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spk20: Good morning and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2024 results and the company's business outlook. Speaking today are the company's chief executive chairman and co-founder, Robert Ortenzio, 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'll turn the call over to Mr. Robert Hortensio.
spk05: Thank you, operator. Good morning, everyone.
spk07: Welcome to Select Medical's earnings call for the first quarter of 2024. I'll first provide some updates on the progress we have made regarding our previously announced plan to pursue the separation of Select Medical's wholly owned occupational health services business, Concentra. On February 27th, we announced that we had received, as expected, a favorable private letter ruling opinion from the Internal Revenue Service confirming the tax-free status of the potential transaction. On March 18th, we announced that Concentra had confidentially submitted a draft registration statement on form S-1 with the SEC relating to the proposed initial public offering of its stock. The IPO is expected to occur after the SEC completes its review process and subject to market and other conditions. We're pleased so far with the progress and expect the separation to be completed by the end of 2024. Overall, we had a very strong first quarter start off 2024 led by both our hospital divisions generating very impressive results. Adjusted EBITDA grew 22% and revenue grew 7% compared to Q1 of the prior year with all four operating divisions exceeding prior year revenue. In the quarter, total company adjusted EBITDA was $261.9 million compared to 214.1 million in the prior year. Our consolidated adjusted EBITDA margin was 14.6 for Q1 compared to 12.9 in the prior year. The first quarter results of our Critical Illness Recovery Hospital Division far exceeded our expectations. Adjusted EBITDA of 115.9 million was 51% higher than Q1 of the prior year with increases in revenue and census along with a 6% reduction in salary, wages, and benefits to revenue ratio. Marty Jackson provides some additional detail regarding CIRH's continued progress with labor within his commentary. On April 9th, we opened a critical illness recovery hospital for the distinct part rehabilitation unit in Chicago with Rush University System, adding 44 critical illness and 56 rehab beds. There is also a strong pipeline for additional growth opportunities under consideration. On the inpatient rehab development front, we are on target to open a 48-bed hospital in Jacksonville, Florida in Q3 2024 with our partner, UF Health Jacksonville. In the first half of 2025, we're opening our fourth rehab hospital with Cleveland Clinic consisting of 32 beds and we are slated to open our third hospital in central Pennsylvania in partnership with UPMC. This will be a 20-bed rehabilitation hospital and will serve the expanding needs of the region. In February, it was announced that Select Medical and Banner Health are breaking ground on a fourth rehabilitation hospital as part of our joint venture. This will be a 56-bed hospital in Tucson, Arizona, with a planned opening in the latter part of 2025. Also in the latter part of 2025, we are expanding our Riverside Hospital in Virginia by 10 beds. Moving on to 2026, we're opening a new 60-bed rehab hospital in southern New Jersey, the Bacharach Institute for Rehab, in partnership with Atlanticare, and are scheduled to open a new freestanding 63-bed rehab hospital in Ozark, Missouri, with Cox Health System. Overall, we are very pleased with development results in the pipeline for our specialty hospital divisions. Between specific projects just mentioned, as well as some other smaller expansions and distinct part units, we plan to add 537 additional beds to our operations from Q2 2024 through 2026. The additional beds consist of 467 rehab beds, which includes 54 non-consolidating beds, and 70 LTAC beds. We also have a lot of activity in regards to development in our Concentra and outpatient divisions. Concentra acquired a four-center occupational medicine practice in Hampton Roads, Virginia market on February 24th, and a second de novo clinic in Fort Myers, Florida opened in March. We currently have six signed leases for de novos slated to open throughout the remainder of 2024 and Q1 of 2025. Concentra continues to maintain a strong pipeline of potential acquisition opportunities and various de novo sites under evaluation. This quarter, our outpatient rehab division added five clinics via four de novos and one acquisition. This offset the closure of 14 underperforming clinics and the forwarding of two clinics into existing operations upon lease expiration. The pipeline for future growth remains strong with 20 executed leases for de novo clinics scheduled to open later this year. Many other acquisitions and de novo opportunities are currently under consideration. Now I'll provide some further data points on the results of each of our operating divisions. As I mentioned, our critical illness recovery hospital division had a very strong quarter. Revenue increased 10% with a 51% increase in adjusted EBITDA compared to the same quarter prior year. Critical illness incurred 2.2 million of startup losses. related to new hospitals this quarter compared to 1.9 million in the same quarter prior year. While our occupancy was slightly down from same quarter last year, average daily census increased 2%. Our rate per patient day increased 8%. The increase in rate was primarily driven by an increase in our case mix index. Medicaid supplement payments that were partially offset by an increase in taxes and favorable payer contract negotiations. Our adjusted EBITDA margin was 17.7% for the quarter compared to 12.9% in prior year Q1. Critical illness experienced a 6% reduction in their salary, wages, and benefit-to-revenue ratio compared to prior year Q1, with nurse agency utilization decreasing 20% and agency rates decreasing by 7%. compared to same quarter prior year. Orientation hours decreased 9% compared to prior year Q1. Nursing sign-on incentive bonus decreased 26% from prior year Q1. In April, CMS issued their LTCH proposed rule for 2025, and if adopted, would see an increase of 2.4% in the standard federal payment rate and an increase in the high-cost outlier threshold. The final rule is expected in late July, early August after the required comment period. Our inpatient rehabilitation hospital vision also had a very strong quarter with a 15% increase in revenue and a 30% increase in adjusted EBITDA compared to Q1 prior year. Average daily census increased 7% and our rate per patient day increased 7%. Our