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spk06: The conference will begin shortly.
spk07: To raise your hand during Q&A, you can dial... Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the third quarter 2022 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 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 the 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 call over to Mr. Robert Ortenzio.
spk01: Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the third quarter of 2022. Before I give some detail on each of our divisions, I'd like to provide some overall commentary on the quarter. This quarter, we have continued to focus on recruitment, training, and retention of personnel throughout the organization, and most specifically on the critical illness recovery hospital divisions. These efforts have been successful as we set the stage for future performance. I'd like to commend our entire team as they continue to meet the challenges head on while remaining committed to providing exceptional patient and employee experience. Throughout 2022, our diversification has provided us the opportunity to offset difficulties we may have encountered in a particular line of business. We couldn't be more pleased with the performance of both our inpatient rehab hospital and concentra divisions this quarter. The inpatient rehab division exceeded prior year revenue, occupancy, and adjusted EBITDA. We recently announced the expansion of our partnership with UPMC to open a 35-bed freestanding rehab hospital in central Pennsylvania with targeted 2023 opening. The development pipeline for inpatient rehab division is strong, and the division is poised for continued success. Concentra's volume continues to grow, and they have consistently exceeded expectation. This quarter, Concentra opened one de novo clinic in Waukesha, Wisconsin, and signed four leases for additional de novo clinics. Three are expected to open by year end, with one located in Wisconsin and two in the Lehigh Valley of Pennsylvania. The fourth de novo in Columbus, Ohio, will open in 2023. On the acquisition front, agreement has been signed to acquire a clinic in Tulsa, Oklahoma, which is set to close by the end of the year. There continues to be a healthy pipeline for potential future de novo and acquisition targets on the horizon. We expect Concentra's strong performance to continue in Q4 and as we head into 2023. Our outpatient division surpassed prior year revenue with an increase in both volume and rate. Staffing and COVID leaves presented challenges this quarter, but did improve as the quarter progressed. These positive trends have continued into the month of October. In Q3, we expanded our clinic count by 13 via acquisitions and de novo growth. Looking forward to the remainder of the year, we have leases executed for 17 de novo clinics. The outpatient division continues to have a strong pipeline of potential de novo and acquisitions. With the progress made in Q3, along with the continued improvement in October, we are confident the outpatient division will be in good shape heading into 2023. The Critical Illness Recovery Hospital Division faced staffing headwinds in this quarter, but continue to make strides reducing RN agency rates and utilization. We have also continued to be successful hiring full-time RN nurses while improving retention. We are cautiously optimistic that as we continue to onboard full-time clinical staff, our cost structure will stabilize heading into 2023. Similar to last quarter, Marty Jackson will provide additional granular data on the direction of the critical illness recovery hospital's labor expenses. Overall, we experienced revenue growth in the quarter with an increase of 2.2% over prior year. The impact of the full reimplementation of sequestration was a $9 million headwind when comparing Q3 to prior year same quarter. For the quarter, the total company adjusted EBITDA was $153.1 million compared to $208.6 million in the prior year. Our consolidated adjusted EBITDA margin was 9.8% for Q3 compared to 13.6% the prior year. CARES Act grant income was recognized in Q3 of this year as well as Q3 of prior year. This quarter, we recognized $8.1 million of grant income versus $1.7 million in prior year. At this point, I'll provide some further data points as commentary on each of our operating divisions. Our Critical Illness Recovery Hospital Division's patient days were 2% higher than prior year. we experienced a drop of 1% in net revenue due to a decline in our revenue per patient day. The full reimplementation of sequestration, lower case mix index, and an increase in threshold days contributed to the decrease in revenue rate. Occupancy decreased to 67% from 68% compared to prior quarter. Many of our referral short-term acute care hospitals continued to experience lower volumes in their ICUs compared to prior year, specifically vent patients, which contributed to both our drop in