Q3 2019 Earnings Call
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the third quarter 2019 results and the company's business outlook.
Speaking today or the company's executive Chairman and co founder Robert Ortenzio, and the company's executive Vice President and Chief Financial Officer, 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 look.
Statements regarding future events for the future financial performance of the company, including without limitation statements regarding operating results growth opportunities and other statements that referred 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 I circumstances change at this time I will turn the conference call over to Mr. Robert Ortenzio.
Thank you operator, good morning, everyone and thanks for joining us for select Medicals third quarter earnings conference call for 2019.
We start out by saying Q3 was a very good quarter for us with three of our four business segments exceeding prior years prior year adjusted EBITDA by double digit growth.
Fourth business segment grew EBITDA by over 7%.
Experis nice growth in terms of patient missions in our specialty hospital business.
Critical illness recovery hospitals growing at almost 5% an inpatient rehabilitation hospitals growing it over 19% or outpatient rehabilitation clinic visits grew by more than 8% in Concentrix visits grew by over 5%. We also saw nice growth in our pricing.
We completed two significant refinancing transactions during the course quarter, both at select income Sentra, which Marty will provide some color in his remarks. We also opened a new nonconsolidated joint venture rehabilitation hospital in the quarter affiliated with several partners in New Orleans, Louisiana.
Overall, our net revenue for the third quarter increased 9.9% to $1.39 billion in the quarter compared to 1.27 billion last year.
Net revenue and are critical in this recovery hospital segment in the third quarter increased 10.2% to $463 million compared to 420 million in the same quarter last year. The increase is attributable to both an increase in patient volumes and revenue per patient day.
Patient days increased 5.8% compared the same quarter last year, the 258000 patient days and the third quarter.
Occupancy in our critical in this recovery Hospital segment was 67% in the third quarter this year compared to 65% in the same quarter last year.
Net revenue per patient day increased 4% to $1773 per patient day in the third quarter compared to $1705 per patient day in the same quarter last year.
Net revenue on a rehabilitation hospital segment third quarter increased 19.9% $273 million compared to $145 million and the same quarter last year.
Patient days increased 12.9% well over 89000 days compared to 79000 days in the same quarter last year.
The increase in patient days was related to new hospitals that recently opened as well as a 4% increase in our existing hospitals that revenue per patient day increased 9% to 1724 hours per day in the third quarter compared to $1582 per day in the same quarter last year.
Net revenue in our outpatient rehab segment in the third quarter increased 8.2% to $265 million compared to 245 million in the same quarter last year.
Patient visits increased 8.1% to 2.2 million visits in the quarter compared to 2 million visits in the same quarter last year.
Net revenue per visit was $103 in both the third quarter of this year and last year.
Net revenue in our Concentrix segment increased 4.3% to $422 million in the third quarter compared to 404 million in the same quarter last year.
For the third quarter revenue from our centers was 380 white $381 million and the balance of approximately 41 million was generated from one side clinics community based outpatient clinics and other services for the centers patient visits increased 5.6% to over 3.1 million visits compare.
I do a little less than 3 million visits in the same quarter last year.
Our net revenue per visit was 120.
Dollars in the third quarter compared to $124 per visit in the same quarter last year. The decline in net revenue per visit was primarily due to a higher mix of employer surface visits, including drugs drug screens, which yield lower per visit rates.
Total company adjusted.
EBITDA for the third quarter increased 6.6% to $182.7 million compared to 156.
Point 6 million in the same quarter last year, our consolidated EBITDA margin was 13.1% in the third quarter compared to 12.4% in the same quarter last year.
And our critical illness recovery Hospital segment, adjusted EBITDA increased 7.4% to $57.2 million in the third quarter compared to 53.3 million in the same quarter last year adjusted EBITDA margin for the segment was 12.4% in the third quarter compared to 12.7.
1% in the same quarter last year the decline in adjusted EBITDA margin is related to our newly acquired hospitals operating at lower margins than our existing hospitals.
Our rehabilitation hospital segment, adjusted EBITDA, Bart EBITDA increased 45.1% to $36.8 million in the third quarter compared to 25.3 million in the same quarter last year adjusted EBITDA margin for the rehabilitation Hospital segment was 21.2% and the third quarter.
Compared to 17.5% in the same quarter last year the increase in adjusted EBITDA and margin was primarily attributable to an increase in volume at our existing hospitals.
