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 first quarter 2025 results at the company's and the company's business outlook. Presenting today are the company's executive chairman and co-founder, Robert Ortenzio, and the company's senior executive vice president of strategic finance and operations, Martin Jackson. Also on the conference line are the company's executive vice president and chief financial officer, Michael Malatesta, and the company's senior vice president, controller, and chief accounting officer, Christopher Weigel. Management will give you an overview of the quarter and 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 plans, expectations, strategies, intentions, and beliefs. These forward-looking statements are based on 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 now turn the call over to Mr. Robert Hortensio.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the first quarter of 2025. This was our first full quarter since our spin of Concentra this past November. As most of you know, we now have three remaining lines of business. Our inpatient rehab division had a very good first quarter and continues to exceed our expectations. We're very excited about the significant growth of this business line for this foreseeable future. This past quarter presented challenges for both our outpatient and critical illness recovery hospital lines of business. Our outpatient division was impacted by severe weather events in the south and central regions, along with a 3% reduction in Medicare reimbursement. The outpatient division, however, had a strong finish to the quarter, which is carried over into the second quarter. The outpatient division would have exceeded prior year adjusted EBITDA performance for the quarter if not for the impact of the severe weather events. We are confident in the outlook for outpatient as the division continues to focus on improving patient access, productivity, and investing in technology. The critical illness recovery hospital division was impacted by a late start to the flu season Another increase in the high-cost outlier threshold, which has almost doubled over the last two years, and the 20% transmittal rule. Approximately two-thirds of critical illness EBITDA missed the prior year was the result of the regulatory changes comprised of the increase to the outlier threshold and the 20% transmittal rule. In spite of these challenges, the division also had a strong finish to the quarter, which is carried into the second quarter. I'm very proud of how our operators were able to finish the quarter, which resulted in each division exceeding prior year adjusted EBITDA performance for the month of March. Our development pipeline remains strong, primarily in our inpatient rehab division. In January, we opened a rehab unit in Madison, Wisconsin with 18 beds. In April, we opened a 12-bed unit in Tallahassee, Florida. and our second rehab hospital with UPMC in central Pennsylvania, comprised of 20 beds. We have additional development projects in various stages for the inpatient rehab division, which I will summarize. Later in Q2, we plan on opening a 45-bed rehab hospital in Temple, Texas. In the last half of this year, we will open our fourth rehab hospital with the Cleveland Clinic in Fairhill, Ohio, with 32 beds and a rehab unit in Orlando, Florida, also with 32 beds. In Q1 of 2026, we plan to open our fourth rehabilitation hospital as part of our joint venture with Banner in Tucson, Arizona, and a new freestanding 63-bed rehab hospital in Ozark, Missouri, with Cox Health Systems. In Q4 2026, our 60-bed rehab hospital in southern New Jersey, branded as Atlanticare Rehabilitation Hospital, is scheduled to open, as well as a 76-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 rehabilitation units in existing hospitals we plan to add 440 additional beds to our operations from q to 2025 through the end of 2027. the additional beds primarily consist of rehab hospital beds which include 68 non-consolidating beds there are also a number of opportunities under evaluation that would further increase our select specialty hospital footprint. This quarter, our outpatient division added 10 de novo clinics. This was offset by the strategic closure or consolidation of 13 locations, further optimizing our existing resources and clinical capacity. This activity aligns with our strategic vision to identify areas of opportunity, serving our patient population, and targeted demographics. Now turning to our first quarter financial results and highlights. On a consolidated basis, our revenue increased over 2% while adjusted EBITDA declined by 9% from $165.8 million to $151.4 million. Earnings per common share from continuing operations increased by 33% to 44 cents for the first quarter compared to 33 cents per share in the same quarter prior year. We are extremely pleased with the first quarter performance of our inpatient rehab hospital division with increases of 16% in revenue, 15% in adjusted EBITDA, and 6% in average daily census when compared to the first quarter of last year. The adjusted EBITDA margin was 23%, which was in line with the prior year same quarter. Our rate per patient day increased by 7%. Our occupancy was 82%, was 5% lower than prior year of 87%, which was