case mix index and occupancy. In the month of October, we have seen improvements in volume, acuity, and threshold days. We still fully expect that when ICU volumes of our short-term acute care hospital referring hospitals increase, we will see these patients within our hospitals. Adjusted EBITDA margin for the critical illness was 2% for the quarter, compared to 11% in the prior year, as our SWB to revenue ratio increased by 14%. An increase in indirect labor, which is comprised of orientation, education, incentive bonus, sign-on bonus, and administrative support, was the main driver for the increase in labor. Orientation hours for RNs increased by 53% over prior year, Overall bonus expense increased by 40% and hospital administrative costs increased by 18%. Nursing agency rates and utilization are continuing to decline and are lower than prior year Q3. We saw a reduction of 16% in RN agency rates and a 27% reduction in RN agency utilization from prior year Q3. On the development front, We've signed agreements with JV Partners to open three hospitals located in Jackson, Tennessee, Tucson, Arizona, and Alexandria, Virginia. We also plan to open a fourth hospital, which will be a satellite of our current Toledo, Ohio hospital. All are expected to open in 2023. Our inpatient rehabilitation hospital division experienced an increase of 8% in net revenue, with patient volumes increasing by 6%. Occupancy increased to 85%, compared to prior year, which was 82%. Revenue per patient day increased $50 from $1,881 to $1,931. Adjusted EBITDA margin for the inpatient rehab was 21.7% for Q3, compared to 20.7% in prior year. The inpatient rehabilitation hospitals experienced a reduction in agency expense compared to prior year, and overall SW&B to revenue ratio increased by 1% from prior year. RN nursing agency usage levels increased from prior year, but we've seen an improvement compared to the first half of this year, along with improvement each month throughout the third quarter. The agency rates for RNs in the rehab division decreased by 38%, from prior year and 22% from Q2. As previously noted, we announced that we are partnering with UPMC to open a 35-bed freestanding rehab hospital in central Pennsylvania with a targeted 2023 opening. Concentra had another strong quarter with revenue increasing over prior year in spite of declining demand for COVID-related testing and evaluation services. Last year, these services generated $21 million in revenue and $11 million in adjusted EBITDA compared to $3 million in revenue and $1 million in adjusted EBITDA in Q3 of this year. The revenue decline from COVID testing services was offset by positive performance in our centers. Center patient volume increased by 2% and concentric overall net revenue per visit increased by 3% to $128. Our adjusted EBITDA margin for Consentra was 20.2% for Q3 compared to 22.6% in the prior year. The results in Q3 of prior year include $1.6 million in CARES grant income. Consentra experienced less than a 1% increase in their SW and B2 revenue ratio from prior year Q3 and remained consistent with Q2. As previously highlighted, Consentra has a strong pipeline for development opportunities. Our outpatient rehabilitation hospital division experienced a 4% increase in net revenue with patient volumes increasing by 3% compared to the same quarter prior year. Net revenue per visit increased to $103 from $102 prior year in spite of a 3% decline in Medicare reimbursement rates. Adjusted EBITDA decreased compared to prior year with a decrease in margin to 9% from 14%. The client adjusted EBITDA margin is primarily due to a 5% increase in our salary, rates, and benefit to revenue ratio and a 14% increase in other operating expenses to revenue ratio compared to same quarter prior year. The increase in SW&V to revenue ratio compared to prior year is attributable to staffing challenges related to the number of employees on COVID leave, which resulted in decreased clinical productivity. As noted previously, we've continued to see improvement in these areas as Q3 progressed and through October. The increase in our other operating expenses is primarily comprised of an investment in our outpatient EMR system and minor equipment. The outpatient division continues to have a robust pipeline of potential de novo and acquisition opportunities. Earnings for fully diluted share were 21 cents for the third quarter, compared to 57 cents per share in the same quarter prior year. In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of 12.5 cents payable on November 29th to stockholders of record as of the close of business on November 16th. This past quarter, we bought back 315,762 shares of stock and an average share price of $23.70 We will continue to be opportunistic and evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks. With that, I'll turn it over to Marty Jackson for additional financial details before we open the call up for questions.
