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 fourth quarter and four-year 2021 results and the company's business outlook. Speaking today are the company's executive chairman and co-founder, Robert Ortenezzo, 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 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 the 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 Ortenizzo.

Thank you, Operator. Good morning, everyone. Thanks for joining us for Select Medical's fourth quarter and full year earnings conference call for 2021. Prior to providing details on the quarter, I would like to thank all of our clinicians and operators for all their hard work and efforts this quarter and for the entire year. Their ability to adjust to the changing COVID variants throughout 2021 is a great testimony to our team's adaptability and their professionalism. Our revenues grew nicely in all four of our business segments, with aggregate revenue growth for the quarter close to 7% and for the year over 12%. However, we also experienced substantial wage pressure in Q4 in terms of agency, nursing rates, and utilization, primarily in our critical illness recovery hospitals. Marty Jackson will cover these labor increases in more detail in his comments. As we have 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, including monthly results from 2019. This information will provide a data point for each of our business segments prior to the pandemic compared to the current filing. 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. I also wanted to note that we recorded $8 million in other operating income in the fourth quarter and $124 million for the full year 2021 related to provider relief fund grant payments. In 2020, we recorded $36 million in other operating income in the fourth quarter and $90 million for the full year 2020 related to these payments. The adjusted EBITDA results for our critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation segments do not include any recognition of these funds. The concentra segment does include $1 million in the fourth quarter and $35 million for the full year 2021 of adjusted EBITDA related to these funds. Total company revenue for the fourth quarter was $1.56 billion, a 6.8% increase compared to the same quarter prior year. For the full year, total company revenue increased 12.2% to $6.2 billion compared to $5.5 billion in the prior year. Revenue in our critical illness recovery hospital segment in the fourth quarter increased 7.3% to $577 million compared to $538 million in the same quarter prior year. Patient days were up 3.2% compared to the same quarter prior year with over 294,000 patient days. Net revenue per patient day increased 3.5% to $1,946 per patient day in the fourth quarter as case mix index was 1.32 in the fourth quarter compared to 1.30 in the same quarter last year. For the year, revenue in our critical illness recovery hospital segment increased 8.1% to over $2.2 billion compared to almost $2.1 billion in the prior year. Patient days were up 1.9%, and revenue per patient day increased 6.1% compared to the prior year. Revenue in our rehabilitation hospital segment in the fourth quarter increased 10.5% to $216 million compared to $196 million in the same quarter prior year. Patient days were up 8.1% compared to the same quarter prior year, and net revenue per patient day increased 2.7% to $1,888 per day in the fourth quarter. For the year... Revenue on our rehabilitation hospital segment increased 15.6% to $849 million compared to $735 million in the prior year, driven by both volume and rate increases. Patient days were up 11.8% as revenue per patient day increased 4.2% compared to the prior year. Revenue in our outpatient rehab segment in the fourth quarter increased 7.8% to $277 million compared to $257 million in the same quarter prior year. Patient visits were up 9.2% compared to the same quarter prior year with over 2.3 million visits in the fourth quarter. Our revenue per visit was $102 in the fourth quarter. For the year, revenue in our outpatient rehab segment increased 17.9% to over $1.08 billion compared to $920 million in the prior year. Patient visits were up 21.1% with almost 9.2 million visits for the year. Our net revenue per visit was $102 for the full year. Revenue in our concentra segment for the fourth quarter increased 3% to $411 million compared to $399 million in the same quarter prior year. For the occupational health centers, patient visits were up 8.3%, with over 3 million visits in the fourth quarter. Revenue per visit in the centers was $125 in the fourth quarter. For the year, revenue of concentra increased 15.4%, to over $1.7 billion compared to $1.5 billion in the prior year. For the occupational health centers, patient visits increased 13.4% with over 12 million visits for the year. Revenue per visit in the centers was $125 for the year. Total company adjusted EBITDA for the fourth quarter was $138.4 million compared to $221.3 million the same quarter prior year. Our consolidated adjusted EBITDA margin was 8.9% for the fourth quarter compared to 15.2% for the same quarter prior year. For the full year, total company adjusted EBITDA increased 18.3% to $947.4 million compared to $800.6 million in the prior year. Our consolidated adjusted EBITDA margin was 15.3% for the year compared to 14.5% in the prior year. As mentioned previously, adjusted EBITDA results for the full year included $124 million of provider relief funds grant income compared