occupancy of 87% was higher than prior year of 86%. Justed EBITDA margin for inpatient rehab was 23.1% for Q1, which was higher than prior year margin of 20.4%. In March, CMS issued the rehab proposal for fiscal year 2025, and if adopted, would see an increase of 1.8% in the standard federal payment rate. The final rule was expected in late July, early August, after the required comment period. Concentra experienced an increase in 2% in net revenues and 3% in adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate. Our workers' comp volume remained strong with an increase of 3% that was offset by a 6% decrease in employer-based visits, which are reimbursed at lower rates. This led to an overall visit decline of 2%, as the employer demands for drug screens and physicals trended downward. Our on-site revenue grew by 9% as Concentra added 11 new on-site clinic locations since Q1 of last year, and we are seeing higher revenue per site. Concentra's adjusted EBITDA margin was in line with prior year at 20.6%. Our outpatient rehab division experienced an increase of 2% in revenue with patient volumes increasing by 4%. Offsetting the volume increase was a decrease in net revenue per visit from 101 per visit to $99. Our volume continues to maintain an upward trend while the rate decreases are primarily due to a decline in the outpatient Medicare fee schedule and payer mix shifts. The outpatient divisions adjusted EBITDA decreased by 17% compared to prior year, and the adjusted EBITDA margin went from 10.2% to 8.2%. In March, the President signed an appropriation bill that mitigated a 3.4% reduction in Medicare physician fee schedule that went into effect in January. The newly signed law includes a 1.68% increase in the fee schedule-based conversion factor for the remainder of the year. The net result of this change is a 2% reduction in Medicare fee schedule for the year as opposed to the original 3.4% cut. Earnings per fully diluted share were $0.75 for the first quarter compared to $0.56 per share in the same quarter prior year. Adjusted earnings per fully diluted share were $0.77 for the first quarter, which excludes consent for separation transaction costs, net of tax. In regards to our allocation of deployment of capital, four directors declared a cash dividend, 12.5 cents, payable on May 30th, 2024, stock orders of record as of the close of business on May 16th, 2024. 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. I'll turn it over to Maury Jackson for additional financial details before we open the call up for questions.
spk17: Thanks, Bob. Good morning, everyone. I'll begin by providing some additional details on the progress we continue to make regarding labor costs within the Critical Illness Recovery Hospital Division. Our SW&B as a percentage of revenue ratio exceeded our expectations of 52.9% this quarter, which is a decrease from 56.2% in Q1 of prior year. In the first quarter of this year, we saw a decrease in agency costs and utilization from prior year Q1. Compared to Q1 of 23, our agency costs decreased by 23% and utilization decreased to 14% from 18%. The hourly agency rate for RNs also decreased by 7% from $83 to $77. Nursing sign-on and incentive bonuses dollars decreased by 26% from Q1, a prior year, down to $7.6 million from $10.3 million the prior year, same quarter. Finally, we saw a decrease of 9% in our new hire orientation hours. Moving on to our financials in Q1, equity and earnings of unconsolidated subsidiaries were $10.4 million. This compares to $8.6 million in the same quarter prior year. Net income attributable to non-controlling interest was $20.3 million compared to $14.5 million in the same quarter prior year. Interest expense was $50.8 million in the first quarter. This compares to $48.6 million in the same quarter prior year. The increase in interest expense was principally due to the increase in the borrowing spread on our term loan, resulting from the amendment to our senior secured credit agreement. At the end of the quarter, we had $3.8 billion of debt outstanding and $93 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2 billion in term loans, $510 million in revolving loans, $1.2 billion in our six and a quarter senior notes, and $77.6 million of other miscellaneous debt. During the first quarter, we prepaid $79 million on our term loans under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of 4.4 times, We estimate approximately $95 million of our incremental borrowings in the quarter were related to the Change Health cyber incident. Our estimated net leverage would have been 4.3 times without the incremental borrowings related to the cyber incident. As of March 31st, we had $202.4 million of availability on our revolving loans. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through September 30th of 2024. For the first quarter, operating activities used $66.7 million in cash flow. Our day sales outstanding was 58 days as of March 31st, 24. This compares to 54 days at March 31, 23, and 52 days at the end of fiscal year 2023. The increase in DSO was principally attributable to the Change Health cyber incident. Investing activities used $57.7 million of cash in the first quarter. This includes $52.5 million in purchases of property equipment and other assets, and $5.2 million in acquisition and investment activities. Financing activities provided $133 million of cash in the first quarter. This was primarily due to $230 million in net borrowings on our revolving line of credit and $8.7 million in net borrowings on other debt, less the $79 million in term loan repayments, $16 million in dividends of our common stock, and $8.8 million in net payments and distributions to non-controlling interests. As stated previously, we did not repurchase any shares under our Board-authorized repurchase program this quarter. Last year, the Board approved a two-year extension of the share repurchase program, which remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We updated our business outlook for 2024. We expect revenue to be in the range of $6.9 to $7.1 billion, adjusted EBITDA to be in the range of $845 million to $885 million, fully diluted earnings per share to be in the range of $1.95 to $2.19, and adjusted earnings per share to be in the range of $1.96 to $2.20. Capital expenditures are expected to be in the range of $225 million $75 million for 24, for year 24, and $123 million of that is allocated towards maintenance, which is consistent with prior years. The balance of that would be in development. This concludes our prepared remarks, and at this time we would like to turn it back to the operator to open up the call for questions.
