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 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 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 over to Mr. Robert Ortizio.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the fourth quarter 2022. As I have done in previous calls, I'll first give some overall commentary on the quarter before providing some details on each of our four operating After that, I'll turn it over to Marty Jackson, who will provide further detail on our progress throughout Q4 and an outlook on labor costs for Q1 for the Critical Illness Recovery Hospital Division. As most of you are aware, and we've discussed in detail throughout 2022, our most significant headwind has been staffing challenges in our Critical Illness Recovery Hospital Division. This past quarter, we've seen some encouraging signs and results as we head into 2023. Our critical illness recovery hospital division salary wages and benefits to revenue ratio improved each month throughout the quarter. I'm extremely pleased that our combined focus on recruitment, training, and retention of personnel has begun to yield positive results. This would not have been possible without all the efforts of our company and colleagues during an extremely challenging macro labor environment. The progress achieved reducing labor costs has resulted in an 80% improvement in our Q4 critical illness recovery hospital divisions adjusted EBITDA compared to the same quarter prior year. Our focus on labor continues to yield positive results in 2023. As previously highlighted, we believe one of our company's greatest strengths is our diversification. Even as the Critical Illness Recovery Hospital Division struggled with labor headwinds, both our inpatient rehab and concentric divisions continued to exceed expectations this past quarter. The inpatient rehab division exceeded prior year Q4 revenue occupancy adjusted EBITDA. We recently announced a definitive agreement with our joint venture partner, Ohio Health, to acquire Reunion Rehabilitation Hospital in Dublin, Ohio, which will feature 40 private rooms and be renamed Ohio Health Rehabilitation Hospital. We've also reached an agreement to enter into a joint venture with Atlanticare, a leading multi-service healthcare system in South Jersey, to build a new inpatient rehabilitation hospital. Intended upon regulatory approval, the hospital will be called Bacharach Institute for Rehabilitation and is slated to open either in late 2024 or 2025. As previously noted on our last call, we are expanding our partnership with UPMC to open a second inpatient rehab hospital in central Pennsylvania. The development pipeline for inpatient rehab division remains strong, and the division is poised for a successful 2023. Concentra had another successful quarter and has done a tremendous job offsetting the decline in COVID-related testing and evaluation services for prior year with increased workers' comp volume in their existing centers. Concentra's workers' comp volume continues to be strong in 2023. This past quarter, Concentra opened three de novo clinics, two in Pennsylvania and one in Green Bay, Wisconsin, with a new joint venture partner. Concentra also acquired a center in Tulsa, Oklahoma, along with transitioning 18 outpatient work net centers and three outpatient physical therapy centers from our outpatient rehabilitation division into 17 full-service Concentra centers in Pennsylvania and New Jersey. Concentra has a strong pipeline of development opportunities with signed purchase agreements for three fold-in acquisitions in Pennsylvania and Connecticut, expected to close in Q1. along with signed leases for three new medical centers in Ohio, Virginia, and Florida that we expect to open the latter half of 2023. In addition, there are several more acquisitions and de novo opportunities in advanced stages that should provide further growth throughout the rest of 2023. Our outpatient rehabilitation division surpassed prior year revenue for the quarter, but did experience elevated cost margins in labor and other operating expenses compared to Q4 prior year. Thus far in 2023, we have seen improvement in positive results in both our outpatient volume and cost margins when compared to the same period prior year. The division has 43 executed leases for de novo clinics which are scheduled to open throughout 2023. There are also many additional opportunities that are under consideration. Overall, when compared to prior year Q4, we experienced revenue growth of 1.4% and a 7.6% increase in adjusted EBITDA. The impact of the reinstatement of Medicare sequestration was $9 million headwind when comparing Q4 to prior year same period. For the quarter, total company adjusted EBITDA was $148.9 million compared to $138.4 million in the prior year. Our consolidated adjusted EBITDA margin was 9.4% for Q4 compared to 8.9% in the prior year. CARES grant