Q1 2024 Select Medical Holdings Corp Earnings Call

Participants

Robert Ortenzio; Executive Chairman of the Board, Co-Founder; Select Medical Holdings Corp

Martin Jackson; Senior Executive Vice President of Strategic Finance and Operations; Select Medical Holdings Corp

Presentation

Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2024 results and the Company's business outlook. Speaking, today are the company's Chief Executive Chairman and Co-Founder, Robert Ortenzio, and 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 be 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'll turn the call over to Mr. Robert Ortenzio.

Robert Ortenzio

Thank you, operator. Good morning, everyone, and welcome to Select Medical's earnings call for the first quarter of 2024. I'll first provide some updates on the progress we have made regarding our previously announced plan to pursue the separation of Select Medical's wholly owned occupational health services business, Concentra. On February 27th, we announced that we had received as expected, a favorable private letter ruling opinion from the Internal Revenue Service, confirming the tax-free status of the potential transaction. On March 18th, we announced that Concentra had confidentially submitted a draft registration statement on Form S-1 with the SEC relating to the proposed initial public offering of its stock. The IPO is expected to occur after the SEC completes its review process and subject to market and other conditions. We are pleased so far with the progress and expect the separation to be completed by the end of 2024. Overall, we had a very strong first quarter start of 2024, led by both our hospital divisions generating very impressive results. Adjusted EBITDA grew 22% and revenue grew 7% compared to Q1 of the prior year with all four operating divisions exceeding prior year revenue. For the quarter, total Company adjusted EBITDA was 261.9 million compared to $214.1 million in the prior year. Our consolidated adjusted EBITDA margin was 14.6 for Q1 compared to 12.9 in the prior year. First quarter results of our critical illness recovery hospital division far exceeded our expectations. Adjusted EBITDA of 115.9 million was 51% higher than Q1 of the prior year with increases in revenue and census, along with a 6% reduction in salary, wages and benefits to revenue ratio. Marty Jackson provide some additional detail regarding CRH's continued progress with labor within his commentary. On April ninth, we opened a critical illness recovery hospital to the distinct part rehabilitation unit in Chicago with Rush University System, adding 44 critical wellness and 56 rehab beds. There is also a strong pipeline for additional growth opportunities under consideration.
On the inpatient rehab development front, we are on target to open a 48 bed hospital in Jacksonville, Florida in Q3 2024, with our partner, you asked help Jacksonville in the first half of 2025. We're opening our fourth rehab hospital with Cleveland Clinic consisting of 32 beds. And we are slated to open our third hospital in Central Pennsylvania and partnership with UPMC. This will be a 20 bed rehabilitation hospital and will serve the expanding needs of the region. In February, it was announced that Select Medical and Banner Health are breaking ground on a fourth rehabilitation hospital as part of our joint venture. This will be a 56 bed hospital in Tucson, Arizona with a planned opening in the latter part of 2025. Also in the latter part of 2025. We are expanding our Riverside hospital in Virginia by 10 beds.
Moving on to 2026, we're opening a new 60 bed rehab hospital in southern New Jersey back rec Institute for rehab in partnership with Atlantic care and are scheduled to open a new freestanding 63 bed rehab hospital in Ozark, Missouri with Cox health system.
Overall, we are very pleased with development results in the pipeline for our specialty hospital divisions between specific projects just mentioned, as well as some other smaller expansions and distinct part units. We plan to add 537 additional beds to our operations from Q2 2024 through 2026. The additional beds consist of 467 rehab beds, which includes 54 non consolidating beds and 70 Altec beds. We also have a lot of activity in regards to development in our Concentra and outpatient divisions. Concentra acquire a fourth center occupational medicine practice in Hampton Roads, Virginia market on February 24th, and a second de novo clinic in Fort Myers, Florida opened in March. We currently have six signed leases for denovos slated to open throughout the remainder of 2024 and Q1 of 2025. Concentra continues to manage to maintain a strong pipeline of potential acquisition opportunities and various de novo sites under evaluation. This quarter, our outpatient rehab division added five clinics via four denovos and one acquisition. This offset the closure of 14 underperforming clinics in the fold and have two clinics into existing operations upon lease expiration. The pipeline for future growth remains strong, with 20 executed leases for de novo clinics scheduled to open later this year. Many other acquisitions and de novo opportunities are currently under consideration.
