Select Medical Holdings Corporation Q1 2023 Earnings Call
Okay.
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2023 results and the Companys business outlook speaking today are the company's executive Chairman and co founder Robert Ortenzio, and the company's executive Vice.
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 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.
And the company.
No obligation to update these statements as circumstances change at this time I will now turn the conference call over to Mr. Robert Ortenzio.
Thank you operator.
Morning, everyone welcome to select Medicals earnings call for the first quarter of 2023.
I have done in our past calls I'll first provide some overall commentary on the quarter and then provide some detail on each of our four operating divisions. I'll, then turn it over at Marty Jackson and he'll provide further detail on the progress we've made.
When our labor costs for the critical illness recovery Hospital Division and also discuss some other financial metrics.
First I'd like to say by almost any standard we had a very good first quarter and I'd like to commend and thank all of our colleagues on countered and overcame many challenges over the past three years, while continuing to provide high level of quality care at a great patient experience within our facilities.
Last call, we noted encouraging signs heading into 2023 and.
And we continue to be encouraged with all four of our operating divisions exceeding prior year EBITDA this past quarter.
Overall revenue grew 4% and adjusted EBITDA by 31% compared to prior year Q1.
The impact of the restatement of the Medicare sequestration was a $9 7 million dollar headwind when comparing Q1 to prior year same quarter.
For the quarter.
Total company adjusted EBITDA was $214 $1 million compared to $163 8 million in.
In the prior year.
Our consolidated adjusted EBITDA margin was 12, 9% for Q1.
Paired to 10, 2%.
Prior year.
Our critical illness recovery Hospital division experienced the most significant increase in performance compared to prior year.
With 114% increase in adjusted EBITDA, along with a 13% reduction in their salary wage and benefit to revenue ratio.
The critical illness recovery hospital divisions, SWM beat our revenue ratio was 56, 3%.
It was within our target range of 55 to 57.
Along with an $87 million reduction in agency expense compared to the same quarter prior year.
In addition to labor improvements critical illness has had a lot of activity on the development front.
With three openings this past quarter.
In January we opened a distinct part units and our Springfield, Missouri Hospital and in February We opened 31 satellite and our current Toledo, Ohio Hospital.
March was also a busy month with the opening of another rehab distinct part units and our Pensacola, Florida critical illness recovery hospital as well as a new 50 bed hospital with a joint venture partner in Jackson, Tennessee.
There are two hospitals with JV partners expected to open in Q2 are located in Tucson, Arizona in Alexandria, Virginia.
We have also signed an agreement to acquire a 60 bed hospital in Richmond, Virginia, which is expected to close in June .
As previously mentioned.
We have an agreement to open our critical illness recovery hospital with a distinct part units in Chicago with our joint venture partner Rush University system for health.
In 2024, we're very excited about the tremendous improvement in our critical illness division and optimistic about the remainder of the year.
I'll now turn it over inpatient rehab.
Patient rehab Hospital Division continued their strong performance exceeding prior year revenue occupancy and adjusted EBITDA.
In March we acquired reunion rehabilitation hospital in Dublin, Ohio, with our joint venture partner and Ohio Health.
This hospitalized 40 private rooms, and has been renamed Ohio Health Rehabilitation Hospital.
We also entered into a joint venture partnership with CHS under which select will purchase a majority interest and a 36 bed in patient rehab hospital currently owned by CHS.
Fort Wayne, Indiana.
This transaction is expected to close after the second quarter this year.
As previously noted we have partnered with Atlanta care to build a new inpatient rehab hospital in southern New Jersey.
Contingent upon regulatory approval the hospital, we called the Bacharach Institute for rehab and is slated to open either in 2024 or 2025.
The development pipeline for inpatient rehab Division remained strong and we anticipate continued strong performance throughout this year.
Can sentra.
Concentric continued their exceptional performance exceeding prior year revenue EBITDA and patient volume.
This quarter concentric completed two transactions and continued to build its pipeline of future acquisition and de Novo projects.
