Q2 2023 Select Medical Holdings Corporation Earnings Call
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the second quarter 2023 results and the business company business outlook.
Speaking today are the Companys 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 the call will open for questions.
Before we get started we would like to remind you that this conference may contain forward looking statements regarding future events or future financial performance of the company, including without limitation statements regarding operation 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 I would now like to turn the conference over to Mr. Robert Ortenzio. Please go ahead Sir.
Thank you operator, good morning, everyone welcome to select Medicals earnings call for the second quarter of 2023.
Before providing detail on each of our four operating divisions.
I'd like to provide some updates and commentary.
As you are aware, we announced our preliminary estimate of certain financial results for the second quarter on July 19 in connection with plans to launch a refinancing of some of the companies that we.
We completed our refinancing on July 31.
And Marty Jackson will provide further comment further details in his commentary.
Sorry, I wanted to highlight that on August 1st U S News and we'll report released its annual best hospitals way.
Pleased to share with you that our Kessler Institute for rehabilitation Hospital.
Six of our partnered inpatient rehab hospitals.
Among the nation's best for 2023 2024.
Three Kessler Institute for rehabilitation.
Number 21, California Rehab Institute.
Number 22.
Scott and White Institute for rehabilitation in Dallas.
Remember 34, Ohio Health rehabilitation hospital in Columbus.
Remember 38, Cleveland Clinic Rehabilitation Hospital number 46 try health rehabilitation hospital in Cincinnati and number 48 banner rehabilitation hospital in Phoenix.
This marks the 30 <unk> consecutive year that Kessler Institute has been named among the nation's best hospitals for rehabilitation and the third year in a row for Baylor, Scott and White, Dallas, and Ohio Health.
This recognition is a testament to our teams and the attention to quality quality at each of these institutions.
On the financial front, we had another strong quarter with all four of our operating divisions exceeding prior year revenue.
Overall revenue growth overall.
Overall revenue grew 6% and adjusted EBITDA by 21% compared to prior year Q2.
The full reinstatement of Medicare sequestration, and cares Act grant and cognate received in Q2 prior year were headwinds when compared to prior year same quarter financial performance and the amount of $4 8 million for Medicare sequestration and $15 1 million.
Cares grant income.
For the quarter.
Total company, adjusted EBITDA was $219 $5 million compared to $181 million.
In the prior year.
Our consolidated consolidated adjusted EBITDA margin was 13, 1% for Q2 compared to 11, 4% in the prior year.
Excluding grant income and the Medicare sequestration impact of Q2 prior year or prior year, adjusted EBITDA was $161 $1 million with a 10.2% margin.
Our critical illness recovery Hospital division experienced the most significant increase in performance compared to prior year with a 227% increase in adjusted EBITDA, along with an eight point reduction in their salary wages and benefit to revenue ratio.
CRH Division SWM beta revenue ratio was 56, 7%, which was within our target range of 55% to 57%.
Along with a $43 million reduction in agency expenses compared to same quarter prior year.
Consistent with last quarter, Marty Jackson will provide additional detail.
Regarding critical wellness sustain labor improvements within his commentary.
<unk> had a lot of activity on the development front with three more openings this past quarter in may.
We opened two hospitals with joint venture partners located in Tucson, Arizona in Alexandria, Virginia.
In June we're off.
So acquired a 60 bed critical illness hospital in Richmond, Virginia.
We incurred $5 1 million in start up losses in our new critical illness recovery hospitals this quarter.
As previously mentioned, we have an agreement to open our critical illness recovery hospitals think part rehabilitation unit in Chicago with our joint venture partner Rush University.
System for health in Q2 of 2024. There is also a strong pipeline of additional opportunities for growth that are under consideration.
The inpatient rehab Hospital division continued their strong performance exceeding prior year quarter revenue and adjusted EBITDA.
As mentioned in Q1, the development pipeline remains strong with a 36 bed in patient rehab hospital in Fort Wayne, Indiana expected to close in Q3.
With our joint venture partner CHS.
Also as previously noted we have partnered with Atlanta care to build a new rehabilitation hospital in Southern New Jersey.
Contingent upon regulatory approval the hospital called Bacharach Institute for rehab and is slated to open in either 2025 or 26.
The pipeline for growth is strong and we anticipate strong performance throughout this year.
