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 fourth quarter and full year 2024 results and the company's business outlook. Speaking today are the company's executive chairman and co-founder Robert Ortenzio, the company's senior executive vice president of strategic finance and operations Martin Jackson and executive vice president and CFO Michael Malatesta. 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 fourth quarter of 2024. The fourth quarter concluded a very busy year at Select. On November 25th, we completed the spin-off of Consentra via special stock distribution to Select Medical shareholders. I'd like to thank all of our colleagues at Select and Consentra for their tremendous dedication and hard work to complete this transaction. The historical results of Consentra are now reflected as discontinued operation in Select's consolidated financial statements. We will focus our results for the fourth quarter on the remaining three lines of business, which exclude Consentra. Also, during the quarter, on December 3rd, we completed a refinancing of $1.6 billion of Select Medical's outstanding debt. We issued $1.05 billion in new seven-year term loans and $550 million in -a-quarter senior notes due 2032. We used the proceeds together with cash on hand to repay our then-existing $373 million in term loans and $1.225 billion in senior notes due August 2026. We also paid related fees and expenses associated with the financing. The interest rate on the new term loans is SOFR plus 2%. In addition, we extended the maturity of our revolving credit facility to 2029 and increased the availability on the revolver from $550 million to $600 million. Our credit agreement leverage was 3.18 times at December 31st, 2024. On the development front, we added 94 inpatient rehabilitation beds in the fourth quarter. We acquired a 50-bed inpatient rehab hospital in Oklahoma City on December 10th with our joint venture partner, SSM. We also opened two neurotransitional units with 12 beds each, one in Dallas with our joint venture partner, Baylor Scott and White, and the other in Dublin, Ohio with our joint venture partner, Ohio Health. And currently with the opening of the Dublin Neurotransitional Center, we also added 20 rehab beds to the Dublin Rehab Hospital, which is also part of our joint venture with Ohio Health. As mentioned on our last call, we have additional development projects in various stages for the inpatient rehab division, which I will summarize again. In January, we opened an acute rehab unit in Madison, Wisconsin with 18 beds. In Q2, we plan on opening a 45-bed rehab hospital in Temple, Texas, as well as our second hospital with UPMC, 20 beds in Central Pennsylvania. In Q3, we'll open our fourth rehab hospital with the Cleveland Clinic in Fair Hill, Ohio with 32 beds. In Q1 of 2026, we plan to open our fourth rehab hospital as part of our joint venture with Banner in Tucson, Arizona, which will be 58 beds, and a new freestanding 63-bed rehab hospital in Ozark, Missouri with Cox Health Systems. In Q4, 2026, our new 60-bed rehab hospital in southern New Jersey, the Baccarat Institute for Rehab in partnership with AtlantaCare, is scheduled to open, as well as a new 68-bed facility in Jersey City, New Jersey, branded as Kessler. Between the specific projects just mentioned, as well as some other smaller expansions and new acute rehab units in existing hospitals, we plan to add 481 additional beds to our operations in 2025 and 2026. The additional beds will consist of 455 inpatient rehab beds, which includes 68 non-consolidating beds and 26 long-term acute care hospital beds. There are also a number of other opportunities under evaluation that would further increase our select specialty hospital footprint. This quarter, our outpatient rehab division added three DeNovo clinics and four clinics through acquisition. This was offset by the strategic closure or consolidation of 18 locations with limited growth potential. We're continually evaluating and identifying areas of opportunity to optimize resources in serving our patient population and targeted demographics. Now I'll turn to our financial results. Overall, we had another strong quarter with all three lines, all three of our divisions exceeding prior year revenue in the fourth quarter with combined revenue increase of 8%. Adjusted EBITDA also grew by 4% from $111.8 million to $116 million. The three remaining divisions returned impressive growth year over year. For the full year, revenue grew from continuing operations was 7% and adjusted EBITDA growth was 14%.

