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spk06: Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the third quarter 2023 results in the company's business outlook. Speaking today are the company's executive chairman and co-founder, Robert Ortizio, and the company's senior executive vice president of strategic finance and operations, 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 call over to Mr. Robert Ortenzio.
spk03: Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the third quarter of 2023. We have a lot to be positive about as Q3 was another strong quarter. We continue to sustain our improvement in labor costs within the critical illness division. Q3 was the sixth sequential quarter that we have seen a reduction in agency expenses. Our end agency usage dropped to our target percentage of 15%, which is lower than our pre-pandemic levels. We also announced promotions within our executive management team that I believe will position the organization for continued long-term success. All four of our operating divisions exceeded prior year revenue and EBITDA. Overall revenue grew 6% and adjusted EBITDA grew by 27% compared to prior year Q3. We received $8.1 million of CARES Act grant income in the prior year, which was a headwind heading into Q3 when comparing current to prior year performance. For the quarter, total company adjusted EBITDA was $193.8 million, compared to 153.1 million in the prior year. Our consolidated adjusted EBITDA margin was 11.6% for Q3 compared to 9.8% in the prior year. Our Critical Illness Recovery Hospital Division experienced the most significant increase in performance compared to prior year with a 7% increase in net revenue, a 320% increase in adjusted EBITDA, along with a 10% reduction in their salary, wages, and benefit to revenue ratio. Consistent with prior quarters, Marty Jackson will provide additional detail regarding this division's continued progress with labor within his commentary. Critical illness incurred $5 million of startup losses related to new hospitals this quarter compared to 707,000 in the same quarter prior year. As previously mentioned, We have an agreement to open a critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with our joint venture partner, Rush University System for Health, in Q2 of 2024. We also have hospital expansions in the works that are expected to be completed in 2025, including Orlando North, which will include a 48-bed rehab distinct unit. There is also a strong pipeline of additional opportunities for growth that are under consideration. On the inpatient rehab development front, on September 1, we entered into a joint venture with CHS and purchased a majority interest in a 36-bed inpatient rehab hospital in Fort Wayne, Indiana. We've reached agreement with our joint venture partner, University of Florida Health Shands, to open a 48-bed inpatient rehab hospital in Jacksonville, Florida, projected to open in Q3 of 2024, where we will have a majority interest. We are also planning to open a fourth inpatient rehab hospital, 32 beds, with our joint venture partner, the Cleveland Clinic, that is projected to open in the first half of 2025. As previously noted, we have partnered with Atlanticare 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 in either 2025 or 2026. The pipeline for growth is strong, and we anticipate strong performance throughout the remainder of the year. Concentra continued their exceptional performance, exceeding prior year revenue, EBITDA, and patient volume. During the quarter, Concentra continued to make progress on various ongoing transactions and bolster its pipeline for future acquisitions and de novos. Concentra acquired three occupational medicine practices, with two located in Delaware and and one in Northeast Maryland that closed on October 13th. In addition to acquisition efforts, three de novos in Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida, opened in October 2023. We have three signed leases for de novos slated to open in 2024. There is a strong pipeline of acquisitions and other de novos that we continue to evaluate. This quarter, our outpatient rehab division also surpassed prior year revenue, EBITDA, and patient volumes. The division added 16 clinics this quarter via acquisitions and de novos. The pipeline for additional growth remains strong with 22 executed leases for de novo clinics of which 11 are scheduled to open in Q4 of 2023 with the remainder to be open in 2024. There are also many additional opportunities for acquisitions and de novos development 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 increases of 7% in net revenue and 320% of adjusted EBITDA for another successful quarter. While our occupancy was down from last year at 64%, down from 67%, an increase in our case mix index and a decrease in threshold days contributed to an increase in our revenue per patient day. Our adjusted EBITDA margin was 8.2% for the quarter compared to 2.1% in the