Now I'll provide some further data points on the results of each of our operating divisions. As I mentioned our critical illness recovery hospital division had a very strong quarter. Revenue increased 10% with a 51% increase in adjusted EBITDA compared to the same quarter prior year critical illness incurred 2.2 million of start-up losses related to new hospitals this quarter compared to $1.9 million in the same quarter prior year. While our occupancy was slightly down from same quarter last year. Average daily census increased 2%. Our rate per patient day increased 8%. The increase in rate was primarily driven by an increase in our case mix index, Medicare Supplement payments that were partially offset by an increase in taxes and favorable payer contract negotiations. Our adjusted EBITDA margin was 17.7% for the quarter compared to 12.9% in prior year. Q1 critical illness experienced a 6% reduction in their salary wages that salary wages and benefit to revenue ratio compared to prior year Q1 with nurse AGENCY utilization decreasing 20% and Agento rates decreasing by 7% compared to same quarter prior year. Orientation hours decreased 9% compared to prior year. Q1 nursing Xiniya incentive bonus decreased 26% from prior year Q1. In April, CMS issued their Altec proposed rule for 2025. And if adopted would see an increase of 2.4% in the standard federal payment rate and an increase in the high cost outlier threshold. The final rule is expected in late late July, early August after the required comment period.
Our inpatient rehabilitation hospital division also had a very strong quarter with a 15% increase in revenue and a 30% increase in adjusted EBITDA compared to Q1 prior year, average daily census increased 7% and our rate per patient day increased 7%. Our occupancy of 87% was higher than prior year of 86%. Adjusted EBITDA margin for inpatient rehab was 23.1% for Q1, which was higher than prior year margin of 20.4. In March, CMS issued the rehab proposed rule for fiscal year 2025, and if adopted, would see an increase of 1.8% in the standard federal payment rate. Final Rule is expected in late July, early August. After the required comment period, Concentra experienced an increase in 2% net revenues and 3% in adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate. Our workers' comp volume remained strong with an increase of 3%. That was offset by a 6% decrease in employer base visits, which are reimbursed at lower rates. This led to an overall visit decline of 2% as the player demand for drug screens and physicals trended downward. Our on-site revenue grew by 9% as Concentra added 11 new on-site clinics locations since Q1 of last year, and we are seeing higher revenue per site. Intentia's adjusted EBITDA margin was in line with prior year at 20.6%. Our outpatient rehab division experienced an increase of 2% in revenue, with patient volumes increasing by 4%. Offsetting the volume increase was a decrease in net revenue per visit from 101 per visit to $99. Our volume continues to maintain an upward trend while the rate Duke decreases are primarily due to a decline in the outpatient Medicare fee schedule and payer mix shifts. The outpatient division's adjusted EBITDA decreased by 17% compared to prior year and the adjusted EBITDA margin went from 10.2% to 8.2% in March. The President signing appropriation bill that mitigated a 3.4% reduction in Medicare physician fee schedule that went into effect in January. The newly signed law includes a 1.68% increase in the fee schedule based conversion factor for the remainder of the year. The net result of this change is a 2% reduction in Medicare fee schedule for the year as opposed to the original 3.4% cut earnings of four per fully diluted share were $0.75 for the first quarter compared to $0.56 per share in the same quarter prior year. Adjusted earnings per fully diluted share were $0.77 for the first quarter, which excludes Concentra separation transaction costs, net of tax in regards to our allocation, deployment of capital for Directors declared a cash dividend, $0.125 payable on May 30th, 2020 for stockholders of record as of the close of business on May 16th, 2024. This past quarter, we did not repurchase shares under our Board-authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt and development opportunities.
That concludes my remarks. I'll turn it over to Marty Jackson for additional financial details before we open the call up for questions.

