Q4 2023 Select Medical Holdings Corporation Earnings Call
Martin F. Jackson: 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 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 At this time, I will turn the conference call over to Mr. Robert Ortenzio. Thanks, operator. Good morning, everyone.
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 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 at this time I will turn the conference call over to Mr. Robert Ortenzio.
Robert A. Ortenzio: Thanks, operator, good morning, everyone welcome to select Medicals earnings call for the fourth quarter of.
Robert A. Ortenzio: Welcome to Select Medical's earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3rd, 2024, we announced that our Board of Directors had approved a plan to pursue the separation of Select Medical's wholly owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be carried out in a tax-free manner for Select Medical and its stockholders and to be completed in 2024. We expect, in the very near future, to receive a private letter ruling from the U.S. Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the consensual business.
Robert Ortenzio: 2023.
Robert A. Ortenzio: We're providing details on each of our four operating divisions.
Robert A. Ortenzio: I will provide some updates and commentary on the business.
Robert A. Ortenzio: As most of you know in January 3rd.
Robert A. Ortenzio: 24, we announced that our board of directors has approved a plan to pursue the separation of select medical's wholly owned occupational health services business can sentra.
Robert A. Ortenzio: I have previously stated we are pursuing the separation of concentrix with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets.
Robert A. Ortenzio: The potential separation is intended to be affected in a tax free manner to select medical and its stockholders and.
Robert A. Ortenzio: And to be completed in 2024.
Robert A. Ortenzio: We expect in the very near future to receive a private letter ruling from the U S. Internal revenue service with an opinion confirming the tax free status of the potential separation uptick in central business.
Robert A. Ortenzio: The completion of the separation is still subject to customary conditions, including favorable market conditions, completion of necessary financing transactions, and final approval by the Select Medical Board of Directors. I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year. We experienced double-digit adjusted EBITDA growth over the prior year in every quarter of this year. In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5%, with all four of our operating divisions again exceeding prior year revenue and EBITDA. For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year.
Robert A. Ortenzio: The completion.
Robert A. Ortenzio: The separation is still subject to customary conditions.
Robert A. Ortenzio: Including favorable market conditions completion of necessary financing transactions and final approval by select medical board of directors.
Robert A. Ortenzio: I will now provide commentary on our four business lines.
Robert A. Ortenzio: Overall, we had a very successful fourth quarter and year.
Robert A. Ortenzio: Spirit's double digit adjusted EBITDA growth over prior year in every quarter of this year.
Robert A. Ortenzio: In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions again exceeding prior year revenue and EBITDA.
Robert A. Ortenzio: For the quarter total company adjusted EBITDA was $180 $1 million compared to $148 9 million.
In the prior year, our consolidated adjusted EBITDA margin was 10, 9% for Q4 compared to nine 4% in the prior year.
Robert A. Ortenzio: Our consolidated adjusted EBITDA margin was 10.9% for Q4 compared to 9.4% in the prior year. Our Critical Illness Recovery Hospital Division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin, along with a 4% reduction in their salary, wages, and benefits-to-revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness's continued progress with labor. Critical illness incurred $3.6 million of startup losses related to new hospitals in this quarter compared to $3.1 million in the same quarter last year.
Robert A. Ortenzio: Our critical illness recovery Hospital Division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin, along with a 4% reduction in their salary wages and benefits to revenue ratio compared to the prior year.
Robert A. Ortenzio: Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continue continued progress with labor.
Robert A. Ortenzio: Critical illness incurred $3 $6 million of startup losses related to new hospitals in this quarter compared to $3 1 million in the same quarter prior year.