prior year Q3. Our positive reductions in labor contributed to the significant improvement in EBITDA margin with a 10% reduction in our salary, wage, and benefit to revenue ratio. Nursing agency rates decreased 9% and nursing agency utilization decreased 30% when compared to prior year Q3. Orientation hours decreased 4% compared to prior year Q3, but increased 19% compared to Q2 2023 as we continue to add full-time nurses. Nursing sign-on and incentive bonuses dollars decreased 49% from prior year Q3, but remained consistent with prior sequential quarter. Our inpatient rehab hospital division experienced an 8% increase in net revenue and adjusted EBITDA. Patient volumes increased 3% and our rate per patient day increased by 5%. Our occupancy was 84% compared to 85% prior year. The adjusted EBITDA margin for inpatient rehab was 22% for Q3, which was consistent with prior year. Concentra experienced an increase of 7% in net revenue driven primarily by rate. Our work comp Net revenue per visit increased 3% and our employer services rates increased by 7%. Incentives adjusted EBITDA increased by 10% with margin increasing to 20.9% for the quarter compared to 20.2% in the same quarter last year. Our outpatient rehab division experienced an increase in 2% in net revenue with patient volumes increasing by 11% offset by a decrease in rate from $103 net revenue per visit to $100 net revenue per visit. The volume increase offset by rate decrease when compared to prior year was consistent with what we saw in Q2. Organizational initiatives focusing on improving clinical productivity via patient access contributed to additional volume, where the decline in rate was due to a decline in outpatient Medicare fee schedule, payer mix, and variable discounts. The outpatient divisions adjusted EBITDA increased by 3% compared to prior year, while their EBITDA margin remained consistent at 9%. Earnings per fully diluted share were 38 cents for the third quarter compared to 21 cents per share in the same quarter prior year. Adjusted earnings per fully diluted share were 46 cents Adjusted earnings per share excludes the loss on early retirement of debt and its related cost and tax effects. In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of 12.5 cents, payable on November 28, 2023, to shareholders of record as of the close of business on November 15, 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 includes my prepared remarks but i'll turn it over to marty jackson from some additional financial details before we open the call up for questions great thank you bob and good morning everyone
spk00: Consistent with the past year, I would like to provide additional details with the progress we continue to make regarding labor costs within the critical in this recovery hospital division. This past quarter, we had a sequential reduction from Q2 to Q3 in our RN agency costs and utilization, but had a slight increase in RN agency rate. The reductions we realized were 17% in RN agency costs having $22.1 million versus $18.4 million this quarter, and a drop in RN utilization from 18% to 15%. The agency rate increased by only 1% from $77 to $78, and we experienced very little change in the rate throughout Q3. RN agency utilization during the quarter inched down from 15.6%. in July, 15.5% in August, and 15.1% in September. And the related costs were $6.2 million in July, $6.3 million in August, and $5.8 million in September. Nursing sign-on and incentive bonus dollars remained consistent with Q2 at $7.8 million, while we had a 19% increase in orientation hours 143,000 hours compared to 120,000 hours with a fluctuation during the quarter from 44,000 hours in July, 51 in August, and 48 in September. Moving on to our financials in Q3, equity and earnings of unconsolidated subsidiaries were $11.6 million. This compares to $8.1 million in the same quarter last year. This increase in earnings was the result of increased earnings in a few of our unconsolidated joint ventures. Net income attributable to non-controlling interest was $12.6 million compared to $11 million in the same quarter prior year. And again, this increase was primarily due to the improved performance of our consolidated joint ventures. Interest expense was $50.3 million in the second quarter. This compares to $45.2 million in the same quarter prior year. The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q3 of 2022. At the end of the quarter, we had $3.7 billion of debt outstanding and $77.4 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $340 million in revolving loans, $1.2 billion in the six and a quarter percent senior notes, and $75.8 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.85 times. As of September 30th, we had $374 million of availability on our revolving loans. As we reported on the last call, we completed a refinancing transaction in the third quarter. We amended and extended our $2.1 billion senior secured term loans, along with increasing our