The acquisition of Lehigh Valley Health networks, Occupational health business was a fold in of their five location into consensus recently opened two practices in Allentown in Bethlehem, Pennsylvania, which solidifies our position in this new market consensus also acquired the Connecticut occupations.
Ill health business of physician won a falling of the business.
From their 16, Connecticut locations into consensus statewide footprint.
<unk> has a strong pipeline of development opportunities, including four signed leases for de Novo locations and several additional acquisitions and de novo opportunities that are under consideration.
I'll now turn to outpatient.
As expected our outpatient rehabilitation division's performance improve surpassing prior years revenue adjusted EBITDA and patient volume.
The Division has 37 executed leases for de Novo clinics, which are scheduled to open throughout 2023.
There are also many additional opportunities that are under consideration.
Yeah.
At this point I will provide some further data points on each of our operating divisions.
Our critical illness recovery Hospital division experienced a 1% decrease in net revenue compared to prior year, primarily due.
Two decreases of less than 1% in both volume and rate, even though we experienced a slight decrease in volume we did see an increase in our occupancy from 71% to 72%.
Our case mix index decrease from prior year.
Which was 135 down to 128, but did increase.
From prior sequential quarter.
Nursing agency rates decreased 42% and nursing agency utilization decreased 53% when compared to prior year Q1.
Nursing agency rates decreased 10%, while nursing agency utilization remained consistent compared to Q4 2022.
Orientation hours increased 11% compared to prior year Q1, but decreased 17% compared to Q4 2022.
Nursing sign on an incentive bonus dollars decreased 29% from prior year, Q1, and 11% from prior sequential quarter.
Our adjusted EBITDA margin was 12, 9% for the quarter compared to 6% in.
In the prior year Q1.
Our positive reductions in labor contributed to the improvement in our EBITDA margin.
Finally in April long term acute care proposal for fiscal 2024.
Posted by CMS.
<unk> seen increase in the federal base rate of three 3% an increase in the high cost outlier threshold, we expect the rule to be finalized in August after the required comment period.
Our inpatient rehabilitation Hospital division.
Experienced a 5% increase in net revenue with patient volumes increasing 4%.
And our rate per patient day by 1%.
Our occupancy was 86% compared to 84% prior year.
The adjusted EBITDA margin for the inpatient rehab was 24% for Q1 compared to 19, 2% in the prior year.
CMS also posted their proposed inpatient rule in April for fiscal 2024, if adopted we would see an increase of three 3% in the federal base rate. We also expect this rule to be finalized in August .
After the required comment period.
Sure.
Concentrix.
Concentric experienced an increase of 8% in net revenue driven by a 3% increase in volume and a 7% increase in rate the.
The increase in rate is attributable to a 3% increase in our workers' comp net revenue per visit along with a decrease in our employer services mix, which has a lower level of reimbursement and work comp.
Consensus adjusted EBITDA margin was 25% for the quarter compared to 21, 5% in the same quarter prior year.
Turning to our outpatient rehab division.
This division experienced an increase of 9% and net revenue with patient volumes increasing by 14%.
Offset by a slight decrease in rate for Morro $102 net revenue per visit to $101 net revenue per visit compared to same quarter prior year.
The increase in volume compared to prior year were spread amongst multiple markets and was primarily attributable to improve patient access and clinic clinical productivity.
The decline in rate was primarily due to a decline in Medicare reimbursement along with the full implementation of sequestration when compared to prior year.
The outpatient division's EBITDA improved by $3 6 million compared to prior year, while their EBITDA margin was 10, 2% this quarter.
Versus nine 8% same quarter prior year.
Earnings per fully diluted share was <unk> 56 for the quarter compared to 37 per share in the same quarter prior year.
In regards to our allocation deployment of capital our board of directors declared a cash dividend of $12.05 payable on May 31.
To stockholders of record as of the close of business on May 18, 2023.
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.
This concludes my remarks at this point I'll turn it over to Martin Jackson to give you some additional financial details before we open the call up for questions.
Thanks, Bob and good morning, everyone.
