213.2 million, and adjusted EBITDA margin of 15% in the same quarter last year. Depreciation and amortization was $50.1 million in both the third quarter of this year and the same quarter last year. We generated $11.5 million in equity and earnings of unconsolidated subsidiaries during the third quarter. This compares to $8.8 million in the same quarter last year. Interest expense was $33.8 million in the third quarter. This compares to $34 million in the same quarter last year. We recorded Income tax expense of $27.7 million in the third quarter this year, which represents an effective tax rate of 21.6%. This compares to the tax expense of $31.6 million and an effective tax rate of 23.2% in the same quarter last year. Net income attributable to non-controlling interests. were $23.3 million in the third quarter. This compares to $27.5 million in the same quarter last year. Net income attributable to select medical holdings was $76.9 million in the third quarter, and earnings per common share was $0.57. At the end of the third quarter, we had $3.4 billion of debt outstanding and $748 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 6.25% senior notes, and $74 million of other miscellaneous debt. Net leverage based on our credit agreement EBITDA was 2.6 times at the end of the third quarter compared to 2.51 times at the end of the second quarter and 3.48 times at the end of last year. Operating activities. provided $99 million of cash flow in the third quarter, which includes the repayment of $92 million of Medicare advances. As of September 30th, 2021, we have $159.5 million of Medicare advances remaining on the balance sheet. We expect this remaining balance to be recouped now through April of 22. Our DSO was 54 days. at September 30th, 21. This compares to 54 days as of June 30th, 21, and 56 days at the end of December, December 30th, 2020. Investing activities used $69.1 million of cash in the third quarter. The use of cash included $48.9 million in purchases of property and equipment, and $21.9 million in acquisition and investment activity in the quarter. We also generated $1.8 million in proceeds from the sale of assets in the third quarter. Financing activities used $85.4 million of cash in the third quarter. This included $64.4 million in the repurchases of common stock, $47.5 million of which constituted repurchases under our board authorization repurchase program. This also included $16.9 million in dividend payments, and $7 million in net payments and distributions to non-controlling interests in the quarter. The company repurchased over 1.38 million shares for a total cost of $47.5 million during the third quarter under our board-authorized share repurchase program. Since inception, the company has repurchased close to 40 million shares for a total consideration of $404 million. As Bob mentioned, our board authorized A $500 million increase in availability under the program extended through December 31st, 2021. Our total available liquidity at the end of the third quarter was over $1.34 billion. This includes $748 million of cash and close to $595 million in revolver availability under the select credit agreement. 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 $6.05 to $6.15 billion, expected adjusted EBITDA to be in the range of $980 million to $1 billion, and expected earnings per common share to be in the range of $2.98 to $3.09. 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 additional questions.