spk20: To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk19: Our first question comes from Justin Bowers with DB. Your line is open.
spk22: Justin Bowers Hi. Good morning, everyone. Bob, thank you for the comprehensive update on development activities. I missed Rush. Can you just give us an update on the new hospital? with that system?
spk05: Sure.
spk07: We built a new hospital in partnership with Rush, which is a new building on their campus, which is composed of both rehab hospital and LTAC hospital. The way the regulations work, it's technically an LTAC hospital with a distinct part rehab unit. But it opened, I think, this past month. And we're going through the six-month qualification period for ELPAC, but the rehab hospital is filling up nicely.
spk22: Okay, great. Thank you. And then, Marty, just pivoting to critical illness, can you just talk about the efforts you guys have done, you know, with labor? You had some really nice improvement there on the SWP ratio.
spk17: Yeah, Justin, our operators have done a terrific job reducing the reliance on agency nurses. Most of the nurses that we would like to have full-time, we have hired, so orientation hours have gone down. So, you know, all in all, it's just been terrific. You know, we've talked about potentially getting back to that 52%, 53% range, but, you know, we thought it would take us another year to get there. And, again, the operators have done a terrific job on their staffing.
spk22: Okay. And then in the prepared remarks, you said agency costs were down 23%. So that was roughly about $18 million then during the quarter. Is that the right ballpark, $18 or $19?
spk18: Staffing costs were – yes, that's right.
spk17: They dropped from – About $24 million down to 18. Okay.
spk22: And then just one last one. You mentioned some Medicaid subpayments. Can you size that for us? And is there any, yeah.
spk19: It is about $4 to $5 million net after taxes.
spk22: Okay, got it. Thank you. I'll jump back in queue.
spk13: Great. Thanks, Justin.
spk20: Thank you. One moment for our next question. Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.
spk02: Hey, thanks, guys, and congratulations on the quarter. I just wanted to ask about the $3.8 billion in debt issue. ahead of the spin. We get a lot of questions about balance sheet allocation between SpinCo and RemainCo. I just want to get your latest thoughts there, considerations, and how you're thinking about the balance. Thank you. Yeah, Ben.
spk17: What we have indicated publicly is that you can think about this in terms of both entities will ultimately have about four times of leverage on the balance sheet or on a gross basis. a little bit less on the net side.
spk02: Thank you. And then also just we've heard one of your peers on the inpatient rehab side talk about strategies around the pre-claim or the review choice demonstration and how their relationships are with fiscal intermediaries in the IRF business. Just wanted to get your thoughts on positioning around that if your footprint is impacted how your relationships are with fiscal intermediaries, and if you've given any thought to kind of how to approach the review choice. Thanks.
spk07: Obviously, I think our relationships are good, but, you know, good-bad relationships, it's all about how you fare through the audits. It does impact our platform, and We've had an extremely good result with all the review choice demonstration audits, so it's not been an issue.
spk20: Thank you. Thank you. One moment for our next question. Our next question comes from Kevin Fishbeck with Bank of America. Your line is open.
spk29: Hi, this is Mia Munoz on for Kevin Fishback with Bank of America. My first question was just regarding how Q1 EBITDA was $40 million above consensus, but you raised the midpoint of the EBITDA guidance by $10 million. So is it fair to say that Q1 results were just closer to your internal expectations compared to where consensus was? And what are the sources of the beat? And so why are you not also raising revenue guidance?
spk18: Yeah, the...
spk17: I mean, our expectations, well, first of all, you know, the thought process for us was really the spread was rather large. What we did was we increased the lower limit by $15 million, and we're taking a look at the, you know, the remaining three quarters, and to the extent that we continue to exceed like this, we'll make adjustments as those quarters, as we see what those quarters are, how we're performing.
spk29: Alright, and just to follow up, or I guess not really follow up a really different question on critical illness margins, improving 480 bits year over year, despite the Medicare reimbursement pressure. So what would you say would be the main drivers for that? And is there more room for improvement?
