Q3 2023 Select Medical Holdings Corp Earnings Call
Okay.
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the third quarter 2023 results and the company's business outlook.
Speaking today are the company's executive Chairman and co founder Robert Ortenzio, and the company's senior Executive Vice President of strategic Finance and operations Martin Jackson.
Management will give you an overview of the quarter and then open the call for questions before we get started we would like to remind you that this conference call may 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.
Medicals 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 as circumstances change.
At this time I will turn the conference call over to Mr Robert or Cynthia.
Thank you operator, good morning, everyone welcome to select Medicals earnings call for the third quarter of 2023.
We have a lot to be positive about is Q3 was another strong quarter we.
We continued to sustain our improvement in labor cost within the critical illness Division.
Q3 was the sixth sequential quarter that we have seen a reduction in agency expenses.
Or an agency usage dropped to our target percentage of 15%.
Which is lower than our pre pandemic levels, we also announced promotions within our executive management team that I believe will position the organization for continued long term success.
All four of our operating divisions exceeded prior year revenue and EBITDA.
Overall revenue grew 6% and adjusted EBITDA grew by 27% compared to prior year Q3.
We received it.
$8 $1 million of cares Act grant income in the prior year, which was a headwind heading into Q3, when comparing current to prior year performance.
For the quarter total company adjusted EBITDA was $193 $8 million compared to $153 1 million in the prior year.
Our consolidated adjusted EBITDA margin was 11, 6% for Q3 compared to nine 8% in the prior year.
Our critical illness recovery Hospital division experienced the most significant increase in performance compared to prior year with a 7% increase in net revenue.
320% increase in adjusted EBITDA, along with a 10% reduction in their salary wages and benefit to revenue ratio.
Consistent with prior quarters, Marty Jackson will provide additional detail regarding this division's continued progress with labor within his commentary critical illness incurred $5 million of startup losses.
Weighted to new hospitals, this quarter compared to 707000 in the same quarter prior year.
As previously mentioned, we have an agreement to open our critical illness recovery hospitals distinct part rehabilitation unit in Chicago with our joint venture partner Rush University system for health in Q2 of 2024.
We also have hospital expansions in the works that are expected to be completed in 2025, including Orlando North which will include a 48 bed rehab distinct unit.
It was also a strong pipeline of additional opportunities for growth that are under consideration.
On the inpatient rehab development front on September one we entered into a joint venture with CHS and purchased a majority interest in a 36 bed in patient rehab hospital in Fort Wayne, Indiana, We've reached agreement with our joint venture partner at University of Florida Health Shands to open 48 bed.
Inpatient rehab hospital in Jacksonville, Florida projected to open in Q3 of 2024, where we will have a majority interest.
We are also planning to open a fourth inpatient rehab hospital 32 beds with our joint venture partner the Cleveland Clinic that is projected to open in the first half of 2025.
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 will be called the <unk> Institute for rehab and is slated to open in either 2025 2026.
The pipeline for growth is strong and we anticipate strong performance throughout the remainder of the year.
And sentra continued their exceptional performance exceeding prior year revenue EBITDA and patient volume.
During the quarter concentric continue to make progress on various ongoing transactions and bolster its pipeline for future acquisitions and de Novo.
Intent to acquire three occupational medicine practices with two located in Delaware and one in northeast, Maryland that closed on October 13th in addition to acquisition efforts three de Novo's, and Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida opened in October 2023, we have three signed.
Leases for de Novo is slated to open in 2024, there is a strong pipeline of acquisitions and other de novo's that we continue to evaluate.
This quarter, our outpatient rehab division also surpassed prior year revenue EBITDA and patient volumes.
<unk> added 16 clinics this quarter would be acquisitions and de Novo.
The pipeline for additional growth remains strong with 22 executed leases for de Novo clinics of which 11 are scheduled to open in Q4 of 2023 with the remainder to be opened in 2024. 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 operating divisions.
Our critical illness recovery Hospital division experienced increases of 7% of net revenue and 320% of adjusted EBITDA for another successful quarter, while our occupancy was down from last year at 64% down from 67% an increase in our case mix index and a decrease in threshold days contributed to an <unk>.