Martin Jackson

Thanks, Bob. Good morning, everyone. I will begin by providing some additional details on the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our SW&B as a percentage of revenue ratio exceeded our expectations at 52.9% this quarter, which is a decrease from 56.2% in Q1 of prior year. In the first quarter of this year, we saw a decrease in agency costs and utilization from prior year Q1 compared to Q1 of 23 R and agency costs decreased by 23% and utilization decreased 14% from 18%. The hourly agency rate for our end also decreased by 7% from $83 to $77. Nursing sign on an incentive bonuses dollars decreased by 26% from Q1 of prior year, down from down to 7.6 million from 10.3 million the prior year same quarter. Finally, we saw a decrease of 9% in our new hire orientation hours.
Moving onto our financials in Q1, the equity and earnings of unconsolidated subsidiaries, we're 10.4 million. This compares to 8.6 million in the same quarter prior year. Net income attributable to noncontrolling interest was 20.3 million compared to 14.5 million in the same quarter prior year. Interest expense was 50.8 million in the first quarter. This compares to 40.6 million in the same quarter prior year. The increase in interest expense was principally due to the increase in the borrowing spread on our term loan resulting from the amendment to our senior secured credit agreement. At the end of the quarter, we had 3.8 billion of debt outstanding and 93 million of cash on the balance sheet. Our debt balance at the end of the quarter included 2 billion in term loans, 510 million in revolving loans, $1.2 billion in our six and a quarter senior notes and 77.6 million of other miscellaneous debt. During the first quarter, we prepaid 79 million on our term loans under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of 4.4 times. We estimate approximately 95 million of our incremental borrowings in the quarter were related to the changed health cyber incident. Our estimated net leverage would have been 4.3 times without the incremental borrow borrowings related to the cyber incident. As of March 31st, we had 202.4 million of availability on our revolving loans. The interest rate on 2 billion of our term loans is capped at 1% so for plus 300 basis points through September 30th of 2024. For the first quarter, operating activities used 66.7 million in cash flow. Our days sales outstanding was 58 days as of March 31st, 24. This compares to 54 days at March 31, 23 and 52 days at the end of March fiscal year 2023. The increase in DSO was principally attributable to the changed health cyber incident. Investing activities used 57.7 million of cash in the first quarter. This includes 52.5 million in purchases of property equipment and other assets and 5.2 million in acquisition and investment activities. Financing activities provided 133 million of cash in the first quarter. This was primarily due to 230 million net borrowings on our revolving line of credit and 8.7 million in net borrowings of other debt, less the 79 million in term loan repayments, 16 million in dividends of our common stock and $8.8 million net payments and distributions to noncontrolling interest. As stated previously, we did not repurchase any shares under our board or authorized repurchase program this quarter. Last year, the Board approved a two year extension of the share purchase repurchase program, which remains in effect until December 31st, 2025, unless further extended or earlier terminated by the Board.
We updated our business outlook for 2024, we expect revenue to be in the range of 6.9 to $7.1 billion, adjusted EBITDA to be in the range of 845 to 885 million, fully diluted earnings per share to be in the range of $1.95 to $2.19 and adjusted earnings per share to be in the range of $1.96 to $2.20. Capital expenditures are expected to be in the range of 225 million to 275 million for 24 for year 24 and 123 million of that is allocated towards maintenance, which is consistent with prior years. The balance of that would be in development.
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