Outpatient rehab adjusted EBITDA increased 16% to 40 million, a third quarter compared to 34.5 million in the same quarter last year adjusted EBITDA margin for the outpatient segment was 15.1% in the third quarter compared to 14.1% in the same quarter last year.
Adjusted EBITDA margin in the quarter increased as a result of increased volumes as well as other cost reduction initiatives implemented in the quarter.
Concentra adjusted EBITDA increased 13% to $17.7 million for the third quarter compared to 68.8 million the same quarter last year adjusted EBITDA margin was 18.4% in the third quarter compared to 17% in the same quarter last year the increase in adjusted EBITDA more.
Region was primarily the result of us achieving operating cost synergies across our combined concentric and U.S. health works business.
Earnings per fully diluted share was 23 cents for the third quarter compared to 24 cents and the same quarter last year.
Adjusted earnings per fully diluted share, which excludes the loss on early retirement of debt and related costs in their tax.
Was 33 cents in the third quarter during the third quarter last year adjusted earnings per fully diluted share excluding gain on sale business as it related tax effect was 23 cents.
Despite I'll turn the call over to Mark Jackson for some additional financial details before we open the call for questions.
Thanks, Bob Good morning, everyone.
For the third quarter, our operating expenses, which include our cost of services and general and administrative expense.
$1.2 billion as a percent of net revenue operating expenses were 87.4% and the third quarter. This year. This compares to 88.1% and the same quarter last year cost of services $1.18 billion for the third quarter. This compares to 1.9 billion.
As in the same quarter last year as a percent of net revenue cost of services was 84.9% for the third quarter compared to 85.8% in the same quarter last year.
DNA expense was 34.4 million in the third quarter. This year. This compares to $30 million in the same quarter last year.
DNA as a percent of net revenue was $2.5 million in the third quarter. This compares to 2.4% the same quarter last year.
As Bob mentioned total adjusted EBITDA was $182.7 million and the adjusted EBITDA margin was 13.1% for the third quarter. This compares to total adjusted EBITDA of $156.6 million and adjusted EBITDA margin of 12.4% in the same quarter last year.
Depreciation and amortization was $52.9 million in the third quarter. This compares to $50.5 million in the same quarter last year.
We generated $7 million an equity in earnings of unconsolidated subsidiaries during the quarter. This compares to $5.4 million in the same quarter last year.
The increase in equity in earnings was attributable to the growth of our non consolidating subsidiaries as a result of the sale of outpatient rehabilitation clinics to these nonconsolidated subsidiaries.
Interest expense was $54.3 million in the third quarter. This compares to $50.7 million in the same quarter last year interest expense in the third quarter includes $3.6 million incremental interest due to the timing of issuing selects new six in the quarter senior notes.
And the repayment no select existing six in three eight senior notes.
We recorded income tax expense of $12.8 million with an effective tax rate of 22.6% in the quarter.
Net income attributable to select medical holdings was $30.7 million in the third quarter and fully diluted earnings per share was 23 cents.
And adjusted earnings per fully diluted share was 33 cents in the third quarter.
As Bob mentioned, we completed two refinancing transactions in the third quarter on August Onest select Klum completed.
A refinancing transaction, which included the issuance of $550 million of new seven years senior notes at a coupon of six in the quarter.
And a new $500 million incremental term loan.
Which is on the same turns terms as our existing term loan.
We used the net proceeds from the new did to reduce to redeem our existing $710 million six and Threeeight senior notes and paid off the balance of our revolving loans with the excess cash now on select balance sheet.
On September 22019, concentric entered into an incremental amendment towards first lien term loan, adding an additional $100 million to its existing $100 billion to $1.14 billion first lien term loans.
Proceeds from the incremental first lien term loan together with the cash on Concentrix balance sheet, we used to repay in full the $240 million and second lien term loans outstanding.
At the ended the quarter, we had $3.4 billion of debt outstanding and $136 million of cash on the balance sheet.
Our debt balance at the ended the quarter included.
$1.53 billion in select term loans.
$550 million in select six in the quarter Senior notes 1.24 billion in Concentrix first lien term loans.
$45 million in unamortized discount premiums and debt issuance costs that reduced the overall balance sheet debt liability and we had $76 million of other miscellaneous debt.
Operating activities provided $133.7 million of cash flow in the third quarter.
The provision of operating cash flow for the quarter is primarily driven by cash income and an increase in accrued expenses.