Increase in our revenue per patient day, our adjusted EBITDA margin was eight 2% for the quarter compared to two 1% in the prior year Q3 or positive reductions in labor contributed to the significant improvement in EBITDA margin with a 10% reduction in our salary wage and benefit to revenue ratio nurse.
The agency rates decreased 9% and nursing agency utilization decreased 30% when compared to prior year Q3 orientation hours decreased 4% compared to prior year Q3, but increased 19% compared to Q2 2023, as we continue to add full time nurses.
Nursing sign sign on incentive bonuses.
Dollar decreased 49% from prior year Q3, but remained consistent with prior sequential quarter.
Our in patient rehab Hospital division experienced an 8% increase in net revenue and adjusted EBITDA patient volumes increased 3% and our rate per patient day increased by 5% our occupancy was 84% compared to 85% prior year, the adjusted EBITDA margin for inpatient rehab.
Was 22% for Q3, which was consistent with prior year.
Ken Sentra experienced an increase of 7% net revenue driven primarily by rate.
Our work comp net revenue per visit increased 3% in our employer services rates increased by 7%.
<unk> adjusted EBITDA increased by 10% with margin increasing to 29% for the quarter compared to 22%.
Same quarter last year.
Our outpatient rehab division experienced an increase in 2% net revenue with patient volumes, increasing by 11% offset by a decrease in rate from $103 net revenue per visit to $100 net revenue per visit the volume increase.
Offset by rate decrease when compared to prior year was consistent with what we saw in Q2.
Organizational initiatives initiatives, focusing on improving clinical productivity via patient access.
Two additional volume where the decline in rate was due to a decline in outpatient Medicare fee schedule Payor mix and variable discounts the hour.
Patient division's adjusted EBITDA increased by 3% compared to prior year, while the EBITDA margin remained consistent at 9%.
Earnings per fully diluted share with <unk> 38.
For the third quarter compared to <unk> 21.
Per share in the same quarter prior year adjusted earnings per fully diluted share were <unk> 46.
Adjusted earnings per share excludes the loss on early retirement of debt and its related costs and tax effects.
In regards to our allocation of deployment of capital our board of directors declared a cash dividend of $12.05 payable on November 28, 2023 to shareholders of record as of the close of business on November 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.
This concludes my prepared remarks 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 and good morning, everyone.
Consistent with the past year I would like to provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery Hospital Division.
This past quarter, we had a sequential reduction from Q2 to Q3.
Our our and agency costs and utilization.
I had a slight increase in our in agency rate.
The reductions we realized were 17% are in agency costs.
Having $22.1 million versus $18 $4 million this quarter and a drop in the RN utilization from 18% to 15%.
The agency rate increase by only 1% from 77 to $78 and we experienced very little change in the rate throughout Q3.
In agency utilization during the quarter inch down from 15 six.
Our percent in July 15, 5% in August.
15, 1% in September.
Is it related costs were $6 $2 million in July $6 $3 million in August and $5 $8 million in September.
Yes.
Nursing sign on an incentive bonus dollars remained consistent with Q2 at $7 8 million.
While we had a 19% increase in orientation hours 143000 hours compared to 120000 hours with the fluctuation during the quarter.
44.
1000 hours in July 51 in August and 48 in September.
Moving on to our financials in Q3 equity in earnings of unconsolidated subsidiaries were $11 6 million. This compares to $8 1 million in the same quarter.
Last year. This 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 $12 6 million.
Compared to $11 million in the same quarter prior year.
And again this increase was primarily due to the improved performance of our consolidated joint ventures.
Interest expense was $53 million in the second quarter. This compares to $45 2 million in the same quarter prior year.
The increase in interest expense was primarily attributable to an increase in the interest rates compared to Q3 of 2022.
And at the end of the quarter, we had $3 $7 billion of debt outstanding and $77 $4 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2 1 billion in term loans.
$340 million in revolving loans $1 $2 billion and the six point.
Six in a quarter percent senior notes.
And $75 8 million of other miscellaneous debt, we ended the quarter with net leverage for our senior secured credit agreement of $4 eight five times.
As of September 30, we had $374 million of availability.
On our revolving loans.
As we reported on our last call, we completed a refinancing transaction in the third quarter we.
We amended and extended our $2 $1 billion senior secured term loans.
Along with increasing our revolving credit facility by $120 million from $650 million to $770 million.