spk17: Well, there's a couple different drivers to that it was really we had we had some nice increases in volume, we had nice increases in case mix index, which increased the rate. And then I'd say by far the largest impact came from controlling costs on the salaries, wages, and benefits side. You saw a nice drop in our SW&B as a percentage of revenue, and that was a big driver of that improvement in margins.
spk29: Marty, thank you so much.
spk20: Thank you. One moment for our next question. Our next question comes from AJ Rice with UBS. Your line is open.
spk15: Hi, everybody. Just a fine point on the comments around the Supplemental Payment Program. Is this the first quarter you recognize that, and is that $4 million an annualized number for that program, or are you going to have $4 million incremental every quarter this year?
spk17: Okay, we have recognized before AJ, but as they become more mature, we're able to recognize on a month-to-month basis, and that's what you're seeing there.
spk15: And so the second, third, and fourth quarter will all have roughly about a $4 million benefit from this program?
spk17: Yeah, that number right there was a one-time number.
spk01: Okay, all right.
spk15: And then on the – I had a couple business questions, but on the concentra spin, I know you said reaffirm targets by the end of the year. Any sense of when, you know, that silent filing is going to flip to public and any plans on having that management team out on a road show and when might that occur?
spk17: Yeah, as you know, AJ, it's really – It's fully dependent on SEC and the comments that we get and the length of time that that takes. So as we get further clarity, we'll be able to give you a much better timeframe.
spk15: Okay. Obviously, a big win for the company in the quarter was on the labor front, as you said. I'm wondering just if you look, I know the year-to-year comps are still really good on the contract labor, if you look sequentially, are you still from quarter to quarter seeing that come down or are you sort of now at a normalized level and you're just, it plays out at that level of contract utilization, et cetera. And then is there any comment on where your wage rates are trending for your permanent workforce in the critical illness division?
spk17: Yeah, AJ, with regards to the RN rates, you know, we think that we're probably at the low end of the range right now. We do believe that there will probably be seasonality in those rates. But, you know, all in all, you know, I think it's within a couple of bucks of each other. I think on the – our full-time employee – rates are in that three to four percent range on an annual basis.
spk15: Okay, and then maybe a last question. On the, I think you previously said one of the issues or challenges in the proposed rule or the rule last year was the LTCH outlier threshold increase. You obviously had a very good quarter in the LTCH business this quarter. Are you seeing any impact on margins or volumes from that and any early comment on the proposal for next year and how that might impact you?
spk07: Well, you know, AJ, we normally don't say much about the proposed rule. When it's in a comment period, we'll be submitting comments. I will say that the continued increase in the fixed loss threshold amount is tougher on the providers that have the higher acuity, longer stay patients. And we just continue to navigate that and continue to tweak our operations in order to accommodate for the changes and the directions that the policymakers are trying to push us. So as you saw in Q1 with the LTACs, that volume and expenses And that salary, wages, and benefit and rate through acuity can really carry the day. So we obviously feel good about the performance and can continue to do that. And our business on that side of the business on the critical illness is better as the acute care hospitals have higher occupancies in their ICUs. So that's what really is the main thing that drives that business.
spk20: Okay.
spk07: All right. Thanks so much.
spk20: Thank you. One moment for our next question. Our next question comes from Bill Sutherland with The Benchmark Company. Your line is open.
spk21: Thanks. Good morning, everybody. I wanted to see if there was any more color you could provide about the trend in the employer demand for Concentra, the lower levels of screens and physicals.
spk18: Yeah, Bill, the demand there really has to do with employment.
spk17: And as you know, I mean, during 2022 and 23, there was much higher demand just because there was a lot more hiring going on. As hiring goes back to normal, you're going to see those drop. And that's something that we expected to see. I think the other point that I'll make there is that those – the types of activities that Concentra does for employment hiring are really the lower end of the range, things like drug testing, which are in the $40 range, or physicals, which are much lower than what the unit pricing is on workers' comp.
spk21: Yeah, I get the positive mix is good. So I guess what you're saying, Marty, is that sequentially, this is going to probably just flatten out, It's just a year-over-year thing right now.
spk04: I think you could think about it that way.
spk07: I don't think that it's not really a concerning issue at this point.
spk21: Okay. Back to LTAC for a sec. The CMI increase was impressive. Is that part of the seasonality of 1Q, or is that something that feels sustainable? No.
spk17: Yeah, Q1 typically has a higher CMI than normal, but the increase that we saw was based on a year-over-year, same-quarter basis. So we felt very good about that.
spk21: Yeah. I guess that goes back to your comment, Bob, about ICU capacity and so forth.
spk07: Well, yeah, and as you see in the first quarter, you're just going to have more of those respiratory cases, the winter ones. months, bring those, and you're going to see more volume in the ICUs, and consequently, you're going to see more volume to the LTCHs.
spk21: Okay. That's all I've got. Thanks, everybody.
spk20: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Robert Ortenzio for closing remarks.
spk07: Thank you, everybody, for joining us and for your questions.
