Select Medical Holdings Corporation

Good morning, and thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the second quarter 2025 results and the company's business outlook. Presenting today are the company's executive chairman and co-founder, Robert Ortenzio, the company's executive vice president and chief financial officer, Michael Malatesta. Also on the conference line is 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 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 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 second quarter of 2025. I'd like to begin today's call by sharing that U.S. News & World Report recently released its list of the nation's best rehabilitation hospitals, and I'm pleased to report that eight of our hospitals, which operate across 15 locations, were recognized among the country's best. Kessler Institute for Rehabilitation, at number four, was once again ranked as one of the top five rehab hospitals in the nation. earning a spot on the list for the 33rd consecutive year. Our other ranked hospitals include Baylor Scott & White Institute for Rehabilitation, Dallas at number eight, Cleveland Clinic Rehab Hospital at number 20, California Rehab Institute at number 24, Banner Rehabilitation Hospital at number 26, and Ohio Health Rehabilitation Hospital at number 31. This year also marked the first recognition for Baylor Scott & White Institute for Rehabilitation Hospitals at Frisco at number 36 and Penn State Health Rehabilitation Hospital at number 47. These rankings underscore the strength and consistency of our services and reflect our ongoing commitment to delivering high quality care to patients in the communities we serve. I'm also pleased to report that we have continued success in executing our development strategy this past quarter. In our rehab division, we recently opened our second hospital with UPMC in central Pennsylvania, adding a 12-bed acute rehab unit in Tallahassee, Florida, and expanding our acute rehab hospital in Pensacola, Florida, with eight additional beds. In addition, we launched a 12-bed neurotransitional care unit with SSM Health in Missouri. Within our outpatient rehab division, we continue to expand our footprint and grew our clinic count by eight this past quarter. Looking ahead, we remain focused on advancing our development pipeline and growing our presence in key markets, particularly within the inpatient rehab division, where we continue to see growing demand for our services. We expect to add 382 rehab beds, which 294 will be consolidating and 88 non-consolidating. and 30 critical illness beds between now and the end of the first half of 2027. This expansion will be achieved through a combination of new openings and bed additions in markets with strong volume and occupancy rates. In Q3, we plan to open a 45-bed hospital in Temple, Texas and add a 30-bed critical illness recovery hospital in Memphis, Tennessee. Later this year, we plan to open our fourth Cleveland Clinic Rehab Hospital as well as a 32-bed acute rehab unit in Orlando, Florida, and complete a 10-bed expansion in one of our existing rehab hospitals. We anticipate opening an additional three rehab hospitals during 2026, including our fourth in partnership with Banner Health in Tucson, Arizona, 58 beds, and a new freestanding 63-bed rehab hospital in Ozark, Missouri, with Cox Health Systems, and a 60-bed rehab hospital branded as Atlanta Care Rehabilitation Hospital in New Jersey. We also intend to add another acute rehab unit and two neurotransitional units in 2026. And in 2027, we plan to open a 76-bed facility in Jersey City, which will operate under the Kessler brand and expand one of our existing hospitals. We expect to continue to fill our pipeline with additional growth opportunities as our inpatient rehab pipeline remains very strong with many opportunities currently under evaluation. In parallel with our growth initiatives, we remain committed to delivering value to our shareholders. This quarter, we repurchased over 5.7 million shares of our stock at an average price per share of $14.86 under our board-authorized stock repurchase program. for a total purchase price of $85.1 million. In addition, our board of directors have also declared a cash dividend of 6.25 cents per share that's payable on August 28, 2025 to stockholders of record as of the close of business on August 13, 2025. Looking forward, we will continue to evaluate the most effective uses of capital to support strong operational performance and shareholder value, including strategic investments for growth, debt reduction, additional share repurchases, and cash dividends. Turning to our second quarter financial results. On a consolidated basis, our revenue grew nearly 5% to $1.3 billion and our adjusted EBITDA increased to $125.4 million from $124.7 million in the prior year. Earnings per common share from continuing operations rose 88% to 32 cents from 17 cents per share in the same quarter prior year. I'd now like to highlight key financial results by segment, starting with our inpatient rehab hospital division, which delivered another exceptional quarter. Revenue rose 17% year over year to $313.8 million, with adjusted EBITDA increasing nearly 15% to 71 million and our adjusted EBITDA margin declining slightly to 22.6% from 23.1% in the prior year. Our occupancy rate was lower than prior year at 82% and is reflected of