Select Medical Holdings Corporation

The conference will begin shortly.

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.

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.