revolving credit facility by $120 million from $650 million to $770 million. Both the term loan and the revolver has been extended two years and will mature on March with an early spring maturity of 90 days prior to the senior notes maturity triggered that more than $300 million of senior notes remains outstanding on May 15, 2026. The refinanced term loan is priced at SOFR plus 3% 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 2.5% with a step down at 25 basis points if our net leverage again falls below four times. It's important to note that the 1% SOFR interest rate cap on $2 billion of our term loans will remain in place through September 30th of 2024. Our $1.2 billion in six and a quarter senior notes matures August 15th of 2026. Q3, we recognized $14.7 million of loss on early retirement of debt as a result of the amendment to the credit agreement. For the third quarter, operating activities provided $116 million in cash flow. Our day sales outstanding, or DSO, was 52 days at September 30th, 23 compared to 53 days of September 30th of 22 at 52 days in June 30th of 23. Investing activities used $63 million of cash in the third quarter. This includes $50.2 million in purchases of property and equipment and $12.8 million in acquisition and investment activity. Financing activities used $77 million of cash in the third quarter. We had $25.1 million in net payments and distributions to non-controlling interests. $16.5 million in net payments on our term loans as a result of the refinancing, $16 million in dividends on our common stock, $9.5 million in share repurchases, and $5 million in net payments on our revolving line of credit. As stated previously, we did not repurchase any shares under our board authorization of repurchase program this quarter. The board has approved a two-year extension of the share repurchase program which will now remain in effect until December 31st, 2025, unless further extended or earlier terminated by the Board. We maintain our business outlook for 2023 with expected revenue to be in the range of $6.55 to $6.7 billion, expected adjusted EBITDA in the range of $795 to $825 million, and fully diluted earnings per share to be in the range of $1.77 to $1.94. Select medical expects adjusted earnings per share, which was revised to exclude the actual tax-affected loss on early retirement of debt to be in the range of $1.85 to $2.02. Adjusted earnings per share excluding the loss on retirement of debt and its related cost and tax effect. Capital expenditures are expected to be in the range of $190 million to $210 million for 2023. This concludes our prepared remarks. At this time, we'd like to turn it back over to the operator to open the call up for questions.
spk06: Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from Justin Bowers with DB. Your line is open.
spk02: Hi, good morning, everyone. Bob, I may have missed this in the prepared remarks, but are there any additional LTCH, is there additional LTCH capacity coming online the rest of this year or into 2024 and or any deals that you announced in the quarter?
spk03: Well, we have a rush next year, which is the combined rehab and critical illness post-acute building. That will be next year. I don't know that we have any other critical illness openings next year that we've announced. I mean, it's possible. Orlando will be 2025. You know, while we typically don't announce those deals until they're signed, I mean, it is possible that we could do a critical illness if it's a hospital within a hospital that we would sign between now and, you know, the end of the year and could be potentially in service next year. But we haven't announced any.
spk02: Got it. And then with respect to, you know, the guide and the rest of the year, what are some of the swing factors in the guide? the big swing factors as you look into 4Q?
spk00: Yeah, Justin, as you know, we provide guidance on an annual basis. And, you know, from that perspective, we're going to keep the guidance that we have provided. You know, I know you guys do it on a quarterly basis, and we anticipated that, you know, we would have the quarter that we did in Q3 for the balance of the year. You know, we think the guidance that's out there on an annual basis is a good guide for the street.
spk02: Okay, got it. And then in terms of, you know, SWB and sort of the targets that you've laid out over the next several years, returning to normalization with critical illness, like how are you thinking about that, any sort of updated thinking around what that trajectory may look like over the next couple of years?
spk00: Yeah, Justin, I mean, our expectation is that, you know, by the end of 2025, when all of the contracts, all of the payer contracts are renegotiated, we anticipate we should return to somewhere in the range of 52% SWMB as a percentage revenue.
spk02: Okay. And would that sort of look like a linear sort of progression from now until then, or is that a reasonable assumption?
