Q3 2020 Select Medical Holdings Corp Earnings and Impact of the COVID-19 Pandemic Call
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the third quarter Twentytwenty results and the company's business outlook.
Speaking today are 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.
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's plans expectations.
Jeeze 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 call.
Let's call over to Mr. Robert Ortenzio.
Thank you operator, good morning, everyone and thanks for joining us for select Medical's third quarter earnings conference call for 2020.
Before I outline some of our operational metrics, let me start by reiterating one of things I said on our last quarter's earnings call, which is how proud I am.
Operational leadership in clinical excellence excellence I've seen throughout our organization.
During these unusual times, we continue to have a group of clinicians and support staff focusing our organization on the priority of providing the highest quality care, while keeping our patients and staff safe we.
We continue to learn adaptable and innovating to address the changing needs in our businesses and today's unique environment I couldn't be more pleased with both our operational and financial performance in the quarter.
I also want to make it clear that our third quarter results did not include any additional grant income in fact recorded a net reduction of $1.2 million of red income in the quarter.
Similar to the second quarter, we have included in our third quarter monthly revenue volume and occupancy statistics and our 10-Q.
And earnings release, which illustrates a very nice improvement in each of our business segments as our operational operating divisions rebound from below the line, we saw early and the cobot pandemic.
Our critical illness recovery hospitals realized a significant increase in our year over year Aachen occupancy rates growing from 67%.
In Q3 of 2019, the 71% for this past quarter.
This volume growth coupled with strong expense management contributed to the 470 basis point improvement in our margins in the third quarter in this segment.
Our rehabilitation hospitals have also experienced meaningful occupancy growth in the third quarter growing from a 75% occupancy rate in Q3 of 2000 1920, 82% occupancy rate this quarter.
The fact that we have some markets that have not fully rebounded from frequent kobin levels.
We continue to experience higher cost to treat patients yet we've been able to manage 250 basis point margin improvement in the third quarter to 23.7%.
While volumes continue to be our biggest challenge in our outpatient rehabilitation in Concentrix segments, we saw meaningful improvement in the third quarter in both segments.
Our outpatient rehab business has seen a significant improvement from the height of the locked down in April and May when we were seeing over 45% negative volume variance for the same period prior year.
In September our negative volume variance for our outpatient business.
Down to 1.6% compared to September of 2019.
Concentra was also experiencing a similar volume improvement with their September volume bearing down 4.3% from September 2019, and a high volume variance of 41.3% this past April.
By all accounts this was a terrific quarter for our company, our inpatient business segments saw a double digit growth and their combined revenue and both our outpatient business segment made great strides in regaining previously volume norms overall, our net revenue for the third quarter was up 2.2% to 1.4.
$2 billion in the quarter.
Net revenue on our critical illness recovery Hospital segment in the third quarter increased 12.2% to $519 million compared to 463 million in the same quarter last year patient days were up 8.1% compared to the same quarter last year with over 279000 patient days.
Net revenue per patient day increased 4.1% to 1845 per patient day in the third quarter case mix index was up from 1.26 in the third quarter of last year to 1.31 in the most recent quarter.
Net revenue our rehabilitation hospital segment in the third quarter increased 8.5% to $188 million compared to 173 million in the same quarter last year pace.
Patient days were up 7% compared to same quarter last year and net revenue per patient day increased 3% to $1775 per day in the third quarter.
Net revenue in our outpatient rehab segment third quarter declined 9.5% to $240 million compared to 265 million in the same quarter last year patient days were down 10% compared to same quarter last year was 1.98 million visits in the third quarter. Our net revenue per visit was $104 in the third quarter.
Four compared to $103 in the same quarter last year.
Net revenue shortfalls to prior years improvement each month during the quarter was September down only 2.5% compared to the same month last year.
Volume trended along the same lines as revenue for the same month periods when compared to the same as last year with visits down only 1.6% in September when compared to the same month last year.
Net revenue in our Concentrix segment for the third quarter declined 7.1% to $392 million compared to 422 million in the same quarter last year.
For the occupational health centers patient visits were down 10.3% 2.8 million visits in the quarter net revenue per visit in the centers with $221 in the third quarter compared to $120 in the same quarter last year.
