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 if 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 spinoff of Concentra via special stock distribution to Select Medical shareholders. I'd like to thank all of our colleagues at Select and Concentra for their tremendous dedication and hard work to complete this transaction. The historical results of Concentra 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 Concentra. 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 six and 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 increase 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 & 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 OhioHealth. 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 Fairhill, 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 Bacharach Institute for Rehab, in partnership with Atlanticare, 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 de novo 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 and 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 eight percent adjusted ebitda also grew by four percent from 111.8 million dollars to 116 million dollars The three remaining divisions returned impressive growth year over year. For the full year, revenue grew from continuing operations with 7% and adjusted EBITDA growth was 14%. Adjusted EBITDA from continuing operations was $510.4 million with a 9.8% adjusted EBITDA margin compared to $446.1 million and 9.2% 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 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 10.5% for the quarter compared to 10.1% in the prior year Q4. Critical illness salary wages and benefits to revenue ratio was 57%, an improvement of 1.2% 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 when 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, 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 Helene. 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 divisions adjusted EBITDA margin increased from 7.5% to 8.3% as the team continues to focus on improving patient access, productivity, and staffing. We were able to see positive results despite two hurricanes, Helene 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 debt the one-time acceleration of stock comp expense and cost related to the consensual 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. and a quarter cents per share, payable on March 13, 2025, to 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, who will 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 illness recovery hospital. As mentioned above, we believe that the cost and utilization of agency nurses has normalized. Overall, our SW&V as a percentage of revenue was 56.9% this quarter, which is a decrease from 57.6% 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 55.9% compared to 57.2% in 23. 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 revolving loans, $550 million in six and 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 31st, we had $453.3 million of availability on our revolving loans. The interest rate on our term loan is SOFR plus 200 basis points, and this matures December 3rd, 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 Concentra 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 concentric was 58 days at December 31st, 2024. This compares to 55 days at December 31st of 2023. 60 days at September 30th of 2024, 62 days at March 31st, 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 Concentra at separation. Additional activity 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 interests. 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 31st, 2025, unless further extended or earlier terminated by the Board. We are issuing our business outlook for 2025 and 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 about $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.