Robert A. Ortenzio: The opening of a Critical Illness Recovery Hospital with a distinct part rehabilitation unit in Chicago with Rush University System for Health remains on target for Q2 of this year. As we mentioned last quarter, we also have hospital expansions underway, which are expected to be completed in 2025, including in our Orlando market, which will also include a 48-bed rehab distinct part unit. On the inpatient rehab development front, we're excited to announce that we have signed an agreement with Cox Health Systems to construct a new freestanding 63-bed inpatient rehab hospital in Ozark, Missouri, in which we will have a majority interest. This hospital is projected to open in early 2026. As previously noted, we have agreements with the University of Florida Health Shands to open a 48-bed hospital in Jacksonville, Florida, in Q3 of 2024, and with the Cleveland Clinic to open a fourth inpatient rehab hospital, which is a 32-bed hospital, scheduled to open in the first half of 2025. In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in southern New Jersey, the Bacharach Institute for Rehab, in partnership with AtlantaCare.
Robert A. Ortenzio: The opening of the critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University system for health remains on target for Q2 of this year.
Robert A. Ortenzio: As we mentioned last quarter. We also have hospital expansions underway, which are expected to be completed in 2025, including an Orlando market.
Robert A. Ortenzio: Which will also include a 48 bed rehab distinct part units.
On the inpatient rehab development front, we're excited to announce that we signed an agreement with Cox health system to construct a new freestanding 63 bed in patient rehab hospital in Ozark, Missouri, and which we will have a majority interest.
Robert A. Ortenzio: This hospital is projected to open in early 2026.
Robert A. Ortenzio: As previously noted we have agreements with the University of Florida Health stands to open our 48 bed hospital in Jacksonville, Florida in Q3 of 2024 and with the Cleveland Clinic to open a fourth inpatient rehab hospital, which is a 32 bed hospitals scheduled to open in the first half of 2025.
Robert A. Ortenzio: In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in Southern New Jersey, Bacharach Institute for rehab and partnership with Atlanta care.
Robert A. Ortenzio: We anticipate that our inpatient rehab division will continue its strong performance and have a successful 2024. Overall, I am pleased with the development results and pipeline for our specialty hospital division. In 2023, we developed or acquired and put in operation 128, inpatient rehab beds, and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds, and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025. Concentra continued its strong performance, exceeding prior year revenue, EBITDA, and patient volume. As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland and the opening of three DeNovos in Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida. We have five signed leases for DeNovo slated to open in 2024, and two signed leases for DeNovo Park expected to open in Q1 2025.
We anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024.
Robert A. Ortenzio: Overall, I am pleased with the development results and pipeline for our specialty hospital divisions.
Robert A. Ortenzio: In 2023, we developed or acquired and putting in operation 128.
Robert A. Ortenzio: Inpatient rehab beds, and 227 critical illness recovery hospital beds.
Robert A. Ortenzio: In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds.
Robert A. Ortenzio: And 70 critical illness recovery hospital beds that will begin operations in the current year or 2025.
Robert A. Ortenzio: Concentrix continued their strong performance exceed exceeding prior year revenue EBITDA and patient volumes as.
Robert A. Ortenzio: As we mentioned on the last call concentric had significant development activity in October with the acquisition of three occupational medicine centers in Delaware, and Maryland, and the opening of three de Novo in Norfolk, Virginia, Columbus, Ohio, and Fort Myers, Florida.
Robert A. Ortenzio: We have five signed leases for de Novo slated to open in 2024, and two signed leases for de Novo expect it to be opened in Q1 2025.
Robert A. Ortenzio: There is a strong pipeline of acquisitions, including one currently under letter of intent and other de novos that we continue to evaluate. This quarter, our Outpatient Rehab Division generated a 41% increase in adjusted EBITDA and an 11% increase in visits per day. The division added seven clinics this quarter via De Novos, which offset the closure of twelve underperforming clinics and the fold-in of eight clinics into existing operations as their leases expired
Robert A. Ortenzio: There is a strong pipeline of acquisitions, including one currently under letter of intent.
We continue to evaluate.
Robert A. Ortenzio: This quarter, our outpatient rehab division.
Robert A. Ortenzio: Generated a 41% increase in adjusted EBITDA and a 11% increase in visits per day.
Robert A. Ortenzio: The division added seven clinics this quarter Villa de novo's, which offset the closure of 12 underperforming clinics and the fold in of eight clinics into existing operations as our leases expire.