Total company adjusted EBITDA for the third quarter was up 16.7% to $213.2 million compared to 182.7 million in the same quarter last year.
Our consolidated adjusted EBITDA margin was up with a 15% margin for the third quarter compared to 13.1% for the same quarter last year adjusted he adjusted EBITDA results for the third quarter included a net reduction of $1.2 million of grant income recognized from the provider really fun.
[noise] are critical in this recovery hospital segment adjusted EBITDA for the third quarter increased 55.2% to $88.8 million compared to 57.2 million in the same quarter last year like.
Adjusted EBITDA margin for the segment was 17.1% in the third quarter compared to 12.4% in the same quarter last year adjusted EBITDA and margin growth were driven primarily by our net revenue growth, which was partially offset by increased operating expense as a result of cove. It.
Rehabilitation Hospital segment adjusted EBITDA for the third quarter increased 21.4% to $44.6 million compared to 36.8 million in the same quarter last year adjusted EBITDA margin for the rehab Hospital segment was 23.7% in the third quarter compared to 21.2% and the same.
Quarter last year.
Adjusted EBITDA margin growth were driven primarily by our net revenue growth, which was partially partially offset by continued year over year shortfalls in our hospitals, any jersey, and South, Florida as well as Hopper higher operating expense as a result of coding.
Our outpatient rehab segment adjusted EBITDA for the third quarter was $30.6 million compared to 40 million in the same quarter last year adjusted EBITDA margin was 12.8% in the third quarter compared to 15.1% in the same quarter last year adjusted.
Adjusted EBITDA and margin decline continued to be adversely affect effect impacted by volume declines related to covis.
Our concentra adjusted EBITDA for the third quarter increased 3.7%.
Percent to $80.5 million compared to 77.7 million in the same quarter last year adjusted EBITDA margin was 20.6% in the third quarter compared to 18.4% in the same quarter last year, while we continue to experience volume shortfalls, we made significant reductions where possible in our operating expenses during.
In the quarter.
Which drove an improvement in both adjusted EBITDA and margin in the quarter compared to the same quarter last year.
Earnings per fully diluted share were 57 cents in the third quarter growing almost a 148% over prior year.
Same period earnings of 23 cents.
Adjusted earnings per fully diluted share was 56 cents per diluted share for the third quarter compared to 33 cents the.
For the same quarter last year.
Adjusted earnings per fully diluted share excludes the non operating gains and the related tax effects in the third quarter. This year and the loss on retirement of debt and related cost in the third quarter last year.
At this point I'll turn it over to Marty Jackson for some additional financial details and then we'll open the call up for questions.
Thank you Bob and good morning, everyone.
For the third quarter, our operating expenses, which include our cost of services in general and administrative expense.
$1.2 billion and 85.4% of net operating revenue.
For the same quarter last year operating expenses were $1.2 billion and 87.4% of net operating revenue.
Cost of services was $1.18 billion for both the third quarter of this year in the same quarter last year as a percent of net revenue cost of services.
Were 82.9% for the third quarter compared to 84.9% in the same quarter last year.
TJ space was 35.5 million in the third quarter. This compares to 34.4 million in the same quarter last year.
DNA as a percent of net revenue was 2.5% in both third quarter of this year.
The same quarter last year.
Bob mentioned total adjusted EBITDA was 2000 $213.2 million and adjusted EBITDA margin was 15% for the third quarter compared to total adjusted EBITDA of $182.7 million adjusted EBITDA margins, 13.1% the same quarter last year.
The adjusted EBITDA results in the third quarter included a net reduction of $1.2 billion in other operating income related to grant income recognized under the provider relief funds as you may recall, we recorded $55 million in other operating income in the second quarter related to these great.
Yes.
On September 19th HHS released it.
Those payment noticeable reporting requirements associated with these payments, which we viewed as a change to the previously issued guidance and caused us to change our great income recognition related to these payments.
On October 22nd HHS released another post payment notice, which again changed our view on grid income recognition of these payments, which will be reflected.
Orders.
Depreciation and amortization.