Both the term loan and the revolver has been extended two years and will mature on March six 2027.
With an early spring in maturity of 90 days prior to the senior notes maturity.
Triggered that more than $300 million of senior notes remains outstanding on May 15th 2026.
The refinanced term loan is priced at silver plus 3% with the step down of 25 basis points, if our net leverage ratio falls below four times.
The revolver has been priced at silver plus.
Two 5% with a step down to 25 basis points, if our net leverage again falls below four times.
It's important to note that the 1% sulfur interest rate cap.
On $2 billion of our term loans will remain in place through September 32024.
Our $1 2 billion in senior.
In six and a quarter senior notes.
Matures August 15th of 2026.
During Q3, we recognized $14 $7 million of loss on early retirement of debt as a result of the amendment to the credit agreement.
For the third quarter operating activities provided $116 million in cash flow.
Our days sales outstanding or DSO was 52 days at September 30 is 23 compared to 53 days at September 30, a 20 to 52 days.
June 30 end of 'twenty three.
Investing activities used $63 million of cash in the third quarter. This includes $52 million in purchases of property and equipment and $12 $8 million in acquisition and investment activity.
Financing activities used $77 million of cash in the third quarter we.
We had $25 1 million in net payments and distributions to noncontrolling interests.
$14 $5 million net payments on our term loans as a result of the refinancing.
$16 million in dividends on our common stock now.
$9 $5 million in share repurchases and $5 million in net payments on our revolving line of credit.
As stated previously we did not repurchase any shares under our board authorization repurchase program this quarter.
Board has approved a two year extension of the share repurchase program, which will now remain in effect until December 31, 2025, unless further extended or earlier terminated by the board.
We maintain our business outlook for 2023 with expected revenue to be in the range of six <unk>.
655 to $6 7 billion.
Expected adjusted EBITDA in the range of $795 million to $825 million.
Fully diluted earnings per share to be in the range.
The $1 77 to $1 94 select medical expects adjusted earnings per share, which was revised to exclude the actual tax affected laws.
On early retirement of debt to be in the range of $1 85 to $2 <unk>.
Adjusted earnings per share, excluding the loss on retirement of debt and its related costs and tax effect.
Capital expenditures are expected to be in the range of 190 million to $210 million for 2023.
This concludes our prepared remarks at this time, we'd like to turn it back over to the operator to open the call up for questions.
Thank you do you like to ask a question. Please press star one one if your question has been answered and you like to remove yourself from the queue. Please press star one again.
First question comes from Justin Bowers with DB. Your line is open.
Hi, good morning, everyone.
Bob I may have missed this.
Prepared remarks, but are there any additional.
Al Tac.
Is there additional capacity coming online.
The rest of this year or into 2024 and or any any deals that you announced in the quarter.
Okay.
While we have the rush next year, which is the combined rehab and critical illness post acute building that will be.
Next year.
I don't know that we have.
Any other critical on this openings.
Next year that we've that we've announced I mean, it's possible.
Orlando will be 2025.
Bob.
While we typically don't announce those deals until they're signed I mean, it is possible that we could do a critical illness. If it's a hospital within a hospital that we would sign between now and the end of the year and could be potentially in service next year, but we haven't announced any.
Got it.
And then with respect with respect to.
The guide.
And the rest of the year what are what are some of the swing factors in the guide.
The big swing factors as we look into <unk>.
Yeah, Justin as you know we provide guidance on an annual basis.
And.
From that perspective.
We're going to keep the guidance that we've provided.
I know you guys do it on a quarterly basis.
We anticipated that we would have.
After that we did in Q3.
For the balance of the year.
We think the guidance Thats out there on an annual basis is a good.
Got to the Street.
Okay got it and then in terms of.
Alright.
<unk> be in sort of the targets that you've laid out over.
The next several years.
Returning to normalization within critical illness like how are you thinking about that any sort of updated thinking around.
What's that trajectory may look like over the next couple of years.
Yes, Justin.
Our expectation is that.
By the end of 2025, when all of the contracts all of the payer contracts are renegotiated, we anticipate we should return to somewhere in the range of 52%.
SWM to be as a percentage of revenue.
Okay.
We'll sort of look like.
A linear sort of progression from now until then or.