spk03: Great. Thank you, Bob, and good morning, everyone. I would first like to provide some additional detail regarding our labor costs within the critical illness recovery hospital division. As in the prior quarter, we've seen a significant sequential reduction from Q2 of 22 to Q3 of 22 in RN agency rates, utilization, and total agency expenses. We realized a 22% reduction in agency rates during the period from $111 an hour to $86 an hour. We saw a 33% drop in agency utilization from 32.9% to 21.9 percent, and a 51 percent reduction in agency costs from $56.4 million down to $29.7 million. Also consistent with prior quarter, we continue to see significant reductions of these categories within the third quarter. We saw a reduction from July to September of 11 percent on the rate, from $93 to $83, a 12 percent reduction on agency utilization from 23.4 percent to 20.5 percent, and a 21 percent reduction for overall agency expense from $11.2 million to $8.8 million. While we have seen significant improvement in our direct RN agency costs, we have continued to experience elevated costs in orientation, and sign-on bonuses as we hire nurses to replace agency. We expect orientation and bonus costs to start returning to normalized levels in Q1 of 23, taking into account the appropriate amount of training time to onboard nurses, which is approximately seven to eight weeks. Another area of opportunity we have are hospital administrative costs, which are fixed. During the pandemic, our focus was providing all the necessary resources needed to care for our patients, Now that we are coming out of the other side of the pandemic, there appears to be some opportunities to reduce administrative costs at the hospital level. With the continued improvements in RN direct labor costs, along with the anticipated reductions in orientation, education, incentive bonuses, administrative fixed costs, and increased revenue, we are confident that our SW&V to revenue ratio should be in the 55 to 57% range in Q1 of 23. Moving on to our financials, in Q3, equity and earnings of unconsolidated subsidiaries were $8.1 million. This compares to $11.5 million in the same quarter last year. The decline in earnings was primarily the result of recording CARES grant income in Q3 of the prior year in our unconsolidated joint ventures. Net income attributable to non-controlling interests was $11 million, compared to $23.3 million in the same quarter last year. This decrease is primarily due to the purchase of membership interest in Concentra in Q4 of 21, which we now own 100% of the voting interest. Interest expense was $45.2 million in the third quarter. This compares to $33.8 million in the same quarter last year. The increase in interest expense was primarily attributable to an increase in the one month LIBOR rate compared to Q3 of 21, as well as borrowings made under our revolving credit facility. The LIBOR rate on $2 billion of our term loans is capped at 1%. This is through September 30th of 24, which provides us a level of protection and predictability moving forward in the current interest rate environment. At the end of the quarter, we had $3.8 billion of debt outstanding and $108.2 million of cash on the balance sheet. Our debt balance at the end of the quarter was $2.1 billion in term loans, $380 million in revolving loans, $1.225 billion in six and a quarter senior notes, and $84.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.9 times As of September 30th, we had $213.5 million of availability on our revolving loans. For the third quarter, operating activities provided $94.3 million in cash flow, of which $5.5 million was recouped in the quarter related to the repayment of Medicare advances. At the end of September, there was less than $1 million to be repaid on the original $325 million Medicare advances we received. Our day sales outstanding was 53 days at September 30, 2022. This compares to 53 days at June 30, 2022, and 52 days at the end of 2021. Investing activities used $55 million of cash in the third quarter. This includes $41.9 million in purchases of property and equipment and $13.1 million in acquisition and investment activity during the quarter. Financing activities used $25.7 million of cash for the third quarter. This was primarily due to the common shares we purchased totaling $15 million, dividends on our common stock of $15.9 million, and $22 million in distributions to non-controlling interests. These were offset in part by $30 million net borrowings on our revolving line of credit. We have the capacity to purchase an additional $400 million of shares under the program, which remained in effect until December 31st, 2023, unless further extended or earlier terminated by the Board. We are reaffirming our revenue outlook for the year and expect revenue to be in the range of $6.25 billion to $6.4 billion for 22. We are also reaffirming our previously issued three-year compounded annual growth rate target for revenue to be in the 4% to 6% range. We still expect capital expenditures to be in the range of $180 million to $200 million for the year. And as stated last quarter, we will readdress our business outlook and target growth rates earnings per share when we believe the labor markets have stabilized and are predictable. This concludes our prepared remarks, and at this time, We would like to turn it back over to the operator to open up the question, to open up the call for questions.
spk07: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster.
spk06: Our first question comes from Justin Bowers with Deutsche Bank.
spk07: You may proceed.