Adjusted

EBITDA from continuing operations was $510.4 million with a .8% adjusted EBITDA margin compared to $446.1 million and .2% margin in 2023. We are very pleased with Q4 performance of our critical illness recovery hospital division with a 6% increase in revenue, a 10% increase in adjusted EBITDA, and a 4% increase in adjusted EBITDA. We are very pleased with Q4 performance of our critical illness recovery hospital division with a 6% adjusted EBITDA margin compared to the same quarter prior year. Our occupancy rate increased from 66% to 67% compared to prior year Q4. Rate per day increased by 7%. Our adjusted EBITDA margin was .5% for the quarter compared to .1% in prior year Q4. Critical illness salary wages and benefits to revenue ratio was 57% and improvement of .2% compared to prior year Q4. As we have mentioned previously, we have seen nursing agency rates stabilize and utilization return to pre-COVID levels. Our utilization of agency nurses remained the same as prior year Q4 at 14%. Nursing sign-on and incentive bonus dollars are again lower than prior year showing a 15% reduction for the fourth quarter and a 20% reduction year over year. We continue to expand our inpatient rehab hospital division with three additional facilities and a 13% increase in revenue compared to prior year Q4. Adjusted EBITDA declined by 6% and adjusted EBITDA margin was 21.2%, which was lower than the prior period margin of 25.5%. The primary reason for the reduction of EBITDA compared to prior year is related to startup losses at our new facilities. We also increased integration costs related to our acquisition in Oklahoma City and a drop in referrals from one of our key partners that was impacted by Hurricane Eileen. Thus far in Q1 of 2025, referrals from this partner are back to normal. Average daily census for the entire rehab division increased 3% and our rate per patient day increased 6%. Our occupancy of 81% was 4% lower than prior year of 85%, which is primarily a result of our new hospitals. Our outpatient rehab division continues to improve from prior year with increases in all areas for the final quarter of 2024. The division saw an increase of 7% in revenue, 4% in patient volume, 2% in net revenue per visit, and 18% in adjusted EBITDA from prior year Q4. Net revenue per visit increased from $100 prior year Q4 to 102 in Q4 this year with the continued improvements in commercial rates despite declines in Medicare reimbursement. The outpatient division's adjusted EBITDA margin increased from .5% to .3% as the team continues to focus on improving patient access, productivity, and staffing. We were able to see positive results despite two hurricanes, Eileen and Milton, in the fourth quarter of this year impacting a number of our southern outpatient markets. We believe the negative EBITDA impact to be slightly over a million dollars with thankfully no material property damage or extended clinic closures. Our dilution loss per common share from continuing operations was 19 cents for the fourth quarter compared to earnings per common share from continuing operations of 12 cents in the same quarter prior year. Adjusted EPS from continuing operations was 18 cents compared to adjusted EPS of 12 cents for the same quarter prior year. Adjusted EPS excludes the loss on early retirement of debt, the one-time acceleration of stock comp expense, and costs related to the consensus of transaction. For the full year, earnings per share from continuing operations was 51 cents compared to 46 cents per share in the prior year. And adjusted earnings per share from continuing operations was 94 cents compared to adjusted EPS of 54 cents in the prior year. In regards to our allocation and deployment of capital, our board has declared a cash dividend of 6.25 cents per share payable on March 13, 2025. We have also established stockholders of record as of the close of business on March 3, 2025. This past quarter, we did not repurchase shares under our board authorized share repurchase program, and we'll continue to evaluate stock repurchases reduction of debt and development opportunities. At this point, I'll turn it over to Marty Jackson. We'll continue to provide some details.

Thanks, Bob. Good morning, everyone. I will begin by providing additional details on the progress we continue to make regarding labor costs with the critical recovery hospital. As mentioned above, we believe that the cost and utilization of agency nurses has normalized. Overall, our SW&B is a percentage of revenue was .9% this quarter, which has decreased from .6% in Q4 prior year. The improvement in the margin was driven by controlling internal labor costs and an increase in the net revenue per patient day. Nursing sign-on and incentive bonus dollars decreased by 15% from Q4 of prior year from $7.4 million to $6.3 million. We are pleased with the continued progress we have made in regards to labor costs and critical illness and finished the year with SW&B as a percentage of revenue at .9% compared to .2% in Q23. Moving on to our financials, at the end of the quarter, we had $1.7 billion of debt outstanding and $59.7 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.05 billion in term loans, $105 million in rebobbing loans, $550 million in -a-quarter senior notes, which are due in 2032, and $26.3 million of other miscellaneous debt. As previously mentioned, we ended the quarter with net leverage for our senior secured credit agreement of 3.18 times. As of December 31, we had $453.3 million of availability on our rebobbing loans. The interest rate on our term loan is SOFR plus 200 basis points, and this matures December 3, 2031. Interest expense was $28.6 million in the fourth quarter. This compares to $40.3 million in the same quarter prior year. The decrease in interest expense was due to the reduction of select debt resulting from the consentor IPO and related debt transaction in the third quarter of this year. Using the proceeds of these transactions, we were able to prepay $1.6 billion on the existing term loan and pay down the revolver balance. For the fourth quarter, operating activities provided $125.4 million in cash flow. Our day sales outstanding, or DSO, for continued operations excluding consentor was 58 days. At December 31, 2024, this compares to 55 days at December 31, 2023. 60 days at September 30, 2024, 62 days at March 31, 2024. We continue to see improvement in our DSO every quarter as the claims processing backlog that resulted from the change healthcare cyber incident earlier in 2024 resolved itself. Investing activities used $74.2 million of cash in the fourth quarter. This includes $63.4 million in purchases of property and equipment and $10.8 million in acquisition and investment activity. Financing activities used $183 million of cash in the fourth quarter. The use of cash included all of the net financing transactions described above, as well as cash transferred to consentor at separation. Additional activity included include $16 million in dividends of our common stock, $20 million in repurchases of common stock, $25 million in net repayments on other debt, and $18 million in net distributions and purchases of non-controlling interest. As stated previously, we did not repurchase any shares under our board authorized repurchase program this quarter. The board approved share repurchase program remains in effect until December 31, 2025, unless further extended or earlier terminated by the board. We are issuing our business outlook for 2025. Expect revenue to be in the range of $5.4 billion to $5.6 billion. Adjusted EBITDA is expected to be in the range of $520 million to $540 million. And finally, adjusted earnings per common share is expected to fall in the range of $1.09 to $1.19. Capital expenditures are expected to be in the range of $160 million to $200 million. 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.