to $90 million in the prior year. Our critical illness recovery hospital segment adjusted EBITDA for the fourth quarter was $24.6 million compared to $75 million in the same quarter prior year. Adjusted EBITDA margin for the segment was 4.3% in the fourth quarter compared to 14% in the same quarter prior year. The reduction EBITDA was primarily driven by labor cost increases due to utilization of agency staffing. For the full year, critical illness recovery hospital segment adjusted EBITDA was $268 million compared to $342.4 million in the prior year. Adjusted EBITDA margin for this segment was 11.9% for the full year compared to 16.5% in the prior year. The reduction of EBITDA is primarily related to increased labor costs throughout the year. Our rehabilitation hospital segment adjusted EBITDA for the fourth quarter was $39.3 million compared to 42.4 million in the same quarter prior year. The margin for the rehab hospital segment was 18.2% in the fourth quarter compared to 21.6% in the same quarter prior year. We also experienced nurse agency pressures in our rehabilitation hospitals during Q4. For the full year, rehabilitation hospital segment adjusted EBITDA was $184.7 million compared to $153.2 million in the prior year. Adjusted EBITDA margin for the segment was 21.7% for the year compared to 20.9% in the prior year. Our outpatient rehab segment adjusted EBITDA for the fourth quarter was $27.6 million compared to $27.7 million in the same quarter prior year. Adjusted EBITDA margin was 9.9% in the fourth quarter compared to 10.8% in the same quarter prior year. For the full year, outpatient rehab segment adjusted EBITDA was $138.3 million compared to $79.2 million in the prior year. Adjusted EBITDA margin was 12.8% for the full year compared to 8.6% in the prior year. Concentra adjusted EBITDA for the fourth quarter was $70.7 million compared to $69.4 million in the same quarter prior year. Adjusted EBITDA margin was 17.2% in the fourth quarter compared to 17.4% in the same quarter prior year. For the full year, Concentra adjusted EBITDA was $389.6 million compared to $252.9 million in the prior year. Just an EBITDA margin was 22.5% for the full year compared to 16.8% in the prior year. Earnings for fully diluted share was $0.37 in the fourth quarter compared to $0.57 per share in the same quarter prior year. For the full year, earnings for fully diluted share were $2.98 compared to $1.93 per share in the prior year. Adjusted earnings per fully diluted share last year was $1.89, excluding non-operating gains and their related tax effects. At this point, I'll turn the call over to Marty Jackson for some additional financial details before we open the call up for questions.

Thanks, Bob, and good morning, everyone. For the fourth quarter, our operating expenses, which include our cost of services, and general and administrative expenses were $1.44 billion, which represents 92.4% of our revenues. For the same quarter prior year, operating expenses were $1.28 billion and represented 87.8% of our revenues. The primary driver of increases in our operating expenses is due to increased labor costs, particularly in our critical illness recovery hospitals. We have seen nearly a doubling of agency nursing rates in Q4 and also an increase in nurse agency utilization in our critical illness recovery hospitals. Our operators have done a good job of controlling other operating costs, as most have decreased on a per-patient day and per-visit basis. As we had mentioned in previous earnings calls, our critical illness recovery hospital strategy is to continue to admit critically complex patients sent to us by our referral partners, even though our labor costs have increased substantially. We have developed strong referral relations during this pandemic and believe continued acceptance of these referrals will provide for strong relationships over the long term. For the full year, our operating expenses were $5.43 billion compared to $4.85 billion in the prior year. As a percent of revenue, operating expenses were 87.6% in both this year and the prior year. As I mentioned in our Q4 operating expense section, the majority of increases in our expenses are the result of increased labor costs throughout the year. Cost of services were $1.4 billion for the fourth quarter. This compares to $1.25 billion in the same quarter prior year. As a percent of revenue, cost of services were 89.9% for the fourth quarter compared to 85.4% in the same quarter per year. For the full year, cost of services were $5.29 billion. This compares to $4.7 billion in the prior year. As a percent of revenue, cost of services were 85.2% for both the full year this year and prior year. G&A expense was $38 million in the fourth quarter. This compares to $35.2 million in the same quarter prior year. G&A as a percentage of revenue was 2.4% in both the fourth quarter this year and the same quarter prior year. For the full year, G&A expense was $147 million. This compares to $138 million in the prior year. G&A as a percent of revenue was 2.4 percent for the full year. This compares to 2.5 percent for the prior year. As Bob mentioned, total adjusted EBITDA was $138.4 million, and adjusted EBITDA margins were 8.9 percent for the fourth quarter. This compares to adjusted EBITDA, $221.3 million, and adjusted EBITDA margin of 15.2 percent in the same quarter for our year. For the full year, total adjusted EBITDA was $947.4 million, and the adjusted EBITDA margin was 15.3%. This compares