And sentra continued their exceptional performance exceeding prior year revenue EBIT.
EBITDA in patient volume.
During the quarter concentric completed two transactions.
The acquisition of Holland Meta Center in Michigan include a Standalone clinic location as well as a mobile unit used for episodic events, extending our footprint approximately 30 miles from Grand Rapids into nearby Holland, Michigan market and.
<unk> also acquired one source occupational medicine transaction that resulted in a fold into the practice.
So our nearby clinic located in Tulsa, Oklahoma.
And center has four signed leases for new de Novo locations that are expected to open in Q4, 2023. Additionally, theres a strong pipeline of acquisition and de Novo's that are currently being evaluated.
This quarter, our outpatient rehabilitation division surpassed prior year prior year revenue and patient volume outpatient entered into a joint venture partnership with Atlanta care, and our South Jersey market contributing 13 clinics.
Where we are the managing partner and majority owner Division.
Division added eight clinics this quarter via the acquisitions and de Novo.
The pipeline for additional growth remains strong with 27 executed leases for de Novo clinics, which are scheduled to open in the second half of 2023. There are also many additional opportunities for acquisitions and de Novo development that are under consideration.
At this point I'll provide some further data points on each of our divisions.
Critical illness recovery Hospital Division experienced.
Increases of 5% of net revenue, 2% and occupancy rates and 227% and EBITDA for us extremely successful quarter, our occupancy was 68% up from 67% our case mix index decreased from prior year of $1 two nine to $1 two six.
Nursing agency rates decreased 31% and nursing agency utilization decreased 44% when compared to prior year Q2.
Nursing agency rates decreased 7%, while nursing agency utilization remained consistent compared to Q1 2023 orientation hours decreased 14% compared to prior year Q2, but increased 24% compared to Q1 2023, as we continue to add full.
Time nurses.
Nursing sign on an incentive bonus dollars decreased 35% from prior year Q2, and 25% from prior from the prior sequential quarter.
Adjusted EBITDA margin was 11, 4% for the quarter compared to three 7%.
In the prior year Q2 are positive reductions in labor contributed to the improvement in our EBITDA margin.
On the regulatory front. This week CMS issued the final <unk> rules for fiscal year, 2024, which will be effective October one of this year. The final rule includes a three 6% increase in the federal base rate, which is higher than the proposed rule the high cost outlier threshold increased by 21350.
$5, which was much lower than the increased outlining the proposed rule of 55800, 55860, <unk> DRG relative weight and expected length of stays were also updated in the final rule.
Our in patient rehab Hospital division experienced a 5% increase in net revenue with patient volumes and volumes, increasing 1% and our rate per patient day by 4%.
Occupancy was 84% compared to 86% prior year and the adjusted EBITDA margin for inpatient rehab was 23% for Q2 compared to 21, 8% in the prior year.
Last week CMS also issued the final inpatient rehab rules for fiscal 2024, which were effective October one final rule includes a three 7% increase to standard payment amount, which is higher than the three 3%, including the proposed rule.
Cost outlier threshold increased $2103, which was slightly less than the 2836 decrease in the proposed rule the CMG relative weights and average length of stay values were also updated in the final rule.
Ken Sentra experienced an increased in 6% of net revenue driven by 2% increase in volume and a 6% increase in rate.
Our work comp net revenue per visit increased by 2% in our employer services rate increased by 9%.
<unk> adjusted EBITDA margin was 21, 5% for the quarter compared to 21%.
And the same quarter prior year, our outpatient rehab division experienced an increase of 6% net revenue patient volumes, increasing by 11% offset by a decrease in rate from 103 net revenue per visit to 100 net revenue per visit compared to same.
Prior year, the increase in volume compared to prior year was spread amongst multiple markets and was partially attributed to organizational initiatives focusing on improving clinical productivity via patient access.
Klein in rate was due to a decline in outpatient Medicare fee schedule full implementation of Medicare sequestration, payor mix and variable discounts when compared to prior year.
Outpatient division's EBITDA declined slightly by 751000 compared to prior year, while the EBITDA margin was 10, 8% this quarter.
Versus 11, 7% same quarter prior year.
Earnings per fully diluted share were <unk> 61 for the second quarter compared to <unk> 43 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 September one 2023 to shareholders of record as of the close of business on.
August 15th 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.
Concludes my remarks, and with that I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.