spk00: Yeah. I mean, I can't tell you that I specifically know when the contracts will be renegotiated. You know, I'm not so sure if we've got, you know, two-thirds left in the last two years. whether those are linear or not. But I think when you get to the end of 25, you can assume that our expectation is we'll be in that 52% range.
spk02: Okay. All right. Appreciate it. I'll jump back into you.
spk00: Thanks.
spk06: Thank you. Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.
spk05: Hi, this is Michael Murray on for Ben. Just focusing on LTACs, the sequential decline in EBITDA was steeper than what we were modeling. Agency labor continued to improve, though occupancy declined 400 bps sequentially, which seems larger than the typical sequential decline that you would see even pre-pandemic. shed some light on some of the inner workings there? What drove the lower occupancy levels?
spk00: Yeah, I think one of the things you really have to do is you've got to take a look and add back that $5 million of startup losses. So if you take a look at those margins, if you added that back, you'd have basically 90 basis point improvement in the margins, right?
spk04: Are you talking sequentially?
spk00: Well, you realize that, you know, when you take a look at historically for us, I mean, if you compare Q3 of 22, sequentially is really irrelevant because of the seasonality of the business. So what you really have to do is take a look at it on a same quarter year-over-year basis. I mean, we normally have a dip in occupancy rate
spk05: in q3 uh yeah the the 400 um bib sequential decline even that seems uh at a higher magnitude than even pre-pandemic levels um so what we're driving what drove the lower occupancy levels yeah i i think that um you know we'll have to
spk00: I think what we're going to have to do is talk offline on this and we'll go through the details. I'm not sure that we fully understand that there's a difference you're saying.
spk04: Next question.
spk06: Thank you. Our next question comes from William Sutherland with the Benchmark Company. Your line is open.
spk01: Thanks. Well, guys, I was wondering, you've had some good progress in outpatient despite the rate headwind. Do you have some, like, goalposts out there that you think you can, you know, move the the productivity and margins to for outpatient just trying to get a sense of kind of where that business can run now. And maybe you have some color, or some insight on where you think rates are heading in the following year.
spk00: So Bill, I'm assuming you've got two questions there. One is improvement of clinical productivity, and we do see some continued improvement in that area. And then with regards to rates, I think our expectation is we're going to see an increase of probably, you know, over the next year, you know, somewhere in that 2% range. Okay.
spk01: That would be a nice switch, and then you'll be doing your commercial. I mean, your commercial is going to be, I assume, the same positive trend that you've been able to negotiate.
spk00: Yeah, commercial should be higher than that 2% that I mentioned, Bill, but then we have the offset with regards to Medicare.
spk01: Right. Oh, so 2% is the blended, Marty, is what you're saying? That's correct. Okay. Okay. Um, are you all, uh, in the course of, um, you know, just improving the whole, um, network of clinics, uh, at, you know, uh, pruning as you add, like when you talk about the ads each quarter, those that's not net ads, is it?
spk00: Yes, that would be net ads.
spk01: Okay. Um, are you, um, Okay, that's good enough there. And then on Concentra, I noticed visits have been just up a hair year-over-year and quarter-on-quarter. I just wanted to understand kind of what's going on behind that number a little bit better.
spk00: Yeah, what we saw though is we saw a change in the mix So we saw employer service volume down a bit, but workers comp up. So that had a nice impact on the rate.
spk01: Is that just something that's something that's kind of occurring this year or is there a longer tail to that, do you think?
spk00: I think that we saw a... significant increase in prior period due to additional employment. And so as that becomes more normalized, and I think that's what you saw this particular quarter, or this particular year, actually.
spk01: Okay. Well, otherwise, looks like a very nice quarter. Thanks, guys. Appreciate the help. Great. Thank you.
spk06: Thank you. That concludes the question and answer session. I'd like to turn the call back over to Robert Ortenzio for closing remarks.
spk04: Thank you, operator. No closing remarks.
spk03: Thanks for your participation, and we'll look forward to updating you next quarter.
spk06: Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.
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