Our days sales outstanding or DSL was 53 days at September Thirtyth 2019. This compares to 53 days at June Thirtyth 2019, and 51 days at December 30, Onest 2018.
Investing activities use $43.2 million of cash in the third quarter.
Cash was related to $34.7 million and purchases of property and equipment and $8.5 million of net acquisition and investment activities during the quarter.
Financing activities, you $78.6 million of cash in the third quarter, we had net term loan and senior note borrowings of $180.5 million. This is offset by $195 million and repayments on the revolving loans related to the refund the refinancing activities, we just talked about.
We also had 27.3 million dollar reduction in bank overdraft as excess cash balances offset outstanding checks.
In addition, we used $23.7 million to repurchase stock during the quarter.
Net payments of and other debt to $4.9 million any point $3 million in net distributions to noncontrolling interest in the quarter.
We purchased 1.26 million shares under the company's authorized repurchase program at an average price of $15, an 87 cents, which includes transaction costs during the third quarter.
Additionally.
In our earnings press release, we updated our business outlook for the calendar year 2019.
We now expect net revenue to be in the range of 5.375 to $5.4 billion to $5 billion.
Adjusted EBITDA to be in the range of $685 million to $700 million.
Fully diluted earnings per share to be in the range of one dollar to one dollarssix.
And adjusted earnings per share.
Dollar seven to $1.13, which excludes the loss on early retirement of debt and its related costs and the gain of sale of businesses and their related tax effects.
This concludes our prepared remarks and at this time, we'd like to open up the call. So operator, if you can please do so.
Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your telephone to withdraw your question press the pound <unk>. Please standby will be compile Q and a roster.
Our first question comes from Frank Morgan with RBC capital markets. Your line is now open.
Good morning, when you talk a little bit about the strong rate growth across the segments.
I know when the Elteks out I believe there was probably a decline in some of the threshold days that you've had in the past, but just any other thing that you can call out about the rate growth there.
Any kind of changing mix or acuity it might have driven that and then the same thing on the on the rehab hospitals that.
Or if rates that really strong there any color around that.
We've heard others talk about the growth in Medicare advantage in their overall business mix in the Earth business. So are you seeing that and how did those rates compare we've been hearing that those case rates did the discounts to fee for service had been declining, but just any color on that as well.
Yes, Frank the the pricing on the Eltek side, we saw.
We saw a bump up in on the Medicaid side, we saw a decent increase in rates there so that was.
Predominantly one of the one of the items.
Actually that was predominantly the reason why.
We saw the rate increases there.
On the piano.
The next question you had I think it was on the.
On the Earth.
Strong regular there.
Yes, I think a good portion of that has to do in particular with California rehab, we see some very nice increase rates there.
And that's one of the predominant drivers.
For that increase.
Gotcha, and then intent as.
As we see more more of our new startups coming on board that that increase will probably mitigated because we're not going to see the same type of rates.
Increase like we do in the California hospitals.
Gotcha in may be on that point, if you would just kind of remind us of the rollout maybe over the next year, which quarters you have additional development coming online and then back to that one of the early questions. You didn't catch was that how much growth are you seeing in Medicare advantage in the rehab hospital business is that how big a part of the mix is that an in house.
Those rates compare and are you pay day rates are case rates and how does that compare the for servers and I'll hop off thanks.
Sure let me answer the.
Your last question first and that is Medicare advantage, we are seeing Medicare advantage increase across the specialty hospital across both elteks and our inpatient rehab.
Hospitals.
And how does that compare most of the Medicare advantage race piggyback off of traditional Medicare.
So we're not seeing case rates were not seeing premiums it's basically it's predominantly.
As I said just.
During the same reimbursement that we see on traditional Medicare and I think Frank the other thing about that is.
Medicare advantage, obviously, unlike Medicare fee for services, it's going to have some variation geographically around the country we have.
Those rates are not standard and so we'll see different things in different parts of the country with different hospitals.
Okay I'll hop back in the Q.
Thanks, Rick Thank you and our next question comes from Peter Peter Costa with Wells Fargo. Your line is open.
If your line is on mute. Please UN mute your phone isn't speaker. Please ask your handset sorry about that.
Congratulations on the quarter nice job guys.
Good morning.
My questions are more on the balance sheet and interest expense Marty you've been kind of busy on the balance sheet. There can you tell us what do you where you think interest expense is going to settle out.