spk20: This concludes today's conference call. Thank you for participating. You may now disconnect. Bye. Thank you. Thank you. Thank you. Good morning and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2024 results and the company's business outlook. Speaking today are the company's chief executive chairman and co-founder, Robert Ortenzio, 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. 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'll turn the call over to Mr. Robert Hortensio.
spk05: Thank you, operator. Good morning, everyone.
spk07: Welcome to Select Medical's earnings call for the first quarter of 2024. I'll first provide some updates on the progress we have made regarding our previously announced plan to pursue the separation of Select Medical's wholly owned occupational health services business, Concentra. On February 27th, we announced that we had received, as expected, a favorable private letter ruling opinion from the Internal Revenue Service confirming the tax-free status of the potential transaction. On March 18th, we announced that Concentra had confidentially submitted a draft registration statement on form S-1 with the SEC relating to the proposed initial public offering of its stock. The IPO is expected to occur after the SEC completes its review process and subject to market and other conditions. We're pleased so far with the progress and expect the separation to be completed by the end of 2024. Overall, we had a very strong first quarter start off 2024 led by both our hospital divisions generating very impressive results. Adjusted EBITDA grew 22% and revenue grew 7% compared to Q1 of the prior year, with all four operating divisions exceeding prior year revenue. In the quarter, total company adjusted EBITDA was $261.9 million compared to $214.1 million in the prior year. Our consolidated adjusted EBITDA margin was 14.6 for Q1. compared to 12.9 in the prior year. The first quarter results of our Critical Illness Recovery Hospital Division far exceeded our expectations. Adjusted EBITDA of $115.9 million was 51% higher than Q1 of the prior year with increases in revenue and census along with a 6% reduction in salary, wages, and benefits to revenue ratio. Marty Jackson provides some additional detail regarding CIRH's continued progress with labor within his commentary. On April 9th, we opened a critical illness recovery hospital for the distinct part rehabilitation unit in Chicago with Rush University System, adding 44 critical illness and 56 rehab beds. There is also a strong pipeline for additional growth opportunities under consideration. On the inpatient rehab development front, we are on target to open a 48-bed hospital in Jacksonville, Florida in Q3 2024 with our partner, UF Health Jacksonville. In the first half of 2025, we're opening our fourth rehab hospital with Cleveland Clinic. consisting of 32 beds and we are slated to open our third hospital in central Pennsylvania in partnership with UPMC. This will be a 20 bed rehabilitation hospital and will serve the expanding needs of the region. In February, it was announced that Select Medical and Banner Health are breaking ground on a fourth rehabilitation hospital as part of our joint venture. This will be a 56 bed hospital in Tucson, Arizona with a planned opening in the latter part of 2025. Also in the latter part of 2025, we are expanding our Riverside Hospital in Virginia by 10 beds. Moving on to 2026, we're opening a new 60-bed rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab, in partnership with Atlanticare, and are scheduled to open a new freestanding 63-bed rehab hospital in Ozark, Missouri, with Cox Health System. Overall, we are very pleased with development results in the pipeline for our specialty hospital divisions. Between specific projects just mentioned, as well as some other smaller expansions and distinct part units, we plan to add 537 additional beds to our operations from Q2 2024 through 2026. The additional beds consist of 467 rehab beds, which includes 54 non-consolidating beds, and 70 LTAC beds. We also have a lot of activity in regards to development in our Concentra and outpatient divisions. Concentra acquired a four-center occupational medicine practice in Hampton Roads, Virginia market on February 24th, and a second de novo clinic in Fort Myers, Florida opened in March. We currently have six signed leases for de novos slated to open throughout the remainder of 2024 and Q1 of 2025. Concentra continues to maintain a strong pipeline of potential acquisition opportunities and various de novo sites under evaluation. This quarter, our outpatient rehab division added five clinics via four de novos and one acquisition. This offset the closure of 14 underperforming clinics and the forwarding of two clinics into existing operations upon lease expiration. The pipeline for future growth remains strong, with 20 executed leases for de novo clinics scheduled to open later this year. Many other acquisitions and de novo opportunities are currently under consideration. Now I'll provide some further data points on the results of each of our operating divisions. As I mentioned, our critical illness recovery hospital division had a very strong quarter. Revenue increased 10% with a 51% increase in adjusted EBITDA compared to the same quarter prior year. Critical illness incurred $2.2 million of startup losses. related to new hospitals this quarter compared to 1.9 million in the same quarter prior year. While our occupancy was slightly down from same quarter last year, average daily census increased 2%. Our rate per patient day increased 8%. The increase in rate was primarily driven by an increase in our case mix index. Medicaid supplement payments that were partially offset by an increase in taxes and favorable payer contract negotiations. Our adjusted EBITDA margin was 17.7% for the quarter compared to 12.9% in prior year Q1. Critical illness experienced a 6% reduction in their salary, wages, and benefit to revenue ratio compared to prior year Q1 with nurse agency utilization decreasing 20% and agency rates decreasing by 7%. compared to same quarter prior year. Orientation hours decreased 9% compared to prior year Q1. Nursing sign-on incentive bonus decreased 26% from prior year Q1. In April, CMS issued their LTCH proposed rule for 2025, and if adopted, would see an increase of 2.4% in the standard federal payment rate and an increase in the high-cost outlier threshold. Final rule is expected in late July, early August after the required comment period. Our inpatient rehabilitation hospital vision also had a very strong quarter with a 15% increase in revenue and a 30% increase in adjusted EBITDA compared to Q1 prior year. Average daily census increased 