income was recognized in Q4 of this year as well as Q4 prior year. This quarter, we recognized only $630,000 of grant income compared to $8 million in prior year Q4. At this point, I'll provide some further data points as commentary on each of our operating divisions. Our critical illness recovery hospital division adjusted EBITDA margin was 8% for the quarter compared to 4% in prior year Q4 and 2% in Q3 of 2022. Our salary, wages, and benefits to revenue ratio improved 10% compared to prior year and 8% compared to prior sequential quarter. Nursing agency rates decreased 33% and nursing agency utilization decreased 52% when compared to prior year Q4. Nursing agency rates increased 7% while nursing agency utilization decreased 17% compared to Q3 of 2022. Orientation hours. increased 28% compared to prior year Q4 but decreased 22% compared to Q3 2022. Nursing sign-on and incentive bonuses dollars decreased 35% from prior year Q4 and 24% from prior quarter. Revenue decreased 3% compared to prior year compared primarily related to volume occupancy decreased from 71% to 70%, while our revenue per patient day remained consistent compared to prior year. Thus far in 2023, we have seen an increase in occupancy compared to the same period prior year, as ICU volumes within our referral short-term acute care hospitals have increased. On the development front, in January, We opened a rehab distinct part unit in our Springfield, Missouri Critical Illness Recovery Hospital, and in February we opened a 31-bed satellite of our current Toledo Hospital Critical Illness Hospital. We'll be opening three hospitals with J.B. Partners in the first half of this year in Jackson, Tennessee, Tucson, Arizona, and Alexandria, Virginia. We also have an agreement to open a critical illness recovery hospital with a rehab distinct part unit in Chicago with our joint venture partner, Rush University System for Health in 2024. As previously noted, our inpatient rehabilitation hospital division continued to perform very well compared to prior year Q4. Revenue increased 10% with patient volume increasing by 4%. Occupancy was 85% compared to prior year which was 83%. Revenue per patient day increased $123 from $1,888 to $2,011. The adjusted EBITDA margin for inpatient rehab was 23.6% for Q4 compared to 18.2% in the prior year. Concentra continued their strong performance with revenue increasing over prior year by 1% in spite of the declining demand for COVID-related testing and evaluation services. Prior year Q4, these services generated $10.4 million in revenue and $4 million in adjusted EBITDA compared to $1.6 million in revenue and $600,000 in adjusted EBITDA in Q4 of this year. The revenue decline from COVID testing services was offset by positive performance in our centers. Center volume increased over prior year in both work comp and consumer health, but was offset by reduction in employer service visits, resulting in a visit decrease of less than 1%. Consenters adjusted EBITDA margin was 15% compared to 17% in prior year Q4. Our outpatient rehabilitation division experienced an increase of 1% in net revenue, with patient volumes increasing by 3% compared to same quarter prior year. Net revenue per visit remained flat at $102 in spite of a 3% decline in Medicare reimbursement rates. Adjusted EBITDA margin decreased compared to prior year with a decrease in margin to 6% from 10%. The decrease in adjusted EBITDA margin is primarily related to an increase in both labor and other operating costs. The increase in labor is primarily attributed to a decrease in clinical productivity in Q4 compared to prior year. The increase in other operating expenses is primarily comprised of an investment in our outpatient electronic medical record systems, along with travel expenses returning to pre-pandemic levels. Thus far, in Q1 of this year, we have seen improvements in volume, revenue, and expense margins compared to the same period prior year. Earnings for fully diluted share were 22 cents in the fourth quarter compared to 37 cents per share in the same quarter prior year. Prior year Q4 had a tax benefit related to our purchase of Concentra's remaining membership interest along with lower interest expense on our debt, which had a positive impact on Q4 prior year EPS. For the full year, earnings for fully diluted share were $1.23 compared to $2.98 per share in the prior year. In regards to our allocation deployment of capital, our Board of Directors declared a cash dividend of 12.5 cents payable on March 15, 2023 to shareholders of record as of the close of business on March 3, 2023. This past quarter, we did not repurchase shares under our Board-authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt, and development opportunities. That concludes my prepared remarks, and with that, I'll turn it over to Marty Jackson for some additional financial details, and then we'll open the call up for questions.