Was $50.1 million in the third quarter compared to $52.9 million in the same quarter last year, we generated $8.8 million in equity in earnings of unconsolidated subsidiaries during the third quarter compared to $7 million in the same quarter last year.
We also had non operating gains of $5.1 million in the third quarter. This year.
Interest expense was $34 million in the third quarter. This compares to $54.3 million in the same quarter last year.
The decline was the result of a reduction in variable interest rates.
As well as refinancing activity, we did during the second half of last year.
We recorded income tax expense was $31.6 million in the third quarter. This year, which represents an effective tax rate of 23.2%.
Compared to tax expense of $12.8 million effective.
Next rate of 22.6% in the same quarter last year.
Net income attributable to non controlling interest.
Were $27.5 million in the third quarter compared to $13.3 million in the same quarter last year.
The increase was in part due to the gain on the sale of the Concentrix Seebach business, which we sold in September 1st as well as improved performance in several of our inpatient rehab joint ventures for the quarter.
Net income attributable to select medical.
With $76.9 million in the third quarter and fully diluted earnings per share was 57 cents.
Turning to non operating gains and the related tax effects our adjusted.
Earnings per share was 56 cents.
The end of the third quarter, we had $3.4 billion debt outstanding is $640 million of cash from the balance sheet.
Debt balance at the end of the quarter included $2.1 billion in term loans $1.2 billion and six in the quarter senior notes and $75 million of other miscellaneous debt.
We ended the third quarter with net leverage for our senior secured credit agreement of 3.66 times.
This reduction in net leverage was the result.
Will result in 25 basis point reduction in our borrowing spread.
On our credit facility debt to LIBOR plus 2.25%.
Operating activities provided $134.5 million of cash flow in the third quarter.
Vesting activities provided $18.4 million of cash in the third quarter.
Provision of cash was driven by gross proceeds from the sale of businesses.
70.9.
A million dollars offset by 34 point.
$3 billion in purchases of property and equipment.
$2 million in acquisitions and investment activities during the quarter.
Financing activities used $22.9 million of cash in the third quarter or.
Our total available liquidity at the end of the third quarter was over $1.1 billion, including $640 million of cash and close to $500 million revolver availability under the selected consumer credit agreements.
Additionally, in our earnings press release, we included our updated business outlook for the calendar year 2020, we expect net revenue to be in the range of $5.44 billion to $5.5 billion, we expected adjusted EBITDA to be in the range of $745 million to $765 million.
We expect fully diluted earnings per share to be in the range of.
$1.65 cents to $1.75 ounces.
Earnings per share.
1.6, $1 to $1.7 million, which.
<unk>, which excludes the non operating gains on sale businesses and the related tax effects.
This concludes our prepared remarks and at this time, we'd like to turn it back over to the operator to open the call for questions.
At this time to ask a question you will need to press star one on your telephone keypad to.
To withdraw your question press, the pound or the Heskey. Please stand by while we compile the Q and a roster.
Your first question comes from Frank Morgan with RBC capital markets.
Good morning.
Obviously, we appreciate the guidance for the for the fourth quarter, but I'm just again in the details about the monthly trends in so far this year, but just curious do you have any initial color on maybe how October trends are looking across your business.
That'd be my first question.
Yes, Frank we do October is trending nicely on the inpatient side, we're seeing a little bit north of an 8% growth on a year over year basis for both the.
The Elteks, India herbs, and we continue to see those trends on the outpatient side.
Got you and I guess in light of the trends that you're seeing when we think about no understanding you're not giving guidance for next year yet but.
Would it be fair to you say the second half of the year sort of as a starting point when we build our 22.
2021 numbers and then my last question is.
When I when I think about the strong volume recovery Youve seen really what do you attribute that to is that is that just mostly cobra business or not.
Noncovered business, just any color around what's driving that growth. Thanks.
Well, let me just respond to the or the last part of your question.
While we are seeing koby patients the.
The majority of the increase is really.
Part of this whole co bid.
Pandemic that we've experienced in the relationships.
We continued to improve with our referral sources.
I think if you talk to our operators. They will tell you that our referral sources now understated that we can handle patients that are critically.
Complex patients that are very very well and so we've really seen that expanded during.