7% and our rate per patient day increased 7%. Our occupancy of 87% was higher than prior year of 86%. Justed EBITDA margin for inpatient rehab was 23.1% for Q1, which was higher than prior year margin of 20.4. In March, CMS issued the rehab proposal for fiscal year 2025, and if adopted, would see an increase of 1.8% in the standard federal payment rate. Final rule was expected in late July, early August after the required comment period. Concentra experienced an increase in 2% in net revenues and 3% in adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate. Our workers' comp volume remained strong with an increase of 3% that was offset by a 6% decrease in employer-based visits, which are reimbursed at lower rates. This led to an overall visit decline of 2%. as the employer demands for drug screens and physicals trended downward. Our on-site revenue grew by 9% as Concentra added 11 new on-site clinic locations since Q1 of last year, and we are seeing higher revenue per site. Concentra's adjusted EBITDA margin was in line with prior year at 20.6%. Our outpatient rehab division experienced an increase of 2% in revenue with patient volumes increasing by 4%. Offsetting the volume increase was a decrease in net revenue per visit from 101 per visit to $99. Our volume continues to maintain an upward trend while the rate decreases are primarily due to a decline in the outpatient Medicare fee schedule and payer mix shifts. The outpatient divisions adjusted EBITDA decreased by 17% compared to prior year, and the adjusted EBITDA margin went from 10.2% to 8.2%. In March, the President signed an appropriation bill that mitigated a 3.4% reduction in Medicare physician fee schedule that went into effect in January. The newly signed law includes a 1.68% increase in the fee schedule based conversion factor for the remainder of the year. The net result of this change is a 2% reduction in Medicare fee schedule for the year as opposed to the original 3.4% cut. Earnings per fully diluted share were 75 cents for the first quarter compared to 56 cents per share in the same quarter prior year. Adjusted earnings per fully diluted share were 77 cents for the first quarter, which excludes consent for separation transaction costs, net of tax. In regards to our allocation of deployment of capital, four directors declared a cash dividend, 12 and a half cents, payable on May 30th, 2024, stock orders of record as of the close of business on May 16th, 2024. 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. I'll turn it over to Maury Jackson for additional financial details before we open the call up for questions.
spk17: Thanks, Bob. Good morning, everyone. I'll begin by providing some additional details on the progress we continue to make regarding labor costs within the Critical Illness Recovery Hospital Division. Our SW&B as a percentage of revenue ratio exceeded our expectations of 52.9% this quarter, which is a decrease from 56.2% in Q1 of prior year. In the first quarter of this year, we saw a decrease in agency costs and utilization from prior year Q1. Compared to Q1 of 23, our agency costs decreased by 23% and utilization decreased to 14% from 18%. The hourly agency rate for RNs also decreased by 7% from $83 to $77. Nursing sign-on and incentive bonuses dollars decreased by 26% from Q1 of prior year, down to $7.6 million from $10.3 million the prior year, same quarter. Finally, we saw a decrease of 9% in our new hire orientation hours. Moving on to our financials in Q1, equity and earnings of unconsolidated subsidiaries were $10.4 million. This compares to $8.6 million in the same quarter prior year. Net income attributable to non-controlling interest was $20.3 million compared to $14.5 million in the same quarter prior year. Interest expense was $50.8 million in the first quarter. This compares to $48.6 million in the same quarter prior year. The increase in interest expense was principally due to the increase in the borrowing spread on our term loan, resulting from the amendment to our senior secured credit agreement. At the end of the quarter, we had $3.8 billion of debt outstanding and $93 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2 billion in term loans, $510 million in revolving loans, $1.2 billion in our six and a quarter senior notes, and $77.6 million of other miscellaneous debt. During the first quarter, we prepaid $79 million on our term loans under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of 4.4 times, We estimate approximately $95 million of our incremental borrowings in the quarter were related to the Change Health cyber incident. Our estimated net leverage would have been 4.3 times without the incremental borrowings related to the cyber incident. As of March 31st, we had $202.4 million of availability on our revolving loans. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through September 30th of 2024. For the first quarter, operating activities used $66.7 million in cash flow. Our day sales outstanding was 58 days as of March 31st, 24. This compares to 54 days at March 31, 23, and 52 days at the end of fiscal year 2023. The increase in DSO was principally attributable to the Change Health cyber incident. Investing activities used $57.7 million of cash in the first quarter. This includes $52.5 million in purchases of property equipment and other assets, and $5.2 million in acquisition and investment activities. Financing activities provided $133 million of cash in the first quarter. This was primarily due to $230 million in net borrowings on our revolving line of credit and $8.7 million in net borrowings on other debt, less the $79 million in term loan repayments, $16 million in dividends of our common stock, and $8.8 million in net payments and distributions to non-controlling interests. As stated previously, we did not repurchase any shares under our Board-authorized repurchase program this quarter. Last year, the Board approved a two-year extension of the share repurchase program, which remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We updated our business outlook for 2024. We expect revenue to be in the range of $6.9 to $7.1 billion, adjusted EBITDA to be in the range of $845 million to $885 million, fully diluted earnings per share to be in the range of $1.95 to $2.19, and adjusted earnings per share to be in the range of $1.96 to $2.20. Capital expenditures are expected to be in the range of $225 million $75 million for 24, for year 24, and $123 million of that is allocated towards maintenance, which is consistent with prior years. The balance of that would be in development. This concludes our prepared remarks, and at this time we would like to turn it back to the operator to open up the call for questions.