to a total adjusted EBITDA of $800.6 million and an adjusted EBITDA margin of 14.5% in the prior year. Depreciation and amortization was $51.9 million in the fourth quarter. This compares to $51.5 million in the same quarter prior year. For the full year, depreciation and amortization was $202.6 million. This compares to $205.7 million in the prior year. We generated $11.2 million in equity and earnings of unconsolidated subsidiaries during the fourth quarter. This compares to $9.8 million in the same quarter prior year. For the full year, equity and earnings were $44.4 million. This compares to $29.4 million in the prior year. We also had a non-operating gain of $2.2 million in the fourth quarter this year and a non-operating loss of $303,000 in the fourth quarter last year. For the full year, we had non-operating gain of $2.2 million and non-operating gains of $12.4 million last year. Interest expense was $33.9 million in the fourth quarter. This compares to $35.5 million in the same quarter prior year. We also recorded interest income of $600,000 in the fourth quarter this year. For the full year, interest expense was $136 million. This compares to $153 million in the prior year. We've also recorded $5.4 million in interest income this year. We recorded an income tax benefit of $8.6 million in the fourth quarter this year, an income tax expense of $35.1 million in the same quarter prior year. For the full year, we recorded income tax expense of $129.8 million, which represents an effective tax rate of 20.6% compared to income tax expense of $111.9 million and an effective tax rate of 24.5%. percent in the prior year. Net income attributable to non-controlling interests were $16.5 million in the fourth quarter. This compares to $24.9 million in the same quarter prior year. For the full year, net income attributable to non-controlling interests were $97.7 million. This compares to $85.6 million in the prior year. Net income attributable to select medical holdings was $49.9 million in the fourth quarter, and fully diluted earnings per share were $0.37. Net income attributable to select medical holdings was $402.2 million for the full year, and fully diluted earnings per share was $2.98. At the end of the year, we had $3.6 billion of debt outstanding, $74 million of cash in the balance sheet. Our debt balance at the end of the year included $2.1 billion in term loans, $160 million in revolving loans, $1.2 billion in 6.25% senior notes, and $85 million of other miscellaneous debt. We ended the year with net leverage for our senior secured credit agreement of 3.77 times. For the fourth quarter, operating activities used $60.8 million of cash flow, This includes repayment of Medicare advances of $75.7 million and deferred employer payroll taxes of $53.1 million. We expect the remaining balance of the Medicare advances of $83.8 million to be repaid by April of this year. Our day sales outstanding, or DSO, was 53 days at the end of the year. This compares to 54 days at the end of the third quarter. and 56 days at the end of last year. Investing activities used $99.3 million of cash in the fourth quarter. This includes $55 million in purchases of property and equipment, and $60 million in acquisition and investment activities during the quarter, including the acquisition of Acuity Healthcare in this quarter. Financing activities used $513.7 million of cash in the fourth quarter. This includes over $660 million to purchase membership interest in Concentra, which we now own 100% of the voting interest. For the full year, operating activities provided over $400 million of cash flow, which was after the repayment of $241 million in Medicare advances and the repayment of the $53 million in deferred payroll taxes. Investing activities used $256.6 million of cash for the full year. This includes $180.5 million in purchases of property and equipment and close to $103 million in acquisition and investment activities for the year. This was offset in part by $26.8 million in proceeds from asset sales during the year. Financing activities used $647.4 million of cash for the full year. As I mentioned, this included over $660 million of purchase membership interest in Concentra in the fourth quarter. The company paid cash dividends to its common shareholders of $16.8 million in the fourth quarter and $50.6 million for the year. The company also repurchased over 387,000 shares of common stock for a total cost of $11.1 million during the fourth quarter and 1.77 million shares for a total cost of $58.6 million for the full year under the terms of its board-authorized repurchase program. Given the uncertainties due to significant increased labor costs, Resulting from higher than expected use of agency clinical staff, we are issuing our business outlook at this time for revenue only for 2022. We expect revenue to be in the range of $6.25 billion to $6.4 billion for the full year of 2022. We are also reaffirming our previously issued three-year compound annual growth rate target for revenue only, which we expect to be in the range of 4% to 6%, for 2021 through 2023. We expect our capital expenditures to be in the range of $180 to $200 million for this year. We do plan to readdress our business outlook and target compound annual growth rates for adjusted EBITDA and earnings per common share when the labor climate stabilizes. This concludes our prepared remarks, and at this time, we would like to turn it back to the operator to open up the call for questions.