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 second quarter 2023 results and the business company 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 the call will open for questions. Before we started, we would like to remind you that this conference may contain forward-looking statements regarding future events or future financial performance of the companies, including, without limitation, statements regarding operational results, growth opportunities, and other statements that refer to 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. I would now like to turn the conference over to Mr. Robert Ortenzio. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the second quarter of 2023. Before providing detail on each of our four operating divisions, I'd like to provide some updates and commentary. As you are aware, we announced our preliminary estimate of certain financial results for the second quarter on July 19th in connection with plans to launch a refinancing of some of the company's debt. We completed our refinancing on July 31st, and Marty Jackson will provide further details in his commentary. So I wanted to highlight that on August 1st, US News and World Report released its annual best hospitals list. I'm pleased to share with you that our Kessler Institute for Rehabilitation Hospital and six of our partnered inpatient rehab hospitals are ranked among the nation's best for 2023-2024. Number three, Kessler Institute for Rehabilitation. Number 21, California Rehab Institute. Number 22, Baylor Scott and White Institute for Rehabilitation in Dallas. Number 34, Ohio Health Rehabilitation Hospital in Columbus. Number 38, Cleveland Clinic Rehabilitation Hospital. Number 46, TriHealth Rehabilitation Hospital in Cincinnati. And number 48, Banner Rehabilitation Hospital in Phoenix. This marks the 31st consecutive year that Kessler Institute has been named among the nation's best hospitals for rehabilitation and the third year in a row for Baylor, Scott & White, Dallas, and Ohio Health. This recognition is a testament to our teams and the attention to quality at each of these institutions. On the financial front, we had another strong quarter with all four of our operating divisions exceeding prior year revenue. Overall revenue growth, overall revenue grew 6% and adjusted EBITDA by 21% compared to prior year Q2. The full reinstatement of Medicare sequestration and CARES Act grant income received in Q2 prior year were headwinds when compared to prior year same quarter financial performances. in the amounts of $4.8 million for Medicare sequestration and $15.1 million for CARES grant income. For the quarter, total company adjusted EBITDA was $219.5 million compared to $181 million in the prior year. Our consolidated adjusted EBITDA margin was 13.1% for Q2 compared to 11.4% in the prior year. Excluding grant income and the Medicare sequestration impact of Q2 prior year, our prior year adjusted EBITDA was $161.1 million with a 10.2% margin. Our critical illness recovery hospital division experienced the most significant increase in performance compared to prior year with a 227% increase in adjusted EBITDA along with an eight-point reduction in their salary, wages, and benefit to revenue ratio. The CRRH Division SW&B to revenue ratio was 56.7%, which was within our target range of 55 to 57%, along with a $43 million reduction in agency expenses compared to same quarter prior year. Consistent with last quarter, Marty Jackson will provide additional detail regarding critical illness sustained labor improvements within his commentary. Critical illness had a lot of activity on the development front with three more openings this past quarter. In May, we opened two hospitals with joint venture partners located in Tucson, Arizona and Alexandria, Virginia. In June, we also acquired a 60-bed critical illness hospital in Richmond, Virginia. We incurred 5.1 million in startup losses in our new critical illness recovery hospitals this quarter. As previously mentioned, we have an agreement to open a critical illness recovery hospital for a distinct part rehabilitation unit in Chicago with our joint venture partner, Rush University System for Health in Q2 of 2024. There is also a strong pipeline of additional opportunities for growth that are under consideration. The inpatient rehab hospital division continued their strong performance, exceeding prior year quarter revenue and adjusted EBITDA. As mentioned in Q1, the development pipeline remained strong with a 36-bed inpatient rehab hospital in Fort Wayne, Indiana, expected to close in Q3 with our joint venture partner, CHS. Also, as previously noted, we have partnered with Atlanticare to build a new rehabilitation hospital in southern New Jersey. Contingent upon regulatory approval, the hospital will be called Bacharach Institute for Rehab and is slated to open in either 2025 or 26. The pipeline for growth is strong, and we anticipate strong performance throughout this year. Concentra continued their exceptional performance, exceeding prior year revenue, EBITDA, and patient