Great. Thank you Bob good morning, everyone.
Consistent with the prior three quarters I would like to provide some additional details with the progress we continue to make regarding labor cost with critical illness recovery Hospital Division.
This past quarter, we had a sequential reduction from Q1 to Q2 and our total are in agency costs.
And our and agency rates.
Utilization of agency remained consistent.
The reductions, we realized were 7% and the Orange agency costs.
And 7% in the agency are in.
Hourly rate from $83 down to $77.
Our utilization of agency remains at 18% for the past three quarters.
We experienced slight fluctuations in our agency rates and cost as the quarter progressed with the rate fluctuation from April to June of 1% from $79 78.
Our in agency costs of $7 $9 million in April $7 $4 million in may and $6 $7 million in June .
<unk> utilization was 90% in April and May this dropped to 17% in June .
Other areas, where we saw improvement compared to the sequential quarters were reductions of 25% in nursing sign on and incentive bonuses.
While our hospital administrative <unk> remain relatively consistent with Q1 this.
This quarter, we had an increase of orientation hours compared to sequential.
Compared sequentially to Q1, 'twenty three of 24%.
In the hours remained relatively consistent during the quarter.
Average of $40000 per month.
For all our SWM to net revenue ratio increased slightly from Q1 to 56, 7% up from 56, 3%.
Which is remaining within the targeted rate that we previously had communicated.
Moving onto our financials in Q2 equity and earnings of unconsolidated subsidiaries.
Were $10 5 million. This compares to $6 2 million in the same quarter prior year net.
Net income attributable to Noncontrolling interest was $13 6 million compared.
Compared to $11 1 million in the same quarter last year.
Interest expense was $49 million in the second quarter. This compares to 41 1 million in the same quarter prior year.
The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q2.
2022.
At the end of the quarter, we had $3 $8 billion of debt outstanding.
$101 $2 million of cash on the balance sheet our.
Our debt balance at the end of the quarter included $2 1 billion in term loans.
$345 million in revolving loans.
$1 2 billion and our sixth in the quarter senior notes.
$77 1 million of other miscellaneous debt.
We ended the quarter with net leverage of our senior secured credit agreement of five six times.
As of June 30, we had 200 close to $250 million of availability on our revolver.
As Bob previously noted we completed.
A refinancing transaction on July 31.
This year.
We amended and extended our $2 $1 billion term loan b.
Secured loan with along with increasing our senior secured revolving credit facility $60 million from $650 million up to $710 million.
Both the term loan and the revolver.
Have been extended two years and will mature on March six 2027, with an early springing maturity of 90 days prior to the senior notes maturity.
Triggering at more than $300 million.
Of senior notes remains outstanding at May 15, 2026.
The refinancing term loan is priced at Super plus 300.
Bps with a step down of 25 basis points, if our net leverage ratio falls below four times.
The revolver has been priced at <unk>, plus 250 with the step down of 25 basis points of net leverage ratio falls below four times.
It is important to note that the 1% silver interest rate cap on the $2 billion of our term loans will remain in place through September 30 of 2024.
Our $1 2 billion or 6% quarter senior notes will mature on August 15 2026.
For the second quarter operating activities provided.
Most to $235 million in cash flow.
Our days sales outstanding or DSO was 52 days at June 32003, compared to 53 days at June 32.
2022, and 54 days.
As of March 31, 23.
Investing activities used $66 $8 million of cash in the second quarter. This includes $59 5 million in purchases of property and equipment and.
$7 3 million in acquisition and investment activity.
Financing activities used $156 million of cash for the second quarter.
We had $115 million in net payments on our revolving line of credit.
$14 3 million of net payments on other debt and $15 9 million in dividends on our common stock.
David previously.
We did not repurchase any shares under our board authorized repurchase program. This quarter. The program remains in effect until December 31, 23, unless further extended earlier terminated by the board.
We are adjusting our business outlook for 2023 with expected revenue to be in the range of $6 $5 5 billion to $6 7 billion.
As expected adjusted EBITDA in the range of 795 million to $825 million.
And our fully diluted earnings per share to be in the range of $1 77 to $1 94.
Medical expects adjusted earnings per share to be in the range.
Of $1 86 to $2 <unk>.
<unk> earnings per share excludes the loss of early retirement of debt and its related costs and tax effects.