If you'd like to ask a question at this time, please press star 1-1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Justin Bowers with Deutsche Bank.

Hey, good morning, everyone. So I think there's a little confusion out there in the market because of what's in and out of consensus and concentra is, you know, partially still in the numbers. Just to level set for 2025, I'm arriving at the midpoint of revenue growth of call it 6%, EBITDA growth of 4%, and then UPS growth of 6%, and a 4Q exit at call it 3.18 turns net leverage. Is that, are those sort of the right metrics here?

Yeah, Justin, hold on just for a second. We'll go through the calculations to make sure that your numbers are correct. But as we do that, let me address, I'm glad you brought it up. We do believe that there's some significant confusion in the marketplace at this time. And I think what the issue is, is I think a number of people have added, have not removed concentra from consensus. So, I mean, if you take a look at, as you know, as you know, concentra had announced, pre-announced their numbers. If you take a look at those numbers on an annual basis, you would have 800, you know, on a revenue basis north of $7 billion, $7 billion, $87 million, which exceeds consensus by 8%. On an EBITDA basis, you would have $887.4 million, which exceeds consensus by 6%. And I'll also point out that it exceeds our, if you recall, we gave annual estimates, it exceeds those estimates on both revenue and EBITDA, the top of the revenue and the EBITDA line. So from that perspective, yes, there is some confusion.

All right. So on a consolidated basis, go ahead.

Yeah. The combined revenue increase that we have is about, oh, we're talking about 25. Yeah, we're talking about 25. So we're going to have to get those calculations. So go ahead with your question.

Okay. So just going back to all the development, I mean, this is the most active that Select has been in company history, frankly, with all the development activity. You have, you're increasing your IRF-FED count by, you know, north of 30% over the next two years. Can you remind us how those facilities sort of mature and also ballpark for us sort of the number of startup costs, maybe in the fourth quarter and 2025 as well?

Yeah, that's a very good point. And you're right. I mean, we're north of 30% increase in beds over the next 18 months. And frankly, that's really having a dampening effect in particular on the inpatient rehab margins for 25. And what you'll see is that they actually, because of the model that we have, the joint venture model, they mature pretty quickly. So you can expect to see those turn around and see some very significant double-digit EBITDA growth in 26 and 27.

Okay, that's helpful. And then, you know, with RemainCo, I'm just doing some math here on the development activity. I'm sort of arriving at like a new growth algo of, you know, top line growth, you know, mid single digit plus, you know, EBITDA growth probably up in the high singles. And then, you know, EPS and free cash flow growth well into per share, you know, well into the double digits before, you know, really deploying any of the excess free cash flow. Is that the right neighborhood?

Yeah, I think that sounds... How would you think of the

model over the next three years or so?

I would...you know, the way I like to take a look at it, Justin, I like to take a look at, you know, off of 25, I would expect to see, you know, double-digit EBITDA growth, you know, in... You know, I think in the teens range because of all the new beds coming on board.

Okay, and that's consolidated?

That's just for the inpatient rehab side.

In your segment. Okay, all right.

Okay. Yeah. Got

it.