spk09: Hi, good morning, everyone. Marty, just, and Bob, you laid out a pretty substantial year-over-year increase in bonuses and, you know, indirect costs and admin costs in the LTAC segment. And, you know, the kind of the labor environment was running a little hot then as well. Just trying to get a sense of where the opportunity is In addition to like the, you know, obviously you have like the agency labor that's under pretty decent control levels at this point. But in terms of helping us bridge from, you know, 3Q and 4Q to 1Q to that 55 to 57 target rate, is it kind of the assumption that you'd be able to go back to the 3Q21 levels or, you know, are you able to maybe, bring a little more savings on some of those increased, you know, indirect costs that you've been having? And at a high level, is there any way to help us to help quantify kind of, you know, where the opportunity is on maybe a quarterly or, you know, annual basis?
spk03: Yeah, Justin, great question. You know, I think the way to take a look at it is, you know, obviously we went through a once in a lifetime issue with the nursing costs. The costs rose very significantly. I think to get back to the norm, we basically utilize three pools of nurses. We take a look at our full-time nurses, our PRNs, and agency nurses. Historically, what you've seen is direct RN nursing hours for full-time was about 70%, for PRNs was about 15% to 16%, and the agency made up the difference. What we saw during, in particular, the latter part of last year and the first two quarters of this year, was significant increases in the dollars paid to travel nurses. And so those nurses, in essence, left the full-time workforce to go travel. So we saw, as I mentioned, 70% on a full-time basis, 66% to 70% on a full-time basis. We saw that go well under 50%. As rates went from historically $72 to $78 an hour to in January of this year, $151 an hour. Those rates, as I mentioned on the call, are now down, for us, are now down to $83 an hour. So what we're seeing are nurses leaving the travel area and moving back to full-time. And as they move back to full-time, we're hiring them. We're hiring, I mean, I think if you take a look at year-to-date between 21 and 22, we've hired 70% more nurses. So as we see it, that really is an investment in the future and getting back to that full-time percentage of 66 to 70%. I think the other way to think about it is during this period of time, we in essence have, we're paying two RNs for one RN FTE. So, you know, we're training nurses. It typically takes about two months to do that. We're also having agency nurses take care of the patients. Once they go through training, those nurses will replace the agency nurses, and you'll see the cost come down significantly. So I'll leave it at that and see if you have any follow-up questions, Justin.
spk09: I guess one of the, just to oversimplify things, it would be one way to think about it would be, all right, so If you're hiring, and I'm just going to put out round numbers out there, if you're hiring 300 nurses in a given quarter, they're not necessarily going to be productive during that period because of the training that you mentioned. Effectively, you can think of those 300 as being part of that double nurses that you're carrying during the quarter. Is that sort of the correct interpretation? And the follow-up there would be just on the overall, on the base wages, some of your peers are seeing pressure there as well. And it's talked about kind of what their underlying rates are. Where have you guys been in terms of the base? for this year or over the pandemic? And then going forward, what's kind of like the underlying inflation there? That would be helpful.
spk03: Yeah. As far as the base salary for our full-time employees, what we've seen over the past two years is about a 10% increase. And then we've actually supplemented that with incentive bonuses. But, you know, what we're looking at is, you know, an annual increase of, in that 5% range, Justin.
spk09: Okay, that's helpful. And just one quick one. Go ahead.
spk03: No, the, you had mentioned the, you know, assuming the 300 was the number, it's much higher than that. But, you know, in essence, those are, they're not just inefficient. I mean, they're, they're basically, being trained, so they're not in the direct workforce at all. So again, getting back to that, the thought that, in essence, we have two full-time nurses for one full-time physician.
spk09: Understood, understood. And then, I think that's where people are having having difficulty bridging the gap and not seeing, you know, the flow through from the increased agency savings. And then just on the new facilities that you guys have coming online, what's kind of the phasing for the LTAC, roughly?
spk01: For the, you're talking about for the four new critical illness hospitals that we have Did I mention my comments?
spk09: Yeah, yeah. I think they'll come here, right?
spk01: Yeah, they come, I think we have them as coming throughout the year, probably Q2 through the end of the year.
spk09: Okay. Appreciate it. I'll hop back and queue.
spk07: Thank you. One moment for questions. Our next question comes from Kevin Fishbeck with Bank of America. You may proceed.