This third quarter yeah.
And Frank is.
The way, we think about next year I mean in our budgeting process in our forecast projections internally that we're doing next year is a tough year to do because I think there is a lot of uncertainty out there I mean, I could give you a number of alternate.
No ideas about what it might look like I mean, if we have a real acceleration of the pandemic as some people are calling for between now and the end of the year when will the carryover into into the first quarter. The first half of next year I guess, it could and in that scenario, we probably have a little bit of it.
Different thinking on the businesses. That's what we've seen is that if while we're still in the pandemic. Our outpatient businesses are recovering as people are if I can use the term learning to live with the virus as the virus is around we're going to continue to see strength as we've seen on the m.
Patient side of the business, if we had absolute lockdowns in some markets than you're obviously going to see a bigger reduction on the outpatient so Mike My best guess is going to be somewhere in between the the I. I. My judgment is that the pandemic will still be around through the first part of next year.
As we as we get closer.
Closer to a vaccine, but on the other hand.
It's hard to envision the absolute strict lockdowns that we saw back in.
In March and April so that's a it's not a direct answer to your question, but that's just how we're thinking about our forecasts and projections that were looking at for next year.
No that's very helpful and very consistent with a lot of the operators are seeing thank you.
Your next question comes from Justin Bowers with Deutsche Bank.
Hey, good morning, everyone.
I'll just continue on on Franks question and ask it a little bit differently, but if we think about kind of the relationships that you guys have is.
Enhance store established and the Eltek business as a result.
Pandemic and.
If we go back to a quote unquote normalized environment.
You know next year.
And we think about kind of 2019 is a starting points and the L. tax you know is it fair to think about kind of growing like the base business or you know increasing the occupancy from that starting point.
Given you know all that's transpired this year.
No I'd, probably encourage you to think about it a little differently I would think of 2020 as this as the starting point and you could go you know flat or up or down on that I mean, I do think and I said this on our last call that the the position of our critical in this recovery hospitals.
In the continuum of care in most of our markets.
I believe will be enhanced.
And has been enhanced either with or without Cove. It up and I think that is just a reflection on the role that has played and the higher visibility of our type of critical illness recovery Hospital.
In our local markets, we have deeper relationships than we have and we have.
Greater confidence.
In us by more referral sources that we had in 2019 and I do not think that that will change now if there are fewer I see you patients in those hospitals, we may see a less volume I mean, I'm not saying that that's not possible, but I don't think that we're thinking about a return to the 2000.
Chain and in fact, we are getting request to accelerate some of our development efforts in some markets.
With our critical on this recovery hospitals.
As a result of I think a greater recognition of the important role that it plays in the continuum of the critically ill patients.
Oh, great well you just you just answered my follow up question as well in that response [laughter] I'll move on it I just I'm, just thinking about kind of use of capital and and the balance sheet I mean, the growth and the EBITDA the cash generation I mean, I'm I'm looking at you guys kind of go.
We now have so for no leverage my role almost sustainably in 2021 is that you know.
It is.
Is that kind of.
The trajectory we're on and then you know how are you guys thinking about kind of capital over the next like say 12 12 to 18 months.
Yes, Justin this is Marty.
Certainly.
As we indicated for the third quarter were at 3.66 times leverage right now.
We will go down I would anticipate to probably in that 3.5 range by the end of the year.
And then next year all of next year, we will be under four times.
No as you probably know.
The feds have changed how the.
How the payment for advanced payments is going to occur we will be paying back some of that money next year by our estimate is probably in that $280 million.
380 units outstanding we will still be below four times during that period of time.
And in terms of use of capital.
Next year I mean, we think will continue to grow and invest in.
Our outpatient not significant significant amounts of capex, but I think where our plan is to continue to add clinics, either de novo or small acquisitions, we'll do some more development in the critical illness.
[noise] area concentric, we'll continue to add add clinics I wouldn't look for any major use of capital in M&A in 2021, I think we'll continue to focus on our plan, our four platforms and driving margins and volumes and watching that the.
The pandemic to make any adjustments to the business that we need to so.
