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 Ortenzio.

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 has 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-third of critical illness EBITDA missed to prior year was the result of the regulatory changes that 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 has 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 Fair Hill, 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 Atlantic Care 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 Q2 2025 through the end of 2027. The additional beds primarily consist of rehab hospital beds which includes 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 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 .4% in the standard federal payment rate. The final rule is 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 .2% to our outpatient division or approximately 2.6 million in the first quarter. Total visits declined by 1% from prior year, same quarter, due to the one less workday. However, there was an increase of 1% in visits per day. Adjusted EBITDA declined 3% from Q1 of prior year and the divisions adjusted EBITDA margin decreased from .2% to 7.9%. Our critical illness recovery hospitals, as previously noted, have 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% in our average daily census was consistent with prior year Q1, the volume decline was primarily a function of one less 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 illness 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 .7% in the standard federal payment rate and an increase in the high cost outlier threshold. The final rule is expected in late July or 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 directors declared a cash dividend of 6.625 per share payable on May 29th, 2025 to stock for the record as of the close of business on May 15th, 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 Martin Jackson from 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 to 2031, $180 million in rebobbing loans, $550 million of six and a quarter senior notes due to 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 rebobbing 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 consentor 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 31, 2025. This compares to 62 days as of March 31, 2024, and 58 days as of December 31, 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 in net borrowings on our rebobbing line of credit and $3.2 million in 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 interest, 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 $1.9 to $1.19. 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.

Thank you. To ask a question, you will need to press star 11 on your telephone and wait for a name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from Justin Bowers from Deutsche Bank. Your line is open.

Hi, good morning everyone. So in IRF you had very strong results and a nice sequential increase in occupancy. Is that, like how should we be thinking about occupancy for the rest of the year with the new capacity coming online?

Justin, I think it should stay around in that 85% plus capacity even with the new business coming online. Because as the new business comes online, we still have some other businesses still maturing. But again, our mature hospitals have all been in that 85 plus percent range.

Okay, thanks. And then on LTCH, you mentioned that two thirds of the NIS was related to the COVID-19 pandemic. Regulatory and some of the outlier stuff. Was that versus like your internal expectations or consensus, just trying to get a sense of what the magnitude there was and maybe you can quantify for us.

Yeah, Justin. It was higher than what we had anticipated. So for example, if you take a look at the high cost outlier impact from Q1 25 versus Q1 of 24, there was about 100% increase in the cost of the high cost outlier. We thought it was gonna be a little bit less than that. And the 20% impact, it was 480% from Q4 of 24. That 20% impact didn't go, that wasn't around Q1 of 24. First quarter we had, it was actually in Q4 of last year.

Okay, understood, thank you. Oh, go ahead.

Yeah, so Justin, from a quantification standpoint, we basically quantified that in the revised guidance.

Okay, understood, appreciate it.

Thanks. One moment for our next question. Our next question will come from Laina Van Hendricks from RBC Capital Markets. Your line is open.

Hey, thank you very much and congrats on the IRF performance. But just going back to LTAC, just wondering if you could provide any update or if you're having any changing thoughts on mitigation strategies with regards to the high cost outlier and the transmittal rule. Kind of anything you can do to kind of head off those headwinds operationally. And then second, just based on your flu commentary and guidance, is there a reason to expect maybe an easing of that year over year headwind as we kind of get into some of the lower acuity quarters? Thanks.

Yes, Ben, to your, and there's two questions there, to both questions. I think when you talk about high cost outliers, typically our Q1 is higher than the balance of the year, just because the QA is a patient, it's pulmonary patients that we're dealing with. So it's typically higher during that period of time, so we should see that drop. So it's part and parcel of the same answer to your two questions.

Okay, and anything that you can do just strategically or is there, is there, is it just something you have to write out or is there anything maybe from a legislation perspective, any conversations in Washington that could help kind of cure this or get traction with, you know, with revised regulations? Thanks.

Yeah, Dennis, Bob, yeah, we are constantly having conversations both on the regulatory side with the new CMS administration and on the legislative side. So that's always ongoing, but I think that that has been stepped up and a little bit narrowed to this high cost outlier impact, because from a policy standpoint, with the criteria for LTACs that encourages taking the higher acuity patients and not taking what they call the site neutral or the patients that are excluded by the criteria that was put in place some years ago, it is going to logically have more patients that reach high cost outlier status. So we're trying to have the kind of conversations that explain that and look for ways that we might be able to propose some ideas and some changes on some of the policies that would help mitigate some of the severe impacts that we're seeing.