the early stage operations of our new hospitals. Our same store occupancy rate remained stable at 86%. In April, CMS issued their proposed rule and if adopted would see an increase of 2.4% and the standard federal payment rate. We expect the final rule to be posted in early August. In our outpatient rehabilitation division, revenue increased 3.8%, which was driven by a corresponding 3.8% in patient volume when compared to prior year. Our net revenue per visit remains stable at $100, and while we continue to see improvements in our commercial managed care rate, these improvements are offset by a 3.2% reduction in Medicare physician fee schedule rates. Reduction in Medicare rate caused a $3 million decrease in our revenue during the quarter, and adjusted EBITDA increased 6.1% year over year, with the Division's adjusted EBITDA margin increasing to 9.3% from 9.1%. Before speaking to the performance of the Critical Illness Recovery Hospital Division, I wanted to address the headwinds we are continuing to face with LTCH reimbursement system. The goals of the 2013 LTCH criteria policy, which we supported, focused on caring for high-acuity patients, those with a minimum three-day ICU stay, with lower-acuity patients being treated in lower-cost settings. Since the enactment of the criteria, the LTCH industry has seen a 56% reduction in Medicare spend. The enactment of criteria and additional regulatory changes has resulted in the closure of over 100 LTCH hospitals, which represents a 24% closure rate. The high-cost outlier threshold targets established more than 20 years ago at 8% preceded the implementation of LTCH criteria and was developed using a significantly different and less acute patient population than the industry is caring for today. This has resulted in a significant reduction in reimbursement for the higher acuity patients in the high cost outlier status has been further magnified by the 20% transmittal. We are committed to engaging in dialogue with regulators regarding potential short and long-term policy reforms. We're hopeful these discussions will lead to positive changes that will enable us to continue to provide excellent care to high acuity patients with complex medical needs. Moving on to the financial results for the Critical Illness Recovery Hospital Division, Revenue was $601.1 million this quarter, which is a decline of 1% from the same quarter last year. The decrease continues to reflect the impact of the increase in high-cost outlier threshold and the implementation of the 20% transmittal rule. Patient volumes remain relatively stable year over year, with our occupancy rate improved to 69% from 67% in the prior year. Our salary, wage, and benefits revenue ratio rose slightly to 58%, and our adjusted EBITDA declined 22% year over year, which was primarily due to the regulatory changes I mentioned earlier. Our adjusted EBITDA margin was 9.4% for the quarter compared to 11.9% in the prior year. Yesterday afternoon, CMS issued the final LTCH rules for fiscal year 2026. These rules, which become effective October 1, include an increase in the standard federal rate of 2.9%, which is higher than the 2.7%, which was within the proposed rule in April. The high cost outlier threshold increased by $1,188 from $77,048 to $78,936, which is less than the $14,199 increase in the proposed rule. The MS LTCH DRG relative weight and expected length of stays were also updated in the final rule. This concludes my remarks and I'll turn it over to Mike Malatesta for some additional financial details before we open the call off for questions.

Thank you, Bob, and good morning, everyone. At the end of the quarter, we had $1.9 billion of debt outstanding and $52.3 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.04 billion in term loans, $250 million in revolving loans, 550 million and six and a quarter percent senior notes due to 2032, and 33 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 3.57. As of June 30th, we had 319.1 million of availability on our revolving loans. The interest rate on our term loan is SOFR plus 200 basis points and matures on December 3rd, 2031. Interest expense was $30 million in the second quarter compared to $28 million in the same quarter prior year. For the second quarter, operating activities generated $110.3 million of cash flow. Our days sales outstanding, or DSO for continuing operations, was 62 days at June 30, 2025 compared to 60 days at June 30, 2024 and 58 days at December 31, 2024. Investing activities use $64.7 million of cash in the second quarter for purchases of property and equipment. Financing activities use $46.5 million of cash in the second quarter, which includes the $85.1 million of shares repurchased under our stock repurchase program, $7.9 million in dividends paid on our common stock, $12 million in net distributions and purchases of non-controlling interests, and a $2.6 million payment on our term loan. This was all set by $70 million in net borrowings on our revolving line of credit. We are reaffirming our business outlook for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion, adjusted EBITDA to be in the range of $510 to $530 million, and adjusted earnings per common share to be in the range of $1.9 to $1.19. We are narrowing our expectation of capital expenditures, which we now project to be in the range of $180 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.