Robert A. Ortenzio: The pipeline for future growth remains strong, with 19 executed leases for de novo clinics, of which 10 are scheduled to open in the first half of 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 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from the same quarter last year... an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We've experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed the prior year.
Robert A. Ortenzio: The pipeline for future growth remains strong with 19 executed leases for de Novo clinics of which 10 are scheduled to open in the first half of 2024.
Robert A. Ortenzio: There are also many additional opportunities for acquisitions and de Novo development that are under consideration.
Robert A. Ortenzio: At this point I'll provide some further data points on each of our operating divisions, our critical illness recovery Hospital Division experienced.
Robert A. Ortenzio: Increases of 1% of net revenue and 29% and adjusted EBITDA.
While our occupancy was down from same quarter last year.
Robert A. Ortenzio: An increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day.
Robert A. Ortenzio: We've experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed prior year.
Robert A. Ortenzio: Our adjusted EBITDA margin was 10.1% for the quarter compared to 7.9% in the prior year Q4. The reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salary, wages, and benefit costs to revenue ratio. Both nursing agency rates and utilization decreased 24% when compared to prior year Q4. Orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q3 of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter.
Robert A. Ortenzio: Our adjusted EBITDA margin was 10, 1% for the.
Robert A. Ortenzio: Quarter compared to seven 9% in the prior year Q4.
Robert A. Ortenzio: The reduction in labor cost contributed to the improvement of our EBITDA margin with a 4% reduction in our salary wages and benefit to revenue ratio.
Robert A. Ortenzio: Both nursing agency rates and utilization decreased 24% when compared to prior year Q4 orientation hours decreased 10% compared to prior year Q4 and decreased 26%.
Robert A. Ortenzio: <unk> to Q3 of 2023.
Robert A. Ortenzio: Nursing sign on incentive bonus dollars decreased 36% from prior year, Q4, and 5% from the prior sequential quarter.
Robert A. Ortenzio: Our inpatient rehab hospital division experienced a 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7%, and our rate per patient day increased 3%; our occupancy of 85% was consistent with the prior year. The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year of 23.6%. Concentra experienced an increase of 6% in net revenue driven primarily by rates.
Robert A. Ortenzio: Our in patient rehab Hospital division experienced a 9% increase in net revenue and a 19% increase in adjusted EBITDA.
Robert A. Ortenzio: Patient volumes increased 7% and.
Robert A. Ortenzio: And our rate per patient day increased 3%.
Robert A. Ortenzio: Our occupancy of 85% was consistent with prior year.
Robert A. Ortenzio: The adjusted EBITDA margin for inpatient rehab was 25, 5% for Q4 higher than the prior year up 23 six.
Robert A. Ortenzio: Concentrix.
Robert A. Ortenzio: First an increase of 6% in net revenue driven primarily by rate.
Robert A. Ortenzio: Workers' comp volume increased 6 percent, but it was offset primarily by a decrease in employer-based visits, which are reimbursed at lower rates that resulted in an overall visit increase of 1 percent. Consentors' adjusted EBITDA margin increased to 15.5 percent for the quarter, compared to 15 percent for the same quarter last year. Our patient rehab division experienced an increase of 6% in net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $102 net revenue per visit to $100. Organizational activities focusing on improving clinical productivity via patient access contributed to additional volume, where the decline in rate was due to a decline in the outpatient Medicare fee schedule, pay-or-mix, and variable discounts. The outpatient division's adjusted EBITDA increased by 40.9% compared to the prior year, with a 33% increase in EBITDA margin to 7.5% from 5.7%.
Robert A. Ortenzio: Our workers comp volume increased 6% there was offset primarily by a decrease in employer base visits which are reimbursed at lower rates that resulted in an overall visit increase of 1%.
Robert A. Ortenzio: <unk> adjusted EBITDA margin increased to 15, 5% for the quarter compared to 15% for the same quarter prior year.
Outpatient rehab division experienced an increase of 6% net revenue with patient volumes, increasing by 11% offset by a decrease in rate from $102 net revenue per visit to $100.