I wouldn't look for anything major and then obviously in 2022, our plan is to make the final payment to bring in the minority interests in concentric through the put call mechanism. So we our plan is to bring to the balance of the minority interest and consent or in early 2022.
And Justin along with.
With that.
The acquisition of the balance of the JV ownership, we anticipate that will be probably in the $600 million range.
And as such most of that if not all of that cash will be on the balance sheet.
Got it.
Alright, understood well, thanks, a lot and well done I think the results speak for themselves.
Thanks, Jason.
Your next question comes from Kevin Fischbeck Bank of America.
Great. Thanks, I guess just wanted to see if we could follow up little bit more on the on the 2021 commentary.
Obviously, a lot of puts.
And takes as far as yeah cares money this year and sequestration in this year.
Potentially being a headwind for next year, but then you know as you mentioned the outpatient business is ramping up.
Nicely I mean, do you think that you could actually grow EBITDA off of these levels from from here or is it still too hard to make that determination into next year.
Yeah, I think I think that we could give him the right set of circumstances I think thats. It is it is possible.
Okay.
And you mentioned kind of a development pipeline on the critical.
This recovery hospitals, I guess I haven't historically, given a lot of credit to the growth in that business can you talk about how you think about the long term growth.
Growth outlook on that on that business once we get the kind of a normalized cobot outlook.
But as you as you might know Kevin we have a lot of partnerships around the country joint venture partnerships that we've done that over the last 10 years and most of those were led with inpatient rehab a partnership.
Dips, but as we've become more embedded in those systems and they tend to be some of the largest systems in the country and are.
Our goal is to expand offerings and so we're we're.
We think that we have opportunities in markets, where we already have a presence to add on additional service and in those markets, where we have a.
Rehab joint ventures were looking to take advantage of perhaps adding some law.
Long term acute care hospitals are are critical in this recovery hospitals in those markets. So we think thats an opportunity for us.
I guess ill [laughter], Kevin I think Theres also opportunities to expanded.
Beds with existing Elteks that we have so [noise].
It's not just the new hospitals that Bob had mentioned, but it's also expansion of Splunk exist.
Existing bed capacity.
And I guess when you guys did the the Earth JV that took a little while to kind of get that going and now it's going to get a pretty nice clip I mean, when do you think we might be able to kind of see that.
Capacity start to start to show up in the numbers.
Yeah, well, let you know that the numbers speak for themselves.
Okay. So there's no like timing as far as when like new hospitals might be coming on line.
Well, we we we don't announce them until we've actually signed I mean, you you may have taken notice that recently, we announced a new partnership with Rush University in Chicago, We think thats going to be a very big and very significant deal and that includes both rehab critical in this recovery hospital and outpatient.
So you know we have announced those and I think our expectations, we will continue on ounces.
Okay.
And just maybe last question I guess I think the Earth growth is likely to be quite strong I got pretty good visibility to that but I guess trying to understand how you think about the long term growth on you can post normalized koger.
Long term growth rate for the outpatient rehab side and the Concentrix side, how should we think about.
It was good this is a long term growth opportunity. Thanks.
Yes, I think on the outpatient side, we expect to continue to see it.
The 6% to 7% top line growth on the outpatient on a post Corbett.
I mean, we anticipate that we will be able to bring back all the volume we had before you saw that in September we were.
Negative variance of 1.6% so the operators have done a terrific job getting that.
Getting that volume back.
And we think that in a post pandemic world there'll be opportunities both on the Concentrix side any outpatient side for us to add in markets, where we currently have a presence and perhaps enter some new markets on both concentrix side and outpatient. So we think the future is very bright and both of those businesses.
Great. Thanks.
Your next question comes from Bill Sutherland with the benchmark company.
Hey, Thanks, good morning terrific job guys.
I wanted to.
Rob you mentioned.
On on rehab hospitals I I had in my notes that you might be opening a couple this quarter.
Yes, Bill we are we've got a banner.
This opened up where we opened up one they started taking patients I think it was last month and then we will open up.
Another hospital actually this week.
So yes.
Two quick tries to.
Will there be a ship should we think about startup expenses Marty.
It's a non consolidating bill so you will see that the only through equity in earnings.