Capital expenditures are expected to be in the range of $190 million to $210 million 423.
This concludes our prepared remarks and at this time, we'd like to turn it back over to the operator to open the call up for questions.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
One moment for your first question. Please.
Okay.
Our first question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.
Hi, good morning, everyone.
Just wanted to clarify one thing on the taxes.
He is the next.
De Novo.
Or JV coming online in 2024.
Or is there anything left in the rest of the year.
This year.
Just just rush is the one that's that we have that would be next based on deals that we've announced so.
Anything else that we would that we would do there would be before that we've not we've not announced yet.
Got it and then just on outpatient.
Given the landscape over the last.
You are so.
Is the plan for you guys sort of stay the course with your.
The JV approach and sort of building around your existing or is there any appetite to do something.
Greater scale.
I would say at this point there is no appetite to do anything on a broader scale, we feel really good about our opportunities for creation of value by adding incrementally in markets, where we have a presence and also snapping outpatient onto.
Our many JV joint venture agreements that are growing pretty rapidly. So I would say to you that we are probably not in the market for a a bigger transaction in the outpatient space.
Okay. Thanks.
Marty.
Healthy free cash flow generation.
In the first half, especially in Q.
How are you guys thinking about capex in the second half and then just given the attractive spread.
And T bills versus the recap.
How should we think about the deleveraging going forward through through September 24 does that just more of a function of.
The EBITDA growth doors or is there going to be some pay down to along the way.
Yes, Justin.
With regards to.
Bob had talked about the use of our free cash flow, we anticipate that we will continue to see.
Dollars on our revolver come down and that should be okay.
Going into 'twenty four.
By the end of 'twenty for that should completely be eliminated any cash.
<unk> on that revolver.
No we will continue to pay down debt.
So you can expect to see leverage come down not only from increased EBITDA, but also a reduction of debt.
Okay understood.
<unk>.
Yes, I'll hop back in queue. Thank you.
Thank you.
Our next question please.
Next question comes from the line of Ben Hendrix with RBC capital markets. Your line is now open.
Thank you very much just a follow up question on your <unk> comments definitely glad to see that outlier threshold come down from the proposal must still seems like a pretty significant hike. How are you thinking about the financial impact of that to your critical illness segment from <unk> to <unk> and then into next year. Thank you.
Yes, there's no doubt that that increase in the high cost outlier.
Number will have we.
We will certainly have some some headwinds there, but there are certainly ways to mitigate that and that's what we're focused on right now.
Okay, and then just overall.
The rate increase.
Three 5% or thereabouts, how does that translate you think for select.
Medical specifically.
Kind of given your case mix.
Thanks.
Could you clarify that question when you say how does it just mean.
You might have.
Just how the rate update if you expect it be any different for select than the three 5% and finalized.
So we anticipate it will be in that neighborhood for us.
You can expect to see increases for our Medicare.
So.
Dollars increased by that percent.
I think thats a good.
A good number to use in your model.
I think youll see.
Better increases on the commercial side.
I think we.
We've been in that.
Negotiated rates, we have been in the five plus percent range.
But with Medicare I think that I think it's I think it's three to happen then I think there is a deduct of about 2%.
For efficiency improvements.
And as usual these al Tac because it's a complicated business. There is any final rules. The aftermath of the final rules. There is a lot of given cakes in this.
Have the we have the high cost outlier threshold, which hasnt had an impact you have the rate increase and then you have our mix of business. The case mix index, and our and our percentage of respiratory cases in pulmonary all of these have an effect on the business. So.
Post the rule and going into next year, we'll be taking a look at all of those.
Adjust all of the levers that we have at our disposal to make sure that we can get some growth out of the segment.
Got you. Thank you and just quickly finally do you expect to set the high cost outlier to drive any industry disruption that could create a consolidation opportunity for you guys.
I do not.
Okay. Thank you.
Thank you one moment for our next question.
The next question comes from the line of Kevin Fischbeck with Bank of America. Your line is now open.
Alright, great. Thanks.
Maybe just to stay on Medicare rates gave us similar comment.
On <unk>, what do you think the kind of net to you guys will be on the referral.
Yes.
Think that.
We're pretty satisfied with what the <unk> rule and are they.
The rehab rule and I think we've got.
A little bit of a tailwind on.
On.