spk20: To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk19: Our first question comes from Justin Bowers with DB.
spk20: Your line is open.
spk22: Justin Bowers Hi. Good morning, everyone. Bob, thank you for the comprehensive update on development activities. I missed Rush. Can you just give us an update on the new hospital? with that system?
spk05: Sure.
spk07: We built a new hospital in partnership with Rush, which is a new building on their campus, which is composed of both rehab hospital and LTAC hospital. The way the regulations work, it's technically an LTAC hospital with a distinct part rehab unit. But it opened, I think, this past month. And we're going through the six-month qualification period for LTCH, but the rehab hospital is filling up nicely.
spk22: Okay, great. Thank you. And then, Marty, just pivoting to critical illness, can you just talk about the efforts you guys have done, you know, with labor? You had some really nice improvement there on the SWP ratio.
spk17: Yeah, Justin, our operators have done a terrific job reducing the reliance on agency nurses. Most of the nurses that we would like to have full-time, we have hired, so orientation hours have gone down. So, you know, all in all, it's just been terrific. You know, we've talked about potentially getting back to that 52%, 53% range, but, you know, we thought it would take us another year to get there. And, again, the operators have done a terrific job on their staffing.
spk22: Okay. And then in the prepared remarks, you said agency costs were down 23%. So that was roughly about $18 million then during the quarter. Is that the right ballpark, $18 or $19?
spk18: Staffing costs were – yes, that's right.
spk17: They dropped from –
spk22: about 24 million dollars down to 18. okay and then just um one last one you you mentioned some medicaid sub payments is there can you size that for us and is there any yeah it is about uh four to five million dollars net after taxes okay got it thank you i'll jump back in queue great thanks Justin
spk20: Thank you. One moment for our next question. Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is open.
spk02: Hey, thanks, guys, and congratulations on the quarter. I just wanted to ask about the $3.8 billion in debt ahead of the spin. We get a lot of questions about balance sheet allocation between SpinCo and RemainCo. I just want to get your latest thoughts there. considerations and how you're thinking about the balance. Thank you.
spk17: Yeah, Ben, what we have indicated publicly is that you can think about this in terms of both entities will ultimately have about four times of leverage on the balance sheet or, you know, on a gross basis, a little bit less on the net side.
spk02: Thank you. And then also just we've heard one of your peers on the inpatient rehab side talk about strategies around the pre-claim or the review choice demonstration and how their relationships are with fiscal intermediaries in the IRF business. Just wanted to get your thoughts on positioning around that if your footprint is impacted. how your relationships are with fiscal intermediaries and if you've given any thought to kind of how to approach the review choice. Thanks.
spk07: Obviously, I think our relationships are good, but, you know, good, bad relationships, it's all about how you fare through the audits. It does impact our platform and We've had an extremely good result with all the review choice demonstration audits, so it's not been an issue.
spk20: Thank you. Thank you. One moment for our next question. Our next question comes from Kevin Fishbeck with Bank of America. Your line is open.
spk29: Hi, this is Mia Munoz on for Kevin Fishback with Bank of America. My first question was just regarding how Q1 EBITDA was $40 million above consensus, but you raised the midpoint of the EBITDA guidance by $10 million. So is it fair to say that Q1 results are just closer to your internal expectations compared to where consensus was? And what are the sources of the beat? And so why are you not also raising revenue guidance?
spk18: Yeah.
spk17: I mean, our expectations, well, first of all, you know, the thought process for us was really the spread was rather large. What we did was we increased the lower limit by $15 million, and we're taking a look at the, you know, the remaining three quarters, and to the extent that we continue to exceed like this, we'll make adjustments as those quarters, as we see what those quarters are, how we're performing.
spk29: All right, and just a follow-up, or I guess not really a follow-up, but a really different question, on critical illness margins improving 480 bits year over year despite the Medicare reimbursement pressure. So what would you say would be the main drivers for that, and is there more room for improvement?