Is that a reasonable assumption.
Yes.
I can tell you that I, specifically know when the contracts will be renegotiated.
I am not to assure that the current if we've got.
Two thirds left.
In the last two years.
But I think when you get to the end of 'twenty five you can assume that.
Our expectation is we'll be in that 52% range.
Yeah.
Alright, I appreciate it all.
Ill jump back in queue.
Thanks.
Thank you. Our next question comes from Ben Hendrix with RBC capital markets. Your line is open.
Hi, This is Michael <unk> on for Ben.
Just focusing on the L tax the the sequential decline in EBITDA was steeper than what we were modeling agency labor continued to improve their occupancy.
Declined 400 bps sequentially, which it.
It seems larger than the typical sequential decline.
And you would see even pre pandemic.
<unk>.
Shed some light on some of the inner workings there.
Drove the lower occupancy levels.
Yes, I think one of the things you really have to do is you've got to take a look and add back that $5 million of startup losses.
So if you take a look at those margins. If you added that back you would have.
Basically the 90 basis point improvement in the margins right.
Are you talking sequentially.
Okay.
Well you realize that when you take a look at historically for us.
If you compare Q3 of 22 sequentially is really relevant because of the seasonality in the business. So what did you really have to do is take a look at it on a.
Over the same quarter.
Year over year basis.
I mean, we normally have a dip.
Occupancy rate in Q3.
Yes, the 400.
<unk> sequential decline even that seems.
At a higher magnitude than even pre pandemic levels.
So.
What we are driving what drove the lower occupancy levels.
Okay.
Okay.
Yes.
I think that.
We'll have to.
I think what we're going to have to do is talk offline on this and we will go through the details.
I'm not sure that we are.
Fully understand that there is a difference you are saying.
Okay.
Next question.
Thank you. Our next question comes from William Sutherland with Benchmark Company. Your line is open.
Okay.
Thanks.
Yes.
Okay.
Just wondering.
Yeah.
You've had some good progress on outpatient.
Despite the rate.
Headwind.
What are do you have.
Some might call it.
<unk> out there that you think.
You can.
Move.
Yeah.
Productivity and merchants to outpatient just trying to get a sense of kind of where that business can run now and maybe you have some color.
Some insight on where you think rates.
Our heritage.
In the following year.
So bill.
I'm, assuming you have got two questions. There one is improving our clinical productivity.
And we do see some continued improvement in that area.
And then with regards to rates.
I think our expectation is we're going to see.
An increase of probably over the next year.
Somewhere in that 2% range.
Okay. So.
That'll be a nice switch and then you'll be doing your commercial commercial is going to be.
I assume.
Same positive trend.
<unk> been able to negotiate.
Yes, commercial commercial should be higher than the 2% that I mentioned bill, but then we have the offset with regards to Medicare.
Alright.
So 2% so blended Marty so what youre, saying is what you are saying that that's correct.
Okay.
Are you all in the course of.
Yes, just improving the whole.
Network.
Of clinics.
Yeah.
Pruning as you add.
When you're talking about the ads each quarter is that's not net adds Susan.
Yeah.
Yes that would be net adds had adds yet.
Okay.
Are you.
Okay. That's good enough there and then.
On Concentrix.
These visits.
We were on.
Just a bit here year over year and quarter on quarter I just wanted to understand.
Kind of what's going on behind that number.
Is it better.
Yeah.
Thanks Scott.
Yes, what we saw though is we saw a change in the mix.
So we saw employer service volume down a bit but workers comp.
So that had a nice impact on the rate.
Mhm.
Is that just something thats.
A.
So can you kind of occurring this year or is there a longer tail to that do you think.
Okay.
I think that we saw.
Ill.
A significant increase in.
In prior period due to additional employment.
And so as that becomes as that becomes more normalized.
And I think Thats, what you saw this particular quarter.
This particular year and actually.
Mhm.
Okay.
Well otherwise.
Very nice quarter. Thanks, guys. Appreciate it all right. Thanks guys.
Okay.
Thank you that concludes the question and answer session I'd like to turn the call back over to Robert <unk> for closing remarks.
Thank you operator, no closing remarks thanks.
Thank you for your participation and look forward updating you next quarter.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Okay.
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Okay.
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