Consistent with the prior two quarters I would like to provide some additional details with the significant progress we have made regarding labor cost within the critical illness recovery hospitals Division.
This past quarter, we had a sequential reduction from Q4 to Q1 and our total are in <unk>.
Agency costs and are an agency right.
Our utilization of agency remains the same.
The reductions we realized were 12%.
In agency costs, moving from $227 2 million in Q4 to $23 8 million in Q1.
And 10% in our agency rate moving from $92 in Q4 to $83 in Q1.
Our utilization of agency remains at 18% we.
We experienced a reduction in our agency rate as the quarter progressed from January to March 11% moving from $89 in January to $70 million in March.
While we slightly fluctuate it within the quarter and both are in agency costs.
And our utilization numbers.
This quarter, we had another decline in orientation hours compared sequentially to Q4 of 22% to 17% other.
Other areas, where we saw improvement.
Compared to Q compared to the sequential quarter.
Were reductions of 11% and nursing sign on an incentive bonus dollars too.
2%.
Hospital administration salaries wages and benefits.
Overall, our salaries wages and benefits to net revenue ratio improved 6% compared to the fourth quarter fourth quarter, we ran at 59, 8%.
And as you know we were down this quarter down to 56, 3%.
Within the target range that we had previously communicated.
Moving on to our financials in Q1 equity in earnings of unconsolidated subsidiaries were $8 6 million. This compares to $5 4 million in the same quarter. Prior year. The increase in earnings was the result of increased earnings and a few of our unconsolidated joint ventures.
Net income attributable to non controlling interest was $14 5 million. This compares to $6 8 million in the same quarter. Prior year. The increase was primarily due to improved performance of our consolidated joint ventures.
Interest expense was $48 6 million in the first quarter. This compares to $35 5 million in the same quarter.
Last year.
The increase in interest expense was primarily attributable to an increase in the one month LIBOR rate compared to Q1 of 'twenty, two as well as borrowings made under our revolving credit facility.
Interest rate on $2 billion of our term loans is capped at 1% LIBOR plus 250 basis points through September 30th of 24, which provides us with a level of protection protection and predictability moving forward in the current interest rate environment.
Yes.
At the end of the quarter, we had $3 9 billion of debt outstanding and $83 $7 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2 1 billion in term loans $460 million revolving loans.
$1 2 billion and this six and a quarter senior notes and $95 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of five five to seven times.
As of March 31, we had $134 million of availability on our revolving loans.
For the first quarter operating activities provided $51 4 million and cash flow our days sales outstanding or DSO was 54 days at.
At the end of March 23. This compares to 53 days March 22% and 55 days at the end of December two.
2022.
Investing activities used $69 $1 million of cash in the first quarter. This includes $58 9 million purchases of property and equipment and $10 2 million in acquisition and investment activity.
Financing activities provided $3 $4 million of cash for the fourth quarter.
We had $15 million net borrowings on our revolving line of credit.
And $10 $3 million of that barring on other debt.
These borrowings were offset by dividends on our common stock for $15 $9 million.
$5 2 million in net payments and distributions to non controlling interests.
As stated previously we did not purchase any shares under our board authorized repurchase program this quarter, but have the capacity to purchase an additional $400 million worth of shares.
This program remains in effect until December 31, 23, unless further extended or earlier terminated by the board.
We issued our business outlook for 2023 with expected revenues to be in the range of six five to $6 7 billion.
Expected EBITDA.
And the range of 780 million to $820 million.
And earnings per share to be in the range of $1 75 to $1 99.
Capital expenditures are expected to be in the range of $190 million to $210 million.
For 2023.
Operator, this concludes our prepared remarks.
And at this time, please open up the call for questions.
To ask a question. Please press star one on your telephone and wait for you to be announce to withdraw your question. Please press star one again please.
Please standby, we compile the Q&A roster.
One moment for our first question.
Our first question will come from the line of Justin <unk> from Deutsche Bank. Your line is open.
Okay.
Hi, good morning, everyone and congratulations on the quarter and reinstating guide.