Question and Answer Session

Operator

to ask a question, please press star one one on your telephone and wait for your name to be in.
To withdraw your question, please press star one one Please standby while we compile the Q&A roster. Our first question comes from Justin Bowers.
David, your line is Good morning, everyone. Bob, thank you for the comprehensive update on development activities. Can I Mr. Rush, can you just give us an update on on the new hospital with that system?
Sure. We built a new hospital with in partnership with Roche, which is a new building on their campus, which is composed of both rehab hospital, a rehab hospital and Altec hospital, the way the regulations work, it's a technically and Altec hospital with a distinct distinct part of rehab unit, but it opened to us, I think this past month and we're going through the the six month qualification period for LTAC., but the rehab hospital is up is filling up nicely.
Okay, great. Thank you.
And then, Marty, just pivoting to critical illness. Can you just talk about the efforts you've had you guys have done, you know, with labor, you had some really nice improvement there on Pemex WPZ ratio.
Yes, Justin, the our operators have done a terrific job on reducing the reliance on agency nurses, most of the nurses that we we would like to have full-time, we have higher. So orientation hours have gone down on. So all in all, it's just been terrific we've talked about potentially getting back to that 50% to 53% range, but we thought it would take us another year to get there. And again, the operators have done a terrific job on their staffing.
Okay.
And then in the prepared remarks, you said agency costs were down 23%, so that that was roughly about 18 million. Then during the quarter.
Is that the right ballpark 18 or 19 staffing costs were?
Yes, that's right. The they dropped from about 24 million down to 18.
Okay.
And then just on one last one. You mentioned some Medicaids payments.
Is there.
Can you size that for us and is there anything?
Jeff is about 4 to 5 million net after taxes.
Okay.
Got it.
Thank you.
I'll jump back in queue, Greg.
Thanks, Justin.
Thank you. One moment for our next question. Our next question comes from Dan Hendrix with RBC Capital Markets.
Your line is.
Hey, thanks, guys, and congratulations on the quarter. I just wanted to ask about the 3.8 billion in debt ahead of the spin. We get a lot of questions about balance sheet allocation between SpinCo and RemainCo? And just wanted to get your latest thoughts there considerations in how you're thinking about the balance.
Thank you.
Yes, Ben, we've indicated publicly is that you can think about this in terms of both entities will ultimately have about four times leverage on the balance sheet. We're on a gross basis a little bit less on the NETg side.
Thank you.
And then also just preferred one of your peers on the inpatient rehab side, talk about strategies around the pre-claim review, Choice Demonstration and how their relationships are with fiscal intermediaries in the ER business. Just wanted to get your thoughts on positioning around that if your footprint is impacted, how your relationships are with fiscal intermediaries and if you've given any thought to kind of how to approach the review choice?
Thanks.
I mean, yes, obviously, I think our relationships are good, but, you know, good bad relationships. It's all about how you fare through the audits. It does impact our platform. And we've had and a extremely good result with all the Review Choice Demonstration audits. So it's not an issue.
Thank you.
Thank you.
One moment for our next question.
And our next question comes from Kevin Fischbeck with Bank of America.
Your line is.
Hi, this is Miyanaga on for Kevin Fischbeck with Bank of America.
My first question was just regarding how our Q1 EBITDA was 40 million above consensus. You raised the midpoint of the EBITDA guidance by EUR10 million. So is it fair to say the Q1 results are just closer to your internal expectations compared to where consensus was? And what are the sources of the beat? And so why are you not operating revenue guidance?
Yes. The I mean are our expectations. We will. First of all, the thought process for us was really the spread was rather large. What we did was we increased the lower limit by 15 million and we're taking a look at the you know that the remaining three quarters and and to the extent that we continue to exceed like this. We'll make adjustments as those quarters on as we see what those quarters are around our performance.
Right.
And just a follow up or I guess not really follow-up a different question on critical illness margins improving 480 bps year over year despite the Medicare reimbursement pressure. So what would you say would be the main drivers for that.
And then modeling front, we know that there's a couple of different drivers to that. It was really we had we had some nice increases in volume. We had nice increases in case mix index, which increased the rate. And then I'd say by far, the largest impact came from our controlling costs on the on the salaries, wages and benefits side, you saw a nice drop in our at WMB as a percentage of revenue, and that was a big driver of that improvement in margins.
Artie, thank you so much.
Thank you One moment for our next question.
Our next question comes from A.J. Rice with UBS.
Your line is.
Hi, everybody. Just a fine point on the comments around the supplemental payment program. Is this the first quarter you recognize that? And is that 4 million an annualized number for that program or are you going to have 4 million incremental every quarter?