You know, we also expect we...you know, I would think on the inpatient or on the LTCH side, you should expect some pretty slow growth there. I mean, I would expect low single digit growth. And then on the outpatient side, I would also expect to see some double digit growth on EBITDA in, you know, 25 and 26.

All right. That is helpful. I will jump back into...thank you.

Thanks, Justin.

Our next question will come from the line of Ben Hendricks with RBC Capital Markets.

Hey, thank you very much. I appreciate the color on your refinancing and year-end leverage and acknowledging that there's been some confusion kind of post-spend, but maybe you can get an idea... ...kind of go forward post-separation leverage targets, how you're thinking about the gearing for this company and kind of where we are versus the kind of the optimal debt load.

Thanks. Yeah, Ben. Thanks for the question. Our expectation is, given the high activity in particular in the inpatient rehab side, I mean, we expect to remain in that 3 to 3.1 time for 25 as far as leverage is concerned, but we would expect to be well below that come 26 and beyond.

I appreciate that. And just to follow up, a question on the inpatient, you know, it looks like margins were a little lower this quarter. It sounds like there, you know, there were some development costs in there. And maybe...were there any other kind of headwinds, transitory or otherwise, that may have kind of caused a little bit of a depression on the IRF side this quarter versus the last several? Thanks.

Yes, at one of our hospitals, one of our referral sources was impacted by the Hurricane Helene and their census was suppressed. So, you know, correspondingly, our census was suppressed at that facility. What we've seen in 2025 is census is back to normal. So we believe that was an anomaly, but that along with the startup losses and the integration costs for our acquisition, that's what contributed to the decrease in margin year over year for the inpatient rehab.

Great. Thank you for that clarification.

Thanks,

Ben. Our next question comes from a line of Joanna Gajcik with Bank of America.

Hi, good morning. Thanks so much for taking the question. So just, I guess, a little bit of follow up to that last comment about the IRF margins. And that relates to 2025. I'll put your guidance implies margins with decline about 20 basis points to solve versus comparable, again, excluding consensual margin in 2025. Or so is that also with driving that EBITDA margin outlook, you know, for this slide the time because the IRF margins, I guess, are going to be still, you know, kind of constrained because of the startup losses. Is that the reason for the consul day margin to be lower? Is there something else to be said about other segment margins for 25?

No, that's the primary driver Joanna. You're correct.

Okay, so it's pretty much the IRF because startup losses. And then for for the LPACs, should we think about those margins relatively stable or how we should think about 25 versus 24?

Yeah, I think relatively stable is really the way to think about it.

Because I guess in that segment, can you talk about the reimbursement change, you know, the change that thresholds for the, you know, in Medicare, how you, I guess, seeing this progress through the year, the impact of that change?

Yeah, you're talking about the high cost outlier threshold?

Yes. Yeah, exactly.

Yeah, yeah, I mean, our operators have done a tremendous job managing through the significant increases we've seen in that threshold. And, you know, so if you take a look at what transpired between 20, 23 to 24, there was about a $20,000 increase per patient. And they've really been able to manage through that. And, you know, if we take a look at it, I think it went into that the increase from 24 to 25 was also in that same magnitude. And that started October 1. Looks like they're doing a very good job managing that too.

Okay, that's great. But I guess with those changes, you think margins should be relatively flat for that segment?

Yes.

Okay. And then last segment, the outpatient rehab. So these margins showed nice improvement in Q4. And sounds like, you know, when you were asked a question about kind of the long-term outlook, you know, you expect the outpatient rehab EBITDA to also grow double digits. So can you talk about, you know, your, I guess, activity there in terms of is it just, you know, kind of sounds like you're streamlining the portfolio, exiting some markets, maybe they don't make sense. Anything else to kind of flag in terms of like, you know, what's driving the expected growth in that segment, EBITDA, and also how to think about 25? Thank you.

Yeah, I think there's really two primary things that are driving that. Number one, we mentioned there was an increase in the rate from $100, that revenue per visit up to 102. I think that's a function of some negotiated negotiations going on with the commercial contracts. So that's been very helpful despite what we're seeing on Medicare cuts. So that's been very good. I think the other thing is that clinical productivity. We had mentioned, I think, in the last earnings call, we've been doing a lot of work on our technology. And we had a rollout in January that we think has been very good and would anticipate seeing additional improvement in our therapist productivity.

Great. Thank you so much for taking

the questions.

Thank you.

That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.

No closing remarks. Thanks everybody for your, you know, attention focus on the quarter as we kind of unravel, unwind, and with concentra so that we have a clearer picture on what's going on here at Select. We appreciate your efforts. Look forward to updating you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.