spk00: Good morning. Actually, this is Joanna Gadrick filling in for Kevin. Thanks for taking the question here. So just to follow up on one of the last comments around the wage increases, you said they expressed about on average 5% annual interest in the last two years. So as we look forward, do you expect the similar increases to continue at least, you know, the next year, or are you expecting something different?
spk03: Yeah, I mean, for us, Joanna, it really is, it depends what's going on in the marketplace. You know, we can certainly see a 5% that the economy is hot. If there's a recession, that's normally timeframes where we see the rates, So if you take a look at where we were in 2008, 2009, we literally saw increases in that 1% range through that period of time through 2014. So we think if there is a recession, that will certainly be a benefit to additional supply of nurses in the market, therefore moderating the base rate.
spk01: Yeah, I think that's an important point that Marty makes. I mean, there is some uncertainty around it. Even though we're seeing a downturn in the economy, as most of you know, the labor market still remains pretty robust. And I think that there is some expectation around that softening as well as the Fed continues to be aggressive. So, you know, we'll see. There are some people who feel that this economy and inflation is not going to come under control until we start seeing unemployment pick up a little bit. If that's the case, that will actually be a benefit for us in terms of labor at our hospitals. Because as you know, and particularly in nursing, nurses, there are a lot of people with nursing licenses, and they can come off the sidelines pretty quickly and add to your labor force, particularly in PRN or taking some shifts, which can really quickly
spk05: assist with the ability to bring them on.
spk00: Oh, exactly. And I guess also on the flip side, in terms of pricing outlook, so can you talk about that by your segment? We see we have the rate of the critical in these hospitals, but also can you talk about the commercial payers and their responsiveness, I guess, to the labor pressure? you know, what rate increases specifically, if you can give us ranges you expect, you know, going into next year and after that. And I guess, you know, in other segments, any color there in terms of the earth or consensual and outpatient policy outlook. Thank you.
spk03: Sure. As you know, on the Medicare side, that's basically fixed, and that's primarily on the inpatient side. And there's typically about an 18- to 24-month lag on that. With regards to commercial, as you might expect, it's hand-to-hand combat. We're looking for high single-digit rate increases, just like CPI. We've been moderately successful at achieving that in a number of cases, but we still have a long way to go.
spk00: And also, I guess, on the pricing commentary in your IRF segment, are your relationships in your joint ventures, are those helping at all with rates? Thank you.
spk01: I'd say very much so. Marty's comments on the negotiation for the commercial rates on the critical illness side really are. It's different when you look at different segments and pockets of the market. of our geographic scope. But I think on the IRF side, because most of our hospitals are partnered with large systems, we have much more pricing power there than we do probably on the critical illness side.
spk06: Great. Thank you for the follow-up.
spk07: Thank you. One moment for questions. Our next question comes from Ben Hendricks with RBC Capital Markets. You may proceed.
spk11: Thank you very much. Could you talk a little bit more about capital allocation priorities and how you're balancing your de novo and M&A opportunities versus the returning stock capital to shareholders, and then also debt pay down, kind of considering where leverage is? Can maybe, you know, how those priorities have evolved and how you believe they will kind of evolve into next year? Thanks.
spk01: Well, first of all, we think that the board declaring the dividend for this quarter, I think you can expect that to continue. I think we're committed to that. We made a point of calling out some of the de novo and acquisition opportunities at both Concentra and Outpatient. I think that we'll continue to allocate capital in that area because, frankly, the valuations are very compelling and the nominal dollars are just, frankly, not that high. Where we tend to have bigger capital allocation is when we build new rehab hospitals. But with really strong partners, that'll continue to be a priority if we can do a hospital with a strong partner or add a hospital in one of our joint venture markets. That's something that I think you could expect us to do. I think that the thing that would be a much lower priority would be any acquisitions of size. I wouldn't expect over the next year to see the company really take on anything that's a significant capital requirement for a larger acquisition inside any of the four divisions for right now. We have the labor to focus on bringing EBITDA back to hit some of our 2023 goals. So that's how we would generally, I think, think about, have you think about capital allocation. Marty, you want to add anything to that?