spk17: Well, there's a couple different drivers to that. It was really we had some nice increases in volume. We had nice increases in case index, which increased the rate. And then I'd say by far the largest impact came from controlling costs on the salaries, wages, and benefits side. You saw a nice drop in our SW&B as a percentage of revenue, and that was a big driver of that improvement in margins.
spk29: Marty, thank you so much.
spk20: Thank you. One moment for our next question. Our next question comes from A.J. Rice with UBS. Your line is open.
spk15: Hi, everybody. Just a fine point on the comments around the supplemental payment program. Is this the first quarter you've recognized that, and is that $4 million an annualized number for that program, or are you going to have $4 million incremental every quarter this year?
spk17: Okay, we have recognized before, A.J., But as they become more mature, we're able to recognize on a month-to-month basis, and that's what you're seeing there.
spk15: And so the second, third, and fourth quarter will all have roughly about a $4 million benefit from this program?
spk17: Yeah.
spk15: That number right there was a one-time number.
spk01: Okay. All right.
spk15: And then on the – I had a couple business questions, but on the concentric spin – I know you said reaffirm target is by the end of the year. Any sense of when, you know, that silent filing is going to flip to public? And any plans on having that management team out on a road show and when might that occur?
spk17: Yeah, as you know, AJ, it's really, it's fully dependent on SEC and the comments that we get and the length of times that that takes. So as we get further clarity, we'll be able to give you a much better timeframe.
spk15: Okay. Obviously, a big win for the company in the quarter was on the labor front, as you said. I'm wondering just if you look, I know the year-to-year comps are still really good on the contract labor. If you look sequentially, are you still – from quarter to quarter seeing that come down, or are you sort of now at a normalized level and it just plays out at that level of contract utilization, et cetera? And then is there any comment on where your wage rates are trending for your permanent workforce in the critical illness division?
spk17: Yeah, AJ, with regards to the RN rates, we think that we're probably at the low end of the range right now. We do believe that there will probably be seasonality in those rates, but all in all, I think it's within a couple of bucks of each other. I think on our full-time employee rates are in that three to four percent range on an annual basis.
spk24: Okay.
spk15: And then maybe last question. On the, I think you previously said one of the issues or challenges in the proposed rule or the rule last year was the LTCH outlier threshold increase. You obviously had a very good quarter in the LTCH business this quarter. Are you seeing any impact on margins or volumes from that and any early comment on the proposal for next year and how that might impact you?
spk07: Well, you know, AJ, we normally don't say much about the proposed rule. When it's in a comment period, we'll be submitting comments. I will say that the continued increase in the fixed loss threshold amount is tougher on the providers that have the higher acuity, longer stay patients. And, you know, we just continue to navigate that and continue to tweak our operations in order to accommodate for the changes and the directions that the policymakers are trying to push us. So, you know, as you saw in Q1 with the LTACs, that, you know, volume and expenses are And that salary, wages, and benefit and rate through acuity can really carry the day. So we obviously feel good about the performance and can continue to do that. And our business on that side of the business on the critical illness is better as the acute care hospitals have higher occupancies in their ICUs. So that's what really is the main thing that drives that business.
spk24: Okay.
spk07: All right. Thanks so much.
spk20: Thank you. One moment for our next question. Our next question comes from Bill Sutherland with The Benchmark Company. Your line is open.
spk21: Thanks. Good morning, everybody. I wanted to see if there was any more color you could provide about the trend in the employer demand for Concentra, the lower levels of screens and physicals.
spk18: Yeah, Bill, the demand there really has to do with employment.
spk17: And as you know, I mean, during 2022 and 23, there was much higher demand just because there was a lot more hiring going on. As hiring goes back to normal, you're going to see those drop. And that's something that we expected to see. I think the other point that I'll make there is that those – the types of activities that Concentra does for employment hiring are really the lower end of the range, things like drug testing, which are in the $40 range, or physicals, which are much lower than what the unit pricing is on workers' comp.
spk21: Yeah, I get the positive mix is good. So I guess what you're saying, Marty, is that sequentially, this is going to probably just flatten out, It's just a year-over-year thing right now.
spk04: I think you could think about it that way.
spk07: I don't think that it's not really a concerning issue at this point.
spk21: Okay. Back to LTAC for a sec. The CMI increase was impressive. Is that part of the seasonality of 1Q, or is that something that feels sustainable? No.
spk17: Yeah, Q1 typically has a higher CMI than normal, but the increase that we saw was based on a year-over-year same-quarter basis. So, we felt very good about that.
spk21: Yeah. I guess that goes back to your comment, Bob, about ICU capacity and so forth.
spk07: Well, yeah. And as you see in the first quarter, you're just going to have more of those respiratory cases, the winter months, bring those, and you're going to see more volume in the ICUs, and consequently, you're going to see more volume to the LTCHs.
spk21: Okay. That's all I've got. Thanks, everybody.
spk20: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Robert Ortenzio for closing remarks.
spk07: Thank you, everybody, for joining us and for your questions.
spk20: This concludes today's conference call. Thank you for participating. You may now disconnect.
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