Marty can you can you talk us through.
The progress you made in Hell tack in labor and it still it sounds like there is some.
Some training costs.
In this segment.
Maybe you can help us think through sort of how.
How the labor plays out through the rest of the year and then just more broadly any seasonality that we should take into account.
With the guide back in place.
Sure Justin.
I think the.
I think really the thing to point out here is that.
While we took a look at the SWM as a percentage of revenue, we provide a little bit of guidance.
At the beginning of the year.
We anticipated would be in that 55% to 57% range. Obviously, we came in right in the mid range there.
We.
To pay for them for the entire year it to be in that same range now there may be some fluctuations between the different quarters.
We'd anticipate quarter, two will probably be in that range, maybe a little bit higher in Q3, just because of.
Seasonality and then Q4, we should see it back to <unk>.
That same range.
Got it and then in terms of the development pipeline.
And maybe this one for Bob you guys have a lot of activity going on and it sounds like.
The pipeline is building up in the outpatient as well.
Is the plan still to do.
<unk> sort of organic and inorganic in and what's the landscape look like in an outpatient these days.
Well, if you look at some of our competitors.
The outpatient looks a little choppy I think from the outside because some companies have struggled.
We think the business is pretty stable, which is why you see us.
Pushing the de Novo projects I wouldn't look for a lot of M&A in the outpatient unless it's really small and really compelling in terms of.
Usually in markets, where we already have a pretty good presence I could see us doing some some one off for some small M&A activity.
The de Novo really seems to make sense for us right now as well as the margins and the staffing efficiency come back.
There's a lot of runway and a lot of white space in the outpatient the.
The sequestration is is a headwind.
On that as well as the Medicare reduction in the Medicare fee schedule for outpatient and I think thats, putting some pressure throughout the industry and I think for US it provides a bit of an opportunity Justin so.
We feel pretty good Marty and I have been careful about the allocation of capital.
We at this point in the company's history, we we do favor those.
Growth opportunities that are lower on the.
The capital side and outpatient de Novo outpatient certainly.
Fits that criteria.
I appreciate it I'll hop back in queue.
Thank you one moment for our next question.
And our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.
Hi, this is going to be able to Trs on for Kevin. Thanks for taking the question.
So I appreciate you, saying that you expect <unk> to be in the 55% to 57% range for the year.
Can you give us some color on what youre, assuming for labor costs in each segment.
We haven't done that before what we've done is we've provided for the critical illness recovery hospital because of the significant variations.
So.
You probably recall historically.
We've been in the SWM as a percentage of revenue in that 52% range and we saw that significantly increased during the pandemic growing one quarter I think we were up as high as 66%. Consequently, that's why we provided that information to make sure that all the investors had an understanding as to what that looks like.
All of the other business segments are relatively in that same there there we haven't seen any significant variation in those those entities. So at this point in time, we're not providing that information.
Yes, I wouldn't expect to see volatility in those others and those other business segments and we haven't.
In the near term.
And then my follow up is what are the swing factors to the low and high end of your EBITDA guidance.
Okay.
Well, yes, it's going to be the usual drivers, it's going to be probably occupancies in volumes is really I think the the thing is when we get as we kind of approached.
At least this quarter the stability on the labor side.
Then its and we can I think we have pretty good visibility on rate its really all going to be volume.
Yeah.
Awesome. Thank you.
Thank you.
Our next question.
Our next question comes from the line of Ben Hendrix from RBC capital markets. Your line is open.
Hey, Thanks, guys with the Kansas productivity headwinds that you saw an outpatient in the fourth quarter Unwinding I was just wondering if you could just talk about the dynamics there and the levers that you can pull to key productivity high in that segment.
Yes, Ben I think it's fair to say that Bob and I were very pleased with the improvement that we saw in the outpatient business.
As we as we talked it was really a function of.
Clinical efficiency improvements.
And.
I'll tell you the other the other variable there was very very strong growth.
One on volume.
So.