Appreciate the call, thank you.

Thank you, one moment for our next question. Our next question comes from William Sutherland from the Benchmark Company, your line is open.

Thanks, operator. Hey, everybody. What do startup costs look like this year? And then versus last year, that would be helpful, thank you.

Bill, this is Marty, good morning. The startup losses are relatively the same from last year to this year.

Okay, and nothing special in the core today, okay. And then, I'm a little confused on the impact, high cost outlier and transcendental rule in the sense that in terms of how it's impacting guidance, so you had this big impact particularly in the first two months of the quarter that I think Bob, you said that March was, you were finishing up the year and March was, I mean the quarter with March even a little ahead of plan. So is this guidance change just reflect really the first two months of the year, particularly for LTCH?

Yeah, Bill, the first two, was actually like the first six weeks. We saw a slow first six weeks versus what we typically see as far as the flu is concerned. We saw that pick up the balance of the quarter. That's basically what we were talking about. As far as the high cost outlier, high cost outlier as I mentioned earlier, on a year over year basis, there was about 100% increase in the high cost outlier.

So that's- And again,

if you take a look what we've seen, we've seen an increase of almost 100% from 23. We saw an increase from 38,000 to 57,000, I believe. Is it 59,000? And then we saw an increase from the 59,000 up to $77,000. We did a pretty good job with this last year and we're going through that right now. Our operators, again, doing a very good job, the best job that they can. But those increases are very, very significant.

Right, now I get it. And then lastly in outpatient rehab, update us if you can on some of the initiatives you've got in place to improve the margins of the business.

The initiatives, I mean a couple of those. We've talked, I think over the last two or three quarters about the change that we're making in our technology. And we have rolled that out in the first quarter. We are seeing some benefits from that. We continue to have additional releases on that software. We think we'll continue to see those benefits expand throughout the year. And from a contracting perspective, we continue to see some nice increases. In the range of four to six percent, so on the commercial side.

Okay. So you've got these progressive, these steady improvements kind of baked into your actual business. Do you have any expectations then in the guide?

Yes we do.

Okay. I'll jump off, thanks guys.

One moment for our next question. Our next question will come from Anne Hines from ZUHO. Your line is open.

Hi, thank you. Maybe we can shift to Earth. Obviously that was the shining star in the quarter. Is there any plans to actually, I know you're accelerating growth a lot. Is there any plans to even accelerate it more to further diversify your business away from LTCH given the regulatory challenges? And I guess like internally, how much capacity can the organization support for that growth? Thanks.

Yeah, thanks Anne. On the development side, I think it's important to note that all the projects that we listed or that I talked about in my prepared remarks, those are projects that are signed under construction and will open. It doesn't include all the other projects that are in our pipeline that will be signed, will be committed to, and some of those could come in along those same timeframes. So the short answer to your question is yes, there is more of an acceleration going on than even that you would see to drive more robust growth on the rehab side.

Okay, great, thanks. And my second question would just be, just on the CMS front, obviously for the industry, the outlier and the transmittal rule, is the pressure point, what type of advocacy do you have? Is CMS just to help the industry try to offset some of these pressures?

Well, you gotta remember that the new CMS team is just so recently installed. I mean, the new CMS administrator was just confirmed a couple weeks ago. So it's very early for them to be in place and to get their hands dirty on all the policies. And they have obviously a lot of things going on that we can assume are bigger issues than the LTCH space, not even including what's being talked about by Medicaid and all the issues with Medicare Advantage. And so it would be presumptuous of me to think that we could be moved to the top of their list. But we have a policy of always engaging with CMS. We did with the last CMS administration, not with a lot of great success on these policies. So I'm optimistic that maybe we can do better under the new administration.

Great, thank you.

Thank you. I'm not showing any other questions in the queue. I would now like to turn the call back over to Mr. Rotenzio for closed remarks.

Yeah, no closing comments. Thanks everybody for being with us and working through our quarter. Look forward to updating you next quarter.

Thank you for your participation in today's conference. This will conclude the program. You may now disconnect. Everyone have a great day.