primarily the result of new hospitals. Same-store occupancy was 87%. In April, CMS issued their proposed rule for fiscal year 2026, and if adopted, we would see an increase of 2.4% in the standard federal payment rate. The final rule was expected in late July, early August, after the required comment period. As previously mentioned, our outpatient rehab division had a challenging quarter due to winter storms in the south and central regions. The estimated impact of these events is approximately $4 million. Notwithstanding the weather events and one less workday for the first quarter compared to prior year, revenue increased 1% driven by an increase in our net revenue per visit compared to the first quarter of prior year. Net revenue per visit increased from $99 prior to Q1 up to $102 in Q1 of this year with continued improvements in managed care, commercial rates, which was offset by the decline in our Medicare rate. The decrease in the Medicare fee schedule was 3.2% to our outpatient division of approximately 2.6 million in the first quarter. Total visits declined by 1% from prior year same quarter due to the one less work day. However, there was an increase of 1% in visits per day. Adjusted EBITDA declined 3% from Q1 of prior year, and the division's adjusted EBITDA margin decreased from 8.2% to 7.9%. Our critical illness recovery hospitals, as previously noted, had a challenging quarter, primarily related to the large increase in the high-cost outlier threshold for the second year in a row, and the 20% transmittal rule, as previously noted. The impact of the regulatory changes in the first quarter were especially challenging when this is when we treat our highest acuity patient population during respiratory season. Revenue decreased from the first quarter of prior year by 3%, driven by a 2% decline in rate per patient day, coupled with a 1% decline in patient days. While our occupancy rate increased from 71% to 73%, and our average daily census was consistent with prior year Q1, the volume decline was primarily a function of long-last calendar day compared to prior year. The decrease in net revenue per patient day was driven by a decrease in our Medicare rate, which was primarily a function of the increase in the high-cost outlier threshold. Critical wellness salary, wage, and benefit to revenue ratio was 54% compared to 53% in prior year Q1. Adjusted EBITDA declined by 25% from prior year, and our adjusted EBITDA margin was 14% for the quarter compared to 18% in the prior year Q1. In April, CMS issued their LTCH proposed rule for fiscal year 26, and if adopted, we would see an increase of 2.7% in the standard federal payment rate and an increase in the high-cost outlier threshold. The final rule is expected in late July and early August after the required comment period. During the quarter, we repurchased almost 650,000 shares of our stock at an average price per share of $17.52 under our board-authorized stock repurchase program. for a total of $11.4 million. In regards to our deployment of capital, the Board of Directors declared a cash dividend of $6.625 per share payable on May 29, 2025 to stockholders of record as of the close of business on May 15, 2025. Going forward, we will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my formal remarks. I'll turn the call over to Mark Jackson for additional financial detail before we open the call up for questions.

Thank you, Bob, and good morning, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding and $53.2 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.05 billion in term loans, which are due 2031. $180 million in revolving loans, $550 million of six and a quarter senior notes due 2032, and $37 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 3.4 times. As of March 31, we had $377.5 million of availability on our revolving loans. The interest rate on our term loan SOFR plus 200 basis points. Interest expense was $29.1 million in the first quarter. This compares to $40.7 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 transactions last year. For the quarter, operating activities used $3.5 million in cash flows. Our day sales outstanding on DSO for continued operations was 60 days at March 31st, 2025. This compares to 62 days as of March 31st, 2024, and 58 days as of December 31st, 2024. Investing activities used $52.3 million of cash in the first quarter for purchases of property and equipment. Financing activities provided $49.3 million of cash in the first quarter. This includes $75 million net borrowings on a revolving line of credit and $3.2 million net borrowings on the other debt. This activity was offset by $11.4 million in common stock repurchases, $8.1 million in dividends of our common stock, $6.8 million in net distributions and purchases of non-controlling interests, and a $2.6 million payment on our term loan. We are slightly adjusting our business outlook for 2025, and now expect revenue to be in the range of $5.3 to $5.5 billion. Adjusted EBITDA is expected to be in the range of $510 to $530 million. And finally, adjusted earnings per common share is still expected to fall in the range of $1.09 to $1.19 million. Capital expenditures are expected to be in the range of $160 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.