And we expect that to hopefully continue and what we've got to do is get just a little bit better we think that theres still some upside on the clinical efficiency side.
So.
We expect to see that through the balance of the year.
Just to follow up on Ken's Center.
The current economic backdrop, we just heard.
Noting that there could be some.
No economic impact on commercial membership through the year I just wanted to get your comments on the persistency Atkins Suntrust patient base kind of versus any economic concerns for the balance of the year.
Sure.
I think that we haven't had an earnings call in the last year, where at some point I didn't say that.
A really bad economic environment would be a headwind for concentrix and I have to repeat that but what we've what we found.
Found is.
That it's a little bit more nuance in that mean concentric has such a big platform now across the entire United States and they they have such a mix of volume from different industries and this was never more apparent than during the pandemic when they still saw a law.
Lot of strong business from those industries that did well during the pandemic. So you talk about the U S is in the Amazons and the Fedex those that were really busy but yet saw others that were a downturn. So today you look at the strength.
And the economy in the hospitality sector and in transportation.
And that drives it and then real estate and construction is hanging on so I guess, what I would say is it all depends on what the economic downturn looks light I can tell you that if for example on the extremes. If you see most of your job reductions and softness in the economy, that's coming out of the <unk>.
<unk> sector.
That is not a headwind for concentrix as long as other segments of the economy.
<unk> strong and <unk>.
Home construction transportation hospitality for now are good.
So it's been it's been strong so.
We don't see any cracks in the.
And the strength that concentrix all in the first quarter and so we remain optimistic so we have I think what we would consider a pretty good situation where.
Staffing costs are coming down.
Our hospital division, but yet the economic activity.
Throughout the economy is still driving Concentrix business. So.
We feel pretty good about that right now.
Thank you.
One moment for our next question.
Okay.
And our next question will come from the line of a J Rice from credit Suisse. Your line is open.
Hi, everybody.
Couple of quick questions here I think you said you were down 12% on agency costs sequentially and I think the number is roughly about $23 $8 million.
You make your guidance for the year now that you are going back out with EBITDA.
<unk> guidance are you assuming further improvement as the year progresses or is that sort of 23 eight something in that neighborhood sort of the run rate to anticipate.
Yes, a J it is in the run rate that we anticipate.
If we take a look at the business historically, we typically run somewhere in the neighborhood of a range of at the high 100, maybe a little bit north of that to a low of $80 million.
So okay.
So it really kind of fits that $23 eight kind of fits right in that range.
Okay.
And then obviously I think we all welcome.
The return to offering the EBITDA outlook.
If I look at your first quarter margin trends by segment.
Asking for a specific margin target for each segment, but generally speaking is there is that a good.
General ballpark.
Think about the rest of the year is there any.
Segment, there was particularly elevated or particularly depressed it still has.
Likely to move to get to where you are now targeting for the full year or is it pretty steady state from here on the margin by segment.
Yes, Jay.
There is as you know since you've been covering us for a long time, there is seasonality in the business and I think what Youll see is youll see second quarter is probably relatively.
The same as the first quarter.
Third quarter is typically.
And in the outpatient in particular, you'll probably see a little bit of a dip in the margin.
And then in the fourth quarter, you typically see a dip in the concentric margin.
And I guess also in the third quarter, we will see a little bit, but we expect to see a little bit of a dip in our critical illness recovery hospitals.
I am sorry, with that last one one quarter was that for the critical ones that would be the third the.
The third quarter.
Right.
But.
But.
Obviously, recognizing the seasonality aspects of it which are good and thanks for pointing that out having a normal seasonal year in a while.
But you are saying that from your perspective, the margin trend that you've shown across the businesses is sort of a normalized one and as you.
Think about the rest of the year, you would factor in seasonality, but not that either there is a division that is particularly outperforming in a meaningful way or underperforming in a meaningful way that would change is that the right takeaway.
Yes, we think so.
Alright, okay.
Okay. Thanks, so much.
Alright, Hey, Jay.
Okay.
One moment for our next question.
Yeah.
Our next question comes from Bill Sutherland from the Benchmark Company. Your line is open.