volume. During the quarter, Concentra completed two transactions. The acquisition of Holland Medicenter in Michigan included a standalone clinic location as well as a mobile unit used for episodic events, extending our footprint approximately 30 miles from Grand Rapids into nearby Holland, Michigan market. Incentra also acquired one source occupational medicine, a transaction that resulted in a fold-in of the practice into our nearby clinic located in Tulsa, Oklahoma. Incentra has four signed leases for new de novo locations that are expected to open in Q4 2023. Additionally, there's a strong pipeline of acquisition in de novos that are currently being evaluated. This quarter, our outpatient rehabilitation division surpassed prior year revenue and patient volume. Outpatient entered into a joint venture partnership with Atlanticare and our South Jersey market, contributing 13 clinics, where we are the managing partner and majority owner. Division added eight clinics this quarter via acquisitions and de novos. The pipeline for additional growth remains strong, with 27 executed leases for de novo clinics, which are scheduled to open in the second half of 2023. There are also many additional opportunities for acquisitions and de novo development that are under consideration. At this point, I'll provide some further data points on each of our divisions. Critical illness recovery. Hospital division experience increases of 5% of net revenue, 2% in occupancy rates, and 227% in EBITDA for an extremely successful quarter. Our occupancy was 68%, up from 67%. Our case mix index decreased from prior year of 1.29 to 1.26. Nursing agency rates. decreased 31%, and nursing agency utilization decreased 44% when compared to prior year Q2. Nursing agency rates decreased 7% while nursing agency utilization remained consistent compared to Q1 2023. Orientation hours decreased 14% compared to prior year Q2 2023. but increased 24% compared to Q1 2023 as we continue to add full-time nurses. Nursing sign-on and incentive bonus dollars decreased 35% from prior year Q2 and 25% from the prior sequential quarter. Our adjusted EBITDA margin was 11.4% for the quarter compared to 3.7% in the prior year Q2. Our positive reductions in labor contributed to the improvement in our EBITDA margin. On the regulatory front this week, CMS issued the final LTCH rules for fiscal year 2024, which will be effective October 1 of this year. The final rule includes a 3.6% increase in the federal base rate, which is higher than the proposed rule. The high-cost outlier threshold increased by $21,355, which was much lower than than the increase outlined in the proposed rule of 55,860. The MS LTCH DRG relative weight and expected length of stays were also updated in the final rule. Our inpatient rehab hospital division experienced a 5% increase in net revenue with patient volumes increasing 1% and our rate per patient day by 4%. Occupancy was 84% compared to 86% prior year. The adjusted EBITDA margin for inpatient rehab was 23% for Q2 compared to 21.8% in the prior year. Last week, CMS also issued the final inpatient rehab rules for fiscal 2024, which were effective October 1. Final rule includes a 3.7% increase to standard payment amount, which is higher than the 3.3% included in the proposed rule. A high-cost outlier threshold increased $2,103, which was slightly less than the 2,836 decrease in the proposed rule. The CMG relative weight and average length of stay values were also updated in the final rule. Concentra experienced an increase in 6% in net revenue driven by 2% increase in volume and a 6% increase in rate. Our work comp net revenue per visit increased by 2% and our employer services rate increased by 9%. Incentives adjusted EBITDA margin was 21.5% for the quarter compared to 21% in the same quarter prior year. Our outpatient rehab division experienced an increase of 6% in net revenue, patient volumes increasing by 11%, offset by a decrease in rate from 103 net revenue per visit to 100 net revenue per visit compared to same year. order prior year. The increase in volume compared to prior year was spread amongst multiple markets and was partially attributed to organizational initiatives focusing on improving clinical productivity via patient access. The decline in rate was due to decline in outpatient Medicare fee schedule, full implementation of Medicare sequestration, payer mix, and variable discounts when compared to prior year. The outpatient divisions EBITDA declined slightly by $751,000 compared to prior year, while their EBITDA margin was 10.8% this quarter versus 11.7% same quarter prior year. Earnings for fully diluted share were $0.61 for the second quarter compared to $0.43 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 September 1, 2023 to shareholders of record as of the close of business on August 15, 2023. This past quarter, we did not repurchase shares under our board-authorized share repurchase program. We'll continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks. With that, I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.

