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 first quarter 2023 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 assumed no obligation to update these statements as circumstances change. At this time, I will now turn the conference call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the first quarter of 2023.

As I've done in past calls, I'll first provide some overall commentary on the quarter. and then provide some detail on each of our four operating divisions. I'll then turn it over to Marty Jackson and he'll provide further detail on the progress we have made on our labor costs for the Critical Illness Recovery Hospital Division and also discuss some other financial metrics. First, I'd like to say by almost any standard, we had a very good first quarter. And I'd like to commend and thank all of our colleagues who encountered and overcame many challenges over the past three years while continuing to provide high level of quality care and a great patient experience within our facilities. Last call, we noted encouraging signs heading into 2023, and we continue to be encouraged with all four of our operating divisions exceeding prior year EBITDA this past quarter. Overall revenue grew 4% and adjusted EBITDA by 31% compared to prior year Q1. The impact of the restatement of the Medicare sequestration was a $9.7 million headwind when comparing Q1 to prior year same quarter. For the quarter, total company adjusted EBITDA was $214.1 million compared to $163.8 million in the prior year. Our consolidated adjusted EBITDA margin was 12.9% for Q1, compared to 10.2% in the prior year. Our Critical Illness Recovery Hospital Division experienced the most significant increase in performance compared to prior year, with a 114% increase in adjusted EBITDA, along with a 13% reduction in their salary, wage, and benefit to revenue ratio. The Critical Illness Recovery Hospital Division's SWMB to revenue ratio was 56.3%, which was within our target range of 55 to 57, along with an $87 million reduction in agency expense compared to the same quarter prior year. In addition to the labor improvements, Critical Illness has had a lot of activity on the development front, with three openings this past quarter. In January, we opened a distinct part unit in our Springfield, Missouri hospital. And in February, we opened a 31 bed satellite in our current Toledo, Ohio hospital. March was also a busy month with the opening of another rehab distinct part unit in our Pensacola, Florida critical illness recovery hospital. as well as a new 50-bed hospital with a joint venture partner in Jackson, Tennessee. There are two hospitals with JV partners expected to open in Q2 that are located in Tucson, Arizona and Alexandria, Virginia. We've also signed an agreement to acquire a 60-bed hospital in Richmond, Virginia, which is expected to close in June. As previously mentioned, We have an agreement to open a critical illness recovery hospital with a distinct part unit in Chicago with our joint venture partner, Rush University System for Health in 2024. We're very excited about the tremendous improvement in the critical illness division and optimistic about the remainder of the year. I'll now turn to inpatient rehab. The inpatient rehab hospital division continued their strong performance exceeding prior year revenue, occupancy, and adjusted EBITDA. In March, we acquired Reunion Rehabilitation Hospital in Dublin, Ohio, with our joint venture partner, Ohio Health. This hospital has 40 private rooms and has been renamed Ohio Health Rehabilitation Hospital. We also entered into a joint venture partnership with CHS, under which Select will purchase a majority interest in a 36-bed inpatient rehab hospital currently owned by CHS in Fort Wayne, Indiana. This transaction is expected to close after the second quarter this year. As previously noted, we have partnered with AtlantaCare to build a new inpatient rehab hospital in southern New Jersey. Contingent upon regulatory approval, the hospital will be called the Bacharach Institute for Rehab and is slated to open either in 2024 or 2025. The development pipeline for our inpatient rehab division remains strong, and we anticipate continued strong performance throughout this year. Concentra. Concentra continued their exceptional performance, exceeding prior year revenue, EBITDA, and patient volume. This quarter, Concentra completed two transactions and continued to build its pipeline of future acquisition and de novo projects. The acquisition of Lehigh Valley Health Network's occupational health business was a fold-in of their five location into Concentra's recently opened two practices in Allentown and Bethlehem, Pennsylvania, which solidifies our position in this new market. Concentra also acquired the Connecticut occupational health business of Physician One, a fold-in of the business from their 16 Connecticut locations into Concentra's statewide footprint. Concentra has a strong pipeline of development opportunities, including four signed leases for de novo locations and several additional acquisitions and de novo opportunities that are under consideration. I now turn to outpatient. As expected, our outpatient rehabilitation division's performance improved, surpassing prior year's revenue, adjusted EBITDA, and patient volume. The division has 37 executed leases for de novo clinics, which are scheduled to open throughout 2023. There are also many additional opportunities that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our critical illness recovery hospital division experienced a 1% decrease in net revenue compared to prior year, primarily due to decreases of less than 1% in both volume and rate. Even though we experienced a slight decrease in volume, we did see an increase in our occupancy from 71% to 72%. Our case mix index decreased from prior year, which was 1.35 down to 1.28, but did increase from prior sequential quarter. Nursing agency rates decreased 42% and nursing agency utilization decreased 53% when compared to prior year Q1. Nursing agency rates decreased 10% while nursing agency utilization remained consistent compared to Q4 2022. Orientation hours increased 11% compared to prior year Q1 but decreased 17% compared to Q4 2022. Nursing sign-on incentive bonus dollars decreased 29% from prior year Q1 and 11% from prior sequential quarter. Our adjusted EBITDA margin was 12.9% for the quarter compared to 6% in the prior year Q1. Our positive reductions in labor contributed to the improvement in our EBITDA margin. Finally, in April, the long-term acute care proposed rule for fiscal 2024 It's posted by CMS. If adopted, we would see an increase in the federal base rate of 3.3% and an increase in the high-cost outlier threshold. We expect the rule to be finalized in August after the required comment period. Our inpatient rehabilitation hospital division experienced a 5% increase in net revenue with patient volumes increasing 4% and our rate per patient day by 1%. Our occupancy was 86% compared to 84% prior year. The adjusted EBITDA margin for the inpatient rehab was 20.4% for Q1 compared to 19.2% in the prior year. CMS also posted their proposed inpatient rule in April for fiscal 2024. If adopted, we would see an increase of 3.3% in the federal base rate. We also expect this rule to be finalized in August. after the required comment period. Concentra. Concentra experienced an increase of 8% in net revenue driven by a 3% increase in volume and a 7% increase in rate. The increase in rate is attributable to a 3% increase in our workers' comp net revenue per visit, along with a decrease in our employer services mix, which has a lower level of reimbursement than work comp. Concentra's adjusted EBITDA margin was 20.5% for the quarter compared to 21.5% in the same quarter prior year. Turning to our outpatient rehab division, this division experienced an increase of 9% in net revenue with patient volumes increasing by 14% offset by a slight decrease in rate from $102 net revenue per visit to $101 net revenue per visit compared to the same quarter prior year. The increase in volume compared to prior year was spread amongst multiple markets and was primarily attributable to improved patient access and clinical productivity. The decline in rate was primarily due to a decline in Medicare reimbursement along with the full implementation of sequestration when compared to prior year. The outpatient divisions EBITDA improved by $3.6 million compared to prior year, while their EBITDA margin was 10.2% this quarter versus 9.8% same quarter prior year. Earnings per fully diluted share was $0.56 for the quarter compared to $0.37 per share in the same quarter prior year. In regards to our allocation deployment of capital, our board of directors declared a cash dividend of 12.5 cents payable on May 31st to stockholders of record as of the close of business on May 18th, 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. This concludes my remarks. At this point, I'll turn it over to Marty Jackson to give you some additional financial details before we open the call up for questions.