For the rest of year and then can you talk about the puts and the timing on when that's going to happen.
If thats going to happen.
Sure Pete.
As far as let me take a look at the or let me provide you with information on what we would anticipate on an apples to apples comparison.
The rifai that occurred at consensual will have a significant impact on an overall basis, just because the elimination of that second lien.
You know that annual interest.
On a number on a pre tax basis should be somewhere in the $15 million to $16 million range.
What we've seen is on the select our refinancing we basically took out the six and creates nodes.
Put in place $550 million of.
Six in the quarter, so there's not that much of a difference there.
There was another I think close to $200 million that was that went to our.
First lien so theres, a little bit of a spread there, but we added additional along or a nominal dollar amount take in consideration the put payments that we had coming up in.
For a second quarter of 2020, so there's really not that much of a savings on the select refinancing.
Okay and then in the winter itself you had the the 3.6 million of.
This transitional costs, so that that on right.
That's correct, yes, that's right if you take a look at I think the overall.
Tax the nominal tax amount was about $54 million and that you'd probably.
Just somewhere in that 50 $51 million range.
Okay and in the put to occur in the second quarter of next year.
Yes.
Yes based on the contract.
It's the first put.
Can start the mechanism that we have is basically on the second year anniversary of the U.S. healthcare to transaction, our joint venture partners can request.
Evaluation to be done.
And we anticipate that could take a couple of months to do that.
It would probably be in the second quarter.
Okay.
And then last question.
The drug screening is continued this quarter.
There was some thought that those would lead to more business down. The road have you have you seen any of that happened. So far in terms of the first struck screenings that you're starting to do.
We have seen some additional pull through of worker comp.
Business.
Because the employers have now come back to us when the drugs grades. So the answer to that is yes.
Okay, great. Thank you.
Thanks Pete.
Thank you and our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open.
Good morning, actually this is Joe and I got you filling in for Kevin today.
First question on your guidance, which now implied revenue actually will be.
Line about 5% quarter over quarter, an EBITDA will be down.
Almost $29 million so.
Actually I noted in the past seasonality with such that the EBITDA was down sequentially in Q4 of them can see but this year. This guidance implies more dramatic decline so just to clarify what's driving that.
Yes, you're joining you're going to have to walk us through those numbers again because.
I mean the.
We don't see could you say that again, so yes because of the of the.
Our guidance.
Revenue.
For 5.4 billion and year to date.
4 billion. So it implies 1.3 billion for fourth quarter. So it sequentially, it's a decline of 5% decline.
Q4.
From Q3 and something similar.
Adjusted EBITDA for since your midpoint of close to 93.
<unk>.
Million annual on a year todays 539.
So that implies.
54, so midpoint for Q4 to this down from 183 in Q3.
It's actually going up Joanna I suggest that maybe using the incorrect year today, so with the year to date EBITDA.
Okay.
Okay.
Yes, I mean once you've got to do is you've got to compare Q4 of 18 to Q4 of 19 and in both situations, it's going up.
All right, but I'm just looking at sequentially from Q3. This you for.
Joining on we don't take a look in the business sequentially, everyone knows the Concentrix business is down.
Seasonality.
Okay, all right. So I just wanted to clarify that okay.
And then I.
I guess also in terms of Q4, what does the guidance if steel for the that inpatient rehab final reclamation implications for that business. So.
That the revisions to the case mix with previously you said there would be positive so.
No way too you quantify that.
There is not no we basically said that.
The impact.
Is neutral to a little bit positive.
So I think would you would assume it's pretty much the same.
Okay.
And then the last question so.
Margin so were pretty good in.
All the segments I guess, Alex it seemed like impact that.
Somehow by the new hospitals.
So.
You are you are you are these margin second said, we would then we start this quarter for for this segment already the good on rate it seems like they were.
Doing pretty good.
Segment, and outpatient Oh contract.
It is a good revenue numbers I mean, I guess, there's some seasonality quarter to quarter, but.
Add to any upside you've seen these margin point at this quarter.
No I think if you go through each of our business segments.
Eltek margins were were down a little bit, but as we mentioned.
On the call that's predominately because the new hospitals that we brought on board or the acquired hospitals that we brought on board and their margins are our single digit. This time, they will grow into our margins, but those margins should be up.
For inpatient rehab inpatient rehab was up nicely where it's.
Over the 21% range.
But you're going to see fluctuations.
In the inpatient rehab is we continue to add new hospitals on board.