The final rule there. So we're looking forward to Q4 and into next into next year Kevin.
Yeah.
Okay.
And then obviously a lot of progress at <unk>.
Will you be.
Wanted to get a sense from you guys, where you thought you were in that and that progress. We all love baseball analogy what inning are we on the improvement. There is there is there much to go still from here or is this the right way to think about.
We view heading into 2024.
Yes.
I think throughout the balance of the year will be in the 55% to 57% range.
Now, we see that dropping down in 'twenty four 'twenty five and the reason being remember we're not just focused on the cost here I mean SWM to be as a percentage of revenue has a revenue component to it.
So I.
Our commercial contracts are basically three years. The terms on those are three years. So it will be negotiating increases in those.
We're down about a third of our contracts now so we'll be negotiating in 2000 and $425 for the for the balance of the contracts.
We anticipate as we do that we get decent increases there we would expect to see.
SWM as a percentage of revenue continue to come down through 'twenty five.
Our our focus is really to get back to that historical rate of 52%.
Okay. That's great. So so when we think about that improvement, though youre, saying that the improvement is less about further declines in bill rates or utilization per se, it's more about getting the top line growth to kind of match inflation.
That's correct.
Okay great.
And then.
Excuse me.
And then maybe just last question.
On the outpatient side.
The rates being down.
Is that something that we should be modeling going into next year I guess, there's still another rehab rate cut at least proposed.
Next year or is there anything kind of unusual you mentioned case you mentioned the payer mix is kind of in there is reason to believe that reach next year will be better than the rates this year.
Yes, there isn't we anticipate that going into next year, we think is going to rebound back to at least be in that.
100 $203 range.
What's driving that.
Again it contracts.
And improvements in some other.
And the CBO area.
Okay, Alright, perfect. Thank you.
Thank you one moment our next question.
Our next question comes from the line of a J Rice with credit Suisse Financial Your line is now open.
Hi, good morning.
Hey, Jerry.
I wanted to ask about the larger volume trends that we're seeing volumes.
Volumes, especially in herbs and outpatient rehab are very strong.
As most of the deferred care flowing through the system or is this more as more sustainable volume.
Thank you.
Yes could you repeat that question.
Yes, you are kind of coming through very clearly.
Yes, I was asking about whether the volume that you are seeing on.
As well as outpatient rehab is a more deferred care flowing through their system. After the pandemic or is there more sustainable volume.
I think our business on the if I am understanding your question I think the business on the Ericsson the outpatient is.
A very sustainable in this.
You characterized as a post pandemic world.
Business on the demand side in urban outpatient as is.
Very very good I mean for a company like ours or others. It's just a question of navigating your linker local market and your competition and your rate negotiations, but I.
I don't think in either of those businesses, it's necessarily theres no systemic volume issue. Yes, we don't really think that it's a function of pent up demand due to the pandemic, we think it's really.
We think we will continue to see.
Increases like this there's lots of things that can affect that in local markets. For example, staffing challenges that large systems continue to have Kent, oftentimes or sometimes affect their surgical volumes and if surgical volumes, particularly on the orthopedic side are impacted in a local market, we're going to act on.
I certainly see some pull through negative on that but.
Overall, when we look nationally.
We see it.
Turning to a pretty strong pretty strong.
Yes.
That answer your question.
Yes got it thanks, maybe one more on <unk> pricing I think revenue per patient day was up four 5% and sequestration should be a headwind and it seems like the acuity mix stepped down as well.
Why is the pricing going up and how does the back half of the year shakeout.
Well I can tell you one thing on the acuity mix in the in the in the winter months, when we tend to see more pulmonary the acuity mix will go up I don't think you should look at the acuity. The case mix index reduction that we commented on as being any.
Kind of.
Hispanic signal a reduction in acuity of our patients in fact, we continue to see increased acuity in our critical illness hospitals.
I think that will continue to remain strong and as you know there is some seasonality in our business.
I think the other thing is as you know we are paid on a DRG so to the extent that the length of stay goes down which it did during the quarter.
That's going to have a positive impact on the rate.
Thank you.
Okay.
Thank you.
I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. <unk>.
Robert Ortenzio for closing remarks.
Closing remarks, thanks, everybody.
For joining us and look forward to updating again next quarter.
Yes.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
[music].
Okay.
[music].
Okay.
Okay.