spk03: Sure. You know, I think the other thing, Ben, is when you take a look at paying down debt, the only area I think we'd be focused on is paying down the revolver. You know, the other, our other debt obligations are senior notes and our term loan, term loan right now, you know, we're pretty well protected by the cap through, you know, September 24. That rate is, on the $2.1 billion, that rate is, maximum is 3.5%.
spk06: So, from that perspective, we will certainly keep that in place. Thanks, guys.
spk07: Thank you. One moment for questions. Our next question comes from Bill Sutherland with the Benchmark Company. You may proceed. Thanks.
spk08: Good morning, everybody. I just wanted to think about the SWB to revenue ratio a little bit, Marty. Appreciate the color on that. What was that ratio pre-COVID, you know, marked in a range that you saw there?
spk03: Yeah, Bill, that range was in that 51% to 52% range, and that period of time is from 2018 to 2020. Okay.
spk08: And you want to get, you think, based on all the steps you're taking, including the indirect that I hadn't thought about until you went into that, you believe you can get back to the mid-50s?
spk03: Our expectation is by the beginning of next year, we'll be in that 55 to 57 percent range. And that's based on the cost side. As you know, that's really made up of not just the cost, but also the revenue. So, if we're getting some higher rate increases, that should be beneficial to potentially take that down even further.
spk08: But I suppose we need to think about, you know, kind of the new normal, regardless of, I mean, the mix that you pointed out between permanent PRN and agency is obviously the biggest lever. But we've had a catch-up, I would say, with new and overall rates for nurses, permanent and agency, that I can't imagine with the shortage. is going to, you know, it's just going to probably, you know, after the step function increase, going to continue to move up at a more normal rate. Is that what you're thinking?
spk03: Well, I think, again, Bill, our focus is, you know, what's going to happen in the future is going to be difficult to predict, right? I think we mentioned to the extent that there's recession in place, that's going to have a moderating effect on any increases. So I think going through 23, we'll be taking a look at that on a consistent basis. As I had mentioned, going from 20 to 22, we saw increases of about 10% or annualized about 5%. I mean, we can certainly... you know, continue to take a look at that. I think we're assuming somewhere in that 4% range for increases.
spk08: You all haven't had any labor disruption issues, have you, like the acute care systems? Define disruptions.
spk04: Picketing, staying out. No, we have not.
spk08: Yeah. Bob, you've mentioned that outpatient rehab had an issue with increased COVID leave. I was a little surprised at that in the quarter. Were you all surprised?
spk01: Yeah, a little bit. I think we were. I mean, you know, whenever, you know, because these outpatient locations are small, you can think of them as almost retail locations, and you think about therapists' close proximity to their patients. So, you know, any sickness even before a COVID test, you know, our therapists and staff will appropriately call off, right? And when you think about a A typical therapy location, unlike a hospital, there may only be one or two therapists in that location. So when one is out for a day, you lose an awful lot of revenue. And so until they get tested and are cleared to come back. So we talk about it as efficiency. It may not even be the right word because when you think about work efficiency, you think of somebody working efficiently, but really what we're referring to is that you have a therapist that calls off in a clinic and there's just, it goes to zero. I mean, there's no treatment, there's no revenue until we either can get somebody else to come in to fill in, which is difficult for professional staff like a therapist, or they get tested or they're, whatever condition they have, they're comfortable, they can come back into the can come back into the clinic. And I think our COVID leaves were in the third quarter were, you know, 706 individuals. So, you know, that can be meaningful. I mean, you see it in the numbers. I mean, you'd have to define what's meaningful, but, you know, it does have an effect. And that number that I just gave you was the highest amount since January of this year, where it was like 850. And we know what situation we were in in January was much more significant. So, yeah, we were surprised. But I think we continue to see that moderate. I mean, the further we go into this.
spk08: The only thing I'm thinking is you may have a – part of this is just an issue of more vulnerability. I'm thinking flu, so – fingers crossed on that.