Great. Thank you, Bob. Good morning, everyone. Consistent with the prior three quarters, I'd like to provide some additional details with the progress we continue to make regarding labor costs with critical illness recovery hospital division. This past quarter, We had a sequential reduction from Q1 to Q2 in our total RN agency costs and our RN agency rates while utilization of agency remained consistent. The reductions we realized were 7% in the RN agency costs and 7% in the agency RN hourly rate from $83 down to $77. Our utilization of agency remained at 18% for the past three quarters. We experienced slight fluctuations in our agency rates and costs as the quarter progressed, with the rate fluctuation from April to June of 1%, from $79 down to $78, and RN agency costs of $7.9 million in April, $7.4 million in May, and $6.7 million in June. Agency utilization was 19% in April and May, This dropped to 17% in June. Other areas where we saw improvement compared to the sequential quarters were reductions of 25% in nursing sign-on and incentive bonuses, while our hospital administrative SWMB remained relatively consistent with Q1. This quarter, we had an increase of orientation hours compared sequentially to Q1-23 of 24%, and the hours remain relatively consistent during the quarter at an average of 40,000 hours per month. Overall, our SW&B to net revenue ratio increased slightly from Q1 to 56.7%, up from 56.3%, which is remaining within the targeted rate that we previously had communicated. Moving on to our financials, in Q2, equity and earnings of unconsolidated subsidiaries were $10.5 million. This compares to $6.2 million in the same quarter prior year. Net income attributable to non-controlling interest was $13.6 million compared to $11.1 million in the same quarter last year. Interest expense was $49 million in the second quarter. This compares to $41.1 million in the same quarter prior year. The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q2 of 2022. At the end of the quarter, we had $3.8 billion of debt outstanding and $101.2 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $345 million in revolving loans, $1.2 billion in our six and a quarter senior notes, and $77.1 million of other miscellaneous debt. We ended the quarter with net leverage of our senior secured credit agreement of 5.06 times. As of June 30th, we had close to $250 million of availability on our revolver. As Bob previously noted, we completed a refinancing transaction on July 31st. This year, we amended and extended our $2.1 billion term loan B, secured loan with, along with increasing our senior secured revolving credit facility $60 million from $650 million up to $710 million. Both the term loan and the revolver have been extended two years and will mature on March 6, 2027. with an early springing maturity of 90 days prior to the senior notes maturity triggering at more than $300 million of senior notes remains outstanding at May 15th, 2026. The refinancing term loan is priced at SOFR plus 300. Bips with a step down of 25 basis points if our net leverage ratio falls below four times. The revolver has been priced at SOFR plus with a step down of 25 basis points if net leverage ratio falls below four times. It's important to note that the 1% SOFR interest rate cap on the $2 billion of our term loans will remain in place through September 30th of 2024. Our $1.2 billion of six and a quarter senior notes still mature on August 15th, 2026. The second quarter operating activities provided close to $235 million in cash flow. Our day sales outstanding, or DSO, was 52 days at June 30th of 23 compared to 53 days June 30th on 2022, and 54 days as of March 31st, 23. Investing activities used $66.8 million of cash in the second quarter. This includes $59.5 million in purchases of property and equipment, and $7.3 million in acquisition and investment activity. Financing activities used $150.6 million of cash for the second quarter. We had $115 million in net payments on our revolving line of credit, $14.3 million of net payments on other debt, and $15.9 million in dividends on our common stock. As stated previously, We did not repurchase any shares under our Board authorized repurchase program this quarter. The program remains in effect until December 31, 2023, unless further extended or earlier terminated by the Board. We are adjusting our business outlook for 2023 with expected revenue to be in the range of $6.55 billion to $6.7 billion. expected adjusted EBITDA in the range of $795 million to $825 million, and a fully diluted earnings per share to be in the range of $1.77 to $1.94. Select medical expects adjusted earnings per share to be in the range of $1.86 to $2.03. Adjusted earnings per share excludes the loss of early retirement of debt and its related costs and tax effects. Capital expenditures are expected to be in the range of $190 million to $210 million for 2023. This concludes our prepared remarks, and at this time, we'd like to turn it back over to the operator to open the call up for questions.