Thanks, Bob. Good morning, everyone. Consistent with the prior two quarters, I'd like to provide some additional details with the progress we've made regarding our labor costs within the Critical Illness Recovery Hospital Division. This past quarter, we had a sequential reduction from Q3 to Q4 in our total RN agency costs and our utilization of agency. We did have a modest increase in our RN agency rate from Q3 to Q4. The reductions we realized were 8% in agency costs, this representing a reduction of $2.5 million on a quarter-over-quarter basis, and a 17% drop in utilization of agency from 21.9% down to 18.1%. Agency hourly rates increased sequentially by 7%, from $86 to $92. Consistent with prior quarters, we did experience a reduction of our agency utilization as the quarter progressed from October to December of 13%, ending the last month of the year at 16.8%. We fluctuated within the quarter in both RN agency costs of $9.3 million in October, $9.5 million in November, and this decreased to $8.4 million in December. And our agency rates, which were $88 in October, $99 in November, and this decreased to $91 in December. This quarter, we saw a 21% decline in orientation hours compared to Q3 of 22. We experienced a 39% decline in orientation hours as the quarter progressed from October to December. Other areas we saw improvement compared to the sequential quarter was in declining nursing sign-on and incentive bonus dollars of 24%. An area of opportunity we mentioned last quarter was hospital administration costs, and we did experience a modest benefit from the third quarter. We expect a continued decline in this area over the next several quarters. Overall, our SW&B to net revenue ratio improved over 8% compared to the third quarter, from 64.7% to 59.8%. We experienced an 11% reduction in our SW&B to revenue ratio from October to December. It dropped from 62.7% down to 55.8%. With the strides we've made in the past quarter and the progress we have seen thus far this quarter, we are confident in our ability to achieve our previously stated target for critical illness recovery hospital SW and meter revenue ratio of 55 to 57% for the first quarter of this year. Moving on to our financials, in Q4, equity and earnings Unconsolidated subsidiaries were $6.8 million. This compares to $11.2 million in the same quarter prior year. Primary decline in earnings was the result of decreased earnings of a few of our unconsolidated joint ventures. Net income attributable to non-controlling interests was $10.2 million. This compares to $16.5 million in the same quarter prior year. The decrease is primarily due to our purchase of the membership interest in Consentra in Q4 of 2021, which we now own 100% of the voting interest. Interest expense was $47.3 million in the fourth quarter. This compares to $33.3 million in the same quarter prior year. The increase in interest expense was primarily attributable to an increase in the one-month LIBOR rate compared to Q4 of 2021, as well as borrowings made on our revolving credit facility. The interest rate on $2 billion of our term loans is capped at 1% LIBOR, plus 250 basis points spread through September 30th of 2024, which provides us with a level of protection and predictability moving forward in the current interest rate environment. At the end of the quarter, we had $3.9 billion of debt outstanding, $97.9 million of cash on the balance sheet. Our debt balance The end of the quarter included $2.1 billion of term loans, $445 million in revolving loans, $1.2 billion in the 6.25% senior notes, and $104.7 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.96 times. As of December 31st, we had $148 million of availability For the fourth quarter, operating activities provided $12.5 million in cash flow, of which included $1 million recouped in the quarter related to repayment of Medicare advances. As of the end of 2022, all Medicare advances have been repaid. Our operating cash flow in the quarter is also reduced by $53 million for repayment of deferred FICA taxes, all of which have been repaid then. Our day sales outstanding, or DSO, was 55 days at December 31st of 2022, compared to 52 days December 31st, 2021, and 53 days at September 30th, 2022. Investing activities used $57.2 million of cash in the fourth quarter. This includes $55.3 million in purchases of property and equipment. $5 million in acquisition and investment activities, less $3 million in proceeds from the sale of assets during the quarter. Financing activities provided $34.4 million of cash for the fourth quarter. This was primarily due to $65 million in net borrowing on our revolving line of credit, offset in part by dividends on our common stock of $15.9 million. As stated previously, we did not repurchase any shares under a report authorized repurchase program this quarter, but have the capacity to purchase an additional close to $400 million shares. This program remains in effect until December 31st of 2023 and was further extended or earlier terminated by the Board. We are issuing our revenue outlook for 2023 and expect revenue to be in the range of $6.5 to $6.7 billion. Capital expenditures are expected to be in the range of $190 to $210 million for 2023. We will address our business outlook for adjusted EBITDA and earnings per common share later in the year as the labor market further stabilizes and is more predictable. This concludes our prepared remarks at this time, and we'd like to turn it back over to the operator to open the call.