spk01: Yeah, of course. And, you know, this does come back to the companies, which is something that I've mentioned. It does come back to our, I think, the benefit and the power of our diversification. I mean, the flu will, the flu could affect the staffing in that area, but a bad flu season will also be a tailwind to our hospitals. And we talked about a And we talked about the labor market. If we have a hard recession, it may be a benefit to staffing on critical illness, but that would be a headwind to our concentric division, which has performed just spectacularly over the last year and before. So we do have that on both sides. And that was, as we've built the company over the last 25 years, that is a little bit intentional as we've tried to moderate our overall Medicare We are about a 50-50 mix in our company between outpatient and inpatient. Concentra is a fabulous spouse that does very well in good economic times, and staffing is benefiting our hospitals in more lean economic times.
spk08: Yep. No, I appreciate the portfolio balance you guys have created. Thanks again. That's it for me.
spk07: Thank you. One moment for questions. Our next question comes from Miles Highsmith with Deutsche Bank. You may proceed.
spk10: Hi, good morning, guys. Thanks for taking my questions. I guess I just wanted to go back to the critical illness margins and expenses. And sorry if you covered it. There are a lot of numbers coming through. I guess first just to clarify, when you hire somebody and they're in that training period, am I right to think that they're getting paid their full-time rate during that seven, eight-week period, or is it different?
spk03: It's their full-time rate, Miles, as well as, you know, we're still experiencing sign-on bonuses. So it's the full-time rate plus, you know, some bonuses.
spk10: Okay. And then that was kind of my second question. I don't know if you've given this or are willing to give it, but I was trying to kind of parse out the nuances of, you know, essentially paying for two nurses, one during the training period and then another to care for the patient. In many cases, that's the agency versus just kind of these indirect costs. I know you gave some percentages on the bonus expenses being up 40% in the quarter. Are you willing to give us like what that dollar amount was, the additional dollar amount, you know, either relative to last year or just on an absolute basis this quarter Or maybe asking it differently, are you willing to give us indirect costs this quarter that might be considered more investments for the future so we can try to parse out what's that duplicative piece versus kind of that temporary indirect piece?
spk03: Well, what we can do, Miles, is give you an idea in terms of nominal dollars what we see as an investment moving forward, right? That is, if you take a look at where we were the first, second, and third quarter, as we started to hire up more and more nurses in that second quarter, there was about an incremental increase of $7 million between the first and the second quarter. The delta between the second and the third quarter was an additional $20 million. So in essence, you're talking about $27 million being what we perceive as an investment in basically replenishing the full-time pool of nurses that we have. And that's on a quarterly basis, so you annualize that, and it's some significant dollars. But again, I think our focus is to try to make sure that that full-time pool of nurses is pretty much up to where we expect to be for 2023. And I think we're pretty close to that.
spk10: Yeah, okay, that's super helpful. Thanks for that color. Last one, I think I heard you say your leverage calculation is 5.9 for the quarter. Are you, was that correct, sorry?
spk06: Yes, that's correct.
spk10: Okay, 5.9. Is there anything different in terms of kind of where you have a comfort level for a target leverage as we get into more normalized times in 2023 and beyond?
spk03: Yeah, I mean, I think 23 with what we're looking at now, Miles, we anticipate to be in the four times range. Yeah, the 23.
spk10: Okay. Yeah, yeah. Okay, thanks a lot, guys. Appreciate the time.
spk04: Thanks, Miles.
spk07: Thank you. One moment for questions. Our next question goes from A.J. Rice with Credit Suisse. He may proceed.
spk02: Hey, everybody. A couple of quick questions. First of all, when I look at the margin variation in the outpatient business, it sounds like you're attributing what part of it is labor and part of it is what you're doing with the EMR system. Is the labor piece, you're saying that's strictly this COVID call-outs, or is there anything else going on in the labor area that's worth highlighting and talking about in that division? And then on the EMR piece, is that just for the third quarter and then you're done, or is that going to be elevated for a while? What's your thought on that?
spk03: Let me address the EMR question first, AJ. Yes, it's elevated in the third quarter. There'll be a little elevation in the fourth quarter, but then we should turn, we should basically have the same type of, it'll be a reduced number moving forward. When I say reduced from the third and the fourth quarter. You know, so if you take a look at pre-third and fourth quarter, you ought to assume that the rates or the cost you see for that EMR will be what they were pre-third and fourth quarter.
spk02: Okay. And then... How about the labor? Was that strictly this COVID call-out in the outpatient rehab business, or are you starting to see pressure there as well on the labor issue?
