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 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.

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

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.