Okay.
The pressure that you called out.
In South Florida.
New Jersey Rehab hospital.
I'm sure that's got to be cobot related Q.
Do you sense, it's just.
Is there any other color you want to provide or.
During a sense of their recovery.
Yeah. The the the operation South Florida has recovered fully that was a factor this past quarter, but was mitigated toward the end of the quarter and I would say that that market is is back to being one of our our strongest.
And then on the other one we call it the other one we called out was on New Jersey is recovering <unk> I would say not fully back to to the levels that it has been historically, but try.
Trending in the right direction.
So I would characterize Florida as fully recovered and and Jersey.
Better, but a little ways to go but not material.
Okay. Thank you and then on the adjusted EBITDA margins, which you just spectacular given [noise].
Backdrop, yes is it Marty is not a good anchor for thinking about 20.
21.
Could you know, there's so many puts and takes but.
There's there's nothing specific to the quarter the circumstances.
I I know length of stay is up but.
In the hospitals, but.
I'm just kind of talk.
Figure out.
If there was anything here that's it.
It's unusual that we can't extrapolate from.
Yeah, Bill I'll tell you that.
Most of the EBITDA margins or find the one I would really focus on is can sentra.
North of 20% margins, we seek is.
Out of the norm and they do have some they were able to pick up some.
Some pretty high margin business.
During the third quarter.
We anticipate that.
What we've talked about before is in that 17% to 18% range. We think that that's a good number for concentrix okay. Okay.
Okay. That's helpful. Thanks, and then finally I'm curious you know given all the.
Okay shifting many such you many many sectors the more virtual types of care.
And I know you've had to use that in outpatient rehab not I'm not sure about concentra.
Do you think that's here to stay for your model, Bob and and it was out of that that does not permanently.
Improve the cost structure.
You have.
Well, we did see significant increases in April and May or tell a rehab until a health both on the outpatient side and on the consumer side.
That has substantially diminished over the past couple of months I think we were that we were at 16 1700 visits ER visits a day and Thats down in the three to 403.
Three to 400 range.
Now so you know.
We think that would you would you really expect to see is people want to come in and they want to see the service.
Jay Cutler.
Physical therapy is a lot of it's a lot of physical manipulation.
So it's not a it's not a natural you're right.
Okay, gentlemen, thanks very much.
Thank you.
Your next question comes from 18 Rice with credit Suisse.
Hey, guys. This is rob mood on for AJ Rice.
Hi, great quarter I, just wanted to ask quickly I see you in Q4, you kind of have a step down in EBITDA in your guide and a little bit of a step down in margin is most of that coming from Concentrix. The seasonality and then also it seems like in Q3, you've you've really help.
Go on and on the cost front just.
As as a total company could you maybe discuss a few of the puts and takes that that are the cost initiatives that you've been able to implement how how sustainable some of those are going forward.
Okay sure.
In answer to your first question, yes, the the step down really is associated with the fourth quarter of concentric.
Margins always drop in the fourth quarter is just a seasonal issue.
With regards to costs.
A lot of that has to do with.
Operators have just done a marvelous job managing expenses.
And you know one of the things when you take a look in particular on the inpatient side.
When you see increased.
Oh volume occupancy rates are going up.
You know a lot of those incremental dollars, you'll see you know because the fixed costs are covered.
You are seeing some very very nice expansion in the margins because of that number two is it just seems you know when we take a look at salaries wages and benefits as a percentage of revenue service base wages and benefits were down.
Definitively.
In a lot of that again, we think has to do with increased volume.
Great and then.
Just as a follow up I saw was the in the quarter you had 71 billion from cash from asset business sales I think this relates to the conceptual department of veterans affair community based outpatient clinics. So.
Divesting if some of these assets is that also helping margins at all there.
No it really wasnt I mean, the margins. We're we're finding that business. It was just a it was a small business that it's not really something that we were we were focused on expanding.
Gotcha understood. Thank you guys appreciate the time.
Thank you.
There are no further questions at this time I will turn the call back over to you.
Thank you no concluding comments thanks for join.
Joining us and well.
Look forward to updating you next quarter.
[noise] [noise], ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].