spk03: The COVID really was the predominant item that impacted clinical efficiency.
spk02: Okay, okay. Then just on your usage of agency, I think you're saying you're down to about $30 million in the third quarter. My sense, and I may not have this right, but was it pre-COVID, that was, you were sort of a 25 to 30 million use of agency labor anyway. So does that mean the agency side is pretty much corrected and it's more this normalizing the permanent staff and not having these duplicative training costs? Is that how you assess the labor situation?
spk03: Yeah, I think if you take a look at the agency pre-pandemic, we were probably in that $80 to $100 million range, AJ, a year.
spk02: Right, so 34.
spk03: Yeah. You're still high. So, yeah, I think we're – it really is that investment cost, you know, and we see that as a one-time event with the training and the onboarding of the new nurses.
spk02: Okay. Okay. Okay. I mean, it sounds like you sort of have a time frame in which you know these onboarded nurses training will be done, and you're expressing confidence in the 55% to 57% SWB as a percent of revenue. What incremental piece of information are you looking for to get back to starting to give guidance again on the operating income?
spk03: Well, right now, AJ, the big item is labor. And as, you know, I mean, if you take a look at what's going on in the labor market, if the labor market continues the way we think it will, which we'll probably see over the next quarter or two, we'll be in a position to determine whether we feel comfortable giving guidance on EBITDA and EPS.
spk01: Yeah, AJ, when you think about it, I mean, it's November already. We're going to go through the holidays in a couple weeks, Thanksgiving and Christmas. It'll be into 2023. Everything that we have been doing, even as we've been talking about in this call, is really pointing to next year. So as we run off this training expense and so forth, we're looking for 2023 to be back to normal year. And if it is, and we see that, then we're going to return to giving guidance. At this point, right now, it would make no sense other than just given the revenue line that we have. For us, even last quarter, it was not a question from the management team of if we were going to get to where we expected to. It was just a question of the pace and how long it would take because you know, what would be the pace of recruitment and the pace of onboarding and, you know, then little things pop up that are unexpected. I mean, I would not have expected the COVID leave on the outpatient. Just surprised me in terms of where we are. So, you know, those things come up. I mean, they're not material to the company, but, you know, they show up. So I think that we have a pretty good chance of those things normalizing and through the end of this year. We get through Christmas and we start the year now. As you know, I mean, there's a lot of people out there saying, oh, there's new things coming or have a resurgence. The flu is going to be greater than ever. I mean, we don't know those things. And they're going to manifest themselves over the next 30 to 60 days. And when they do and we get through the holidays, you know, I think we could be back in a position to have businesses as usual and normal and get back to being able to give the street a more guidance.
spk02: Okay. That's helpful. And maybe just the last one on the comments about the cap on the floating rate, $2 billion of debt. Are you at that 1% cap now, so there's no further near-term impact from rising interest rates? And are you 100% fixed on that? Can you just expand on that just a little bit more?
spk03: Sure. Hey, Jay, yes, we're well in excess of the 1% cap.
spk02: I mean, I think... I didn't know if it was 1% or some benchmark rate or whether that was absolutely 1%.
spk03: Well, it's 1% is the LIBOR rate, and then you have a... With the spread on top of that, our spread is in the 250 range. So all in, you're looking at maximum 3.5%. I got you.
spk02: And you're the... Obviously, you're there at this point. And is that 100% of your debt that is...
spk03: is uh is covered or sort of fixed at least through 24. well you've got yeah we've got um really two large portions of debt 2.1 billion dollars of floating so 2 billion of the 2.1 billion is covered and then we've got fixed at a billion 225 at six minutes so yeah that basically it's everything now there is the portion there's we don't have any coverage on the revolver So we are seeing some higher cost there, but, you know, we see our ability to pay that down over the next year, you know, is pretty probable.
spk02: Okay. How much is the revolver drawn now at this point?
spk03: Just roughly? I think it's about 310. Okay. I'm sorry, 380. Okay. All right.
spk02: That's great.
spk03: Thanks so much.
spk07: Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Ortenzio for any further remarks.
spk04: No further comments. Thank all of you for joining us, and thank you, operator.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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