This year.
Okay.
We have recognized before rate, A.J., but as they become more mature, we're able to recognize on a on a month-to-month basis, and that's what you're seeing.
And so the second, third and fourth quarter will all have roughly around a $4 million benefit from this program?
Yes, that number right. There was a one-time number.
Okay. All right.
And then on the I had a couple of business questions, but on the Concentra spin, I know you said reaffirm target is by the end of the year. Any sense of when you know those that style and filings that have flipped Republic and any plans on having that management team out on a road show and when might that occur?
Yes. As you know, A.J., it's really it's fully dependent on SEC and the comments that we get and the lead times that that takes. So as we get as we get further clarity, we'll be able to give you a much better time frame.
Okay. Obviously a big win for the Company in the quarter was on the labor front, as you said. I'm wondering just if you look, I know the year-to-year comps are still really good on the contract labor. If you look sequentially, are you still from quarter to quarter of seeing that come down or are you sort of now at a at a normalized level and you're just you're just it plays down at that level of contract utilization, et cetera. And then is there any comment on where your wage rates are trending for your permanent workforce and the critical illness division?
Yes. Yes, A.J., with regards to the RN rates, we think that we're probably at the low end of the range right now, we do believe that there will probably be seasonality and those rates. But all in all, I think it's one to within a couple of parts of each other. I think on the of the our full-time employee rates are in that 3% to 4% range on an annual basis.
Okay. And then maybe a last question on the I think you previously said one of the issues or challenges and the proposed rule or the rule last year was the Altec outlier threshold increase. You obviously had a very good quarter in this Altec business this quarter. Are you seeing any impact on margins or volumes from that at any early comment on the proposal for next year?
And how that might impact?
Well, the aging, we normally don't say much about the proposed rule. What it what it's in a comment period will be submitting comments. I will say that the continued increase in the fixed loss threshold amount is tougher on the providers that have the higher acuity longer-stay patients. And we just continue to navigate that and continue to tweak our operations and in order to accommodate for the changes that are and the directions that the policymakers are trying to push us. So yes, as you saw in Q. one with the L tax that volume and expenses and that salary, wages and benefit and rate through acuity, I can can really carry the day. So we obviously feel good about their performance and can continue to do that. And our our business on that side of the business on the critical illness is better as the acute care hospitals have higher occupancies in their ICUs. So that's what really the main thing that drives that business.
There are all types of loans.
Yes.
Thank you.
One moment for our next question. Our next question comes from Bill Sutherland with The Benchmark Company.
Your line is.
Thanks a morning, everybody. Wanted to see if is there any more color you could provide about the trend in the employer demand for Concentra is the lower levels of screens physicals?
Yes, Bill, the demand there really has to do with employment. And as you know, I mean, during 2020, 22 and 23, there was much higher demand just because there was a lot more hiring going on as hiring goes back to normal, you're going to see those drop. And then that's something that we expected to see. I think the other point that I'll make there is that those the types of activities that Concentric does for employment hiring are really that the lower end of the range and things like drug testing, which are in the $40 range or physicals, which are much lower than what the the unit pricing is on workers' comp?
Yes, I get the positive mix is good. So I guess what you're saying, Marty, is that sequentially this is kind of probably just flatten out. It's just a year-over-year thing right now.
But I think as I think you could think about it that way, we don't I think that it's it's not really a concerning issue at this point.
Okay.
Back to Altec for a sec. The CMI increase was impressive. Is that is that part of the seasonality of 1Q or is that something that feels sustainable?
Yes, Q1 typically has a higher CMI than normal, but the increase that we saw was based on a year-over-year same quarter basis. So we thought pretty we felt very good about that.
Yes, and I guess that goes back to your comment, Bob, about ICU capacity and so forth.
And as you see you see in the first quarter, you're just going to have more of those respiratory cases, the winter months bring those and you're going to see you're going to see more volume in the ICUs. And consequently, you're going to see more volume to the OpEx Okay. That's all I got. Thanks everybody, Eric.
Thank you.
I'm showing no further questions at this time. I would now like to turn it back to Robert Ortenzio for closing remarks.
And thank everybody for joining us for and for your questions.
This concludes today's conference call.
Thank you for participating.
You may now disconnect.