So I would think you could expect to see 19% to 20% margins on the outpatient at 15% I think thats, probably a pretty good rate.
And then on consent or rates I think can center rates are on an annualized basis and that 17% rate.
Okay.
Alright. Thank you so much it's very helpful. I'll go back Q.
Thank you and our next question comes from Justin borrowers with Deutsche Bank. Your line is open.
Hey, good morning, everyone and nice broad based performance this quarter so.
Just going looking at a few of the segments on the Eltek side. It looks like you guys added another hospital in the quarter.
And I'm, just trying to get a sense of.
What the kind of like what the underlying growth was versus.
Contribution from the new adds either on a volume or admission basis.
Yeah, Justin we did add.
Another hospital.
That is a non consolidating hospital.
So that will not come through the piano just under the equity line.
So that should answer your first question right and then the second one had what we've seen was a very nice increase.
On the inpatient rehab due to the.
To the new hospitals and the volume that was generated there in particular shands and.
Dignity on Las Vegas.
Okay got it and then just in terms of looking ahead.
What are we thinking about in terms of the.
Piece of the startup losses is that is there going to be similar to kind of what we saw in 2018 or are we looking at something a little more moderate.
And.
With regards to startup losses. The next time, we're going to see startup losses, we'll probably see some start just a little bit in Q2.
And then in Q3 and four we'll see some more and that's due to two banner hospitals coming on.
Yep.
Okay Yep. Thank you and then just in terms of the new hospitals and a critical illness. What are we thinking in terms of the ramp to get those back up to.
You know the core margins.
Is that is that is that a one years at a two year kind of.
Trajectory or how are you guys thinking about that.
Yes, how we're thinking about it is we would expect to see improvements in the next two to three month two to three quarters.
Okay.
Okay, and then just any thoughts on just the outpatient rehab is there's some seasonality to that is well or something like funky with.
With the high deductible plans I mean, it was just the volume was was.
Yes there.
Yes, there is seasonality with that business and typically it's down in the third quarter. So the third and fourth quarters, you typically see that volume down, but the operators did a terrific job.
So you know.
It was the margin was was terrific and we've talked to the operators and they said they think that can continue.
Okay, great. Thanks, so much I'll take the rest offline.
Sure. Thanks, Thank you and our next question comes from the line of AJ Rice with Credit Suisse. Your line is open.
Hey, everybody I know you had a good results across the board some of the companies have talked about how they did get a little bit of held from that extra business day have you sort of size.
How much that was a factor in and Ah in these volume numbers and performance.
Yes, Hey, Jay was about $1.5 million to $2 million.
Okay, that's across the entire company pretty much that's correct yes.
Alright, and you mentioned the U.S. held works synergies was.
Helpful any update on exactly how much of that you've realized at this point and do you have a.
Is there still more to come on that or are we did sort of a run rate at this point.
On through the third quarter, we've achieved most of the synergies we think there's probably an additional $3 million to $4 million over the next quarter too.
Okay.
And we think about the raised 100 million in revenue guidance about a 12 and a half million on EBITDA is that mainly reflecting the outperformance in relative to your internal forecast on Q3 or.
Have you made IZEA adjustment to your Q4 assumption in that updated guidance.
It's basically take in consideration would occurred in Q3.
Okay.
Great. Thanks, a lot.
Thanks Jay.
Thank you.
Next question comes from Frank Morgan with RBC capital markets. Your line is open.
Hey, My my follow up question was actually a asked but I will send some back.
On California Research Institute, obviously, a big source of the rate growth there, but just maybe a little more color like how much upside do you see left there where are the occupancy is today I know thats been up a big project and as it has a lots capacity, but that maybe how much upside DC left in that one thanks.
Well theres some upside Frank.
The the hospital is running very high occupancy. So are we will be very shortly capacity constrained. So.
And then but I think there's other opportunities out there and perhaps we can begin to develop some outpatient I know all that results from the inpatient of California Rehab Institute is really been the inpatient with modest amounts of outpatient. So I would say, we have a little bit of incremental opportunity or not.
In patient census, and then we'll begin to flip to use the market share that we gain too has been done in other markets to expand and snap on hopefully some other services.
Thank you.
Thank you and I'm not showing any further questions at this time.
I would now like to turn the call back to Mr. ortenzio for any further remarks.
No further comments, thanks, everybody for joining us and we'll look forward to updating you again next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may all day.