Hey, good morning.
Bob.
Is there any color that.
Would be helpful on the CMI change.
Critical illness.
So what you are talking about is the drop in CMI.
Yes.
Yes, I think that Thats really just a function of the types of patients we were receiving.
I don't think Theres I don't think theres any meaningful takeaway on that I mean that it's still a high case mix index in the industry and it will vary.
Barry a little bit based on the acuity of the some of the patients that will get in.
So no I wouldn't take anything away from that we report on it because it's continues to be strong and high for the industry, but.
That that change is I would not.
Anything meaningful about that.
And on the admissions growth, which was kind of flat.
How should we think about that going forward.
With regards to growth there I think you can anticipate.
Just overall numbers because of some of the.
Some of the additional.
Activity, we're having on development you can expect to see that ryzen batesville probably in that.
2% to 3% range is probably a good range.
Okay.
<unk>.
And then on top of that of course.
So.
Additional beds coming in.
Could I add a point or two I suppose.
Yes, I think thats right.
Okay.
Yes.
I'm curious.
When you look at your plans Capex focused on tech are there any initiatives you guys are.
In any of the four groups that are.
Particularly notable that could be in.
<unk>.
Down the road.
When you say, yes.
Well when you say out every time I'm thinking I'm, sorry, I'm thinking about everything from jest.
The.
More typical.
<unk> kinds of things to maybe some of the new frontier stuff in AI and so forth.
Well I think what we've really focused on really in the past year or two.
Is really adding automation to a number of our processes.
The use of <unk>.
Box and some of our more.
Some of the areas, where it's room in activity is typically going on so we've seen a significant increase in utilization of those bots and thats been very very helpful.
With regards to AI.
I think.
We don't really see a lot of we won't be out in front of that.
Stuff.
That most of the stuff that will focus on is for efficiencies and things that we can do that with the use of technology that will make say for example, each one of our hospitals more efficient and that we can.
Recognize the benefit of that over the over 137 hospitals and that will be our focus is that more immediate return, but in the area of AI, we won't lead on that.
I didn't expect.
That would be.
Top priority for you.
Okay.
<unk>.
Another aspect to it of course is virtualization.
Which I guess for you guys would just be an outpatient.
<unk>.
Okay.
Is that.
In the past you said that Hasnt really had a meaningful impact, but I'm just wondering.
So are you talking about telemedicine.
Can you talk about.
Catherine.
Yeah PT done virtually.
In conjunction with the program for.
In clinic.
Rehab as well.
I think what our clinicians have found and I think our patients also bill is that.
There was a usefulness to that during the pandemic when you had significant.
Infectious type of activities going on.
I think what we've seen is substantial reduction in the utilization of that.
Especially on the outpatient as it makes sense is.
For PT, you need physical a lot of it is physical manipulation.
So continue yes.
I would also say bill is the law.
Largest provider of PT and I believe that we are the largest employer of physical therapist in the country in fact.
I'm quite sure that we are we don't have our heads in the sand on on this issue that's been out there where we're watching it very closely and there are some companies out there that have promoted.
This idea that perhaps <unk> could be.
<unk>.
Provided virtually.
And I have to say that at this time.
With.
A focus on it we don't see it.
I could give you a lots of reasons why clinically.
But we won't be surprised by what's going on out there and we track it very closely.
But at this point in time I can tell you that.
We don't see the really strong viability of that except in limited very limited circumstance and that's just our opinion as from our vantage point of our position in the industry.
Yes no.
And some of it.
<unk> fairly recently.
It's.
These guys like sword in hand.
I'm surprised that the contracts are getting but.
That's.
It seems to be it should be more hands on at night and you are right.
That's it for my questions. Thanks, guys.
Great.
Thank you.
And with no further questions in the queue I will turn the call back over to Mr. <unk> for any closing comments.
No closing comments, thanks for joining us and thanks for your questions.
We'll look forward to updating you and if theres other questions feel free to reach out the Marty.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
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Okay.
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Okay.