Robert A. Ortenzio: Organizational activities, focusing on improving clinical productivity via patient access contributed to additional volume.
Robert A. Ortenzio: The decline in rate was due to a decline in the outpatient Medicare fee schedule Payor mix and variable discounts.
Robert A. Ortenzio: The outpatient division adjusted EBITDA increased by 49% compared to prior year with a 33% increase in EBITA margin to seven 5% from five 7%.
Robert A. Ortenzio: Earnings per fully diluted share were <unk> 36 cents in the fourth quarter compared to <unk> 22 per share in the same quarter prior year.
Robert A. Ortenzio: For the full year earnings per fully diluted share or $1 91, compared to $1 23 per share in the prior year.
Robert A. Ortenzio: Adjusted earnings per fully diluted share were <unk>.
Robert A. Ortenzio: 99, this year, which excludes the loss from early retirement of debt and its related costs and tax effects.
Robert A. Ortenzio: Earnings per fully diluted share were $0.36 in the fourth quarter compared to $0.22 per share in the same quarter of the previous year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. Adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effects. In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of $0.125 payable on March 13, 2024, to stockholders of record as of the close of business on March 1, 2024. This past quarter, we did not repurchase shares under our Board-authorized share repurchase program.
Robert A. Ortenzio: In regards to our allocation deployment of capital our board of directors declared a cash dividend of $12.05 payable on March 13, 2024 to stockholders of record as of the close of business on March one 2024.
Robert A. Ortenzio: This past quarter, we did not repurchase shares under our board authorized share repurchase program.
Robert A. Ortenzio: And we will continue to evaluate stock repurchases reduction of debt and development opportunities.
Robert A. Ortenzio: This concludes my remarks, and I'll turn the call over to Marty Jackson for some additional <unk>.
Actual details and commentary before we open the call up for questions.
Martin F. Jackson: Thanks, Bob Good morning, everyone.
Martin F. Jackson: I would like to first provide additional details with the progress we continue to make regarding labor cost within the critical illness recovery Hospital Division.
Martin F. Jackson: Overall, our salaries wages and benefits as a percentage of revenue decreased from 59, 8% in Q4 prior year down to 57, 6% this past quarter.
Martin F. Jackson: We will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks, and I'll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call up for questions. Thanks, Bob. Good morning, everyone.
Martin F. Jackson: Our SWM as a percentage of revenue improved as the quarter progressed.
Martin F. Jackson: Year to date basis.
Martin F. Jackson: With regards to SWM as a percentage of revenue decreased from 63, 4% and 22 down to 57, 2% and 23.
Martin F. Jackson: Thus far in 2024 hour SWM as a percentage of revenue has continued to trend favorably and we expect to finish at or below 55% in Q1.
Martin F. Jackson: I would like to first provide additional details on the progress we continue to make regarding labor costs within the Critical Illness Recovery Hospital Division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 of the previous year down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed, but our year-to-date basis, with regard to SW&B as a percentage of revenue, decreased from 63.4% in 22 down to 57.2% in 23. Thus far in 2024, our SW&B as a percentage of revenue has continued to trend favorably, and we expect to finish at or below 55% in Q1. This past quarter, we had a sequential reduction from Q3 to Q4 in our R&A costs with a decrease in both utilization and agency rates. The reductions realized were 17% in R&N agency costs, a drop in R&N utilization from 15% to 14%, and a decrease in agency rates from $78 to $70. RN agency utilization decreased throughout the quarter from 14.4 percent in October.
Martin F. Jackson: This past quarter, we had a sequential reduction from Q3 to Q4 and are in agency costs with a decrease in both utilization and agency rates.
Martin F. Jackson: The reductions realized were 17% and our and agency costs, a drop in utilization from 15% to 14%.
And a decrease in agency rate from $78 to $70.
Martin F. Jackson: Our non agency utilization decreased throughout the quarter from 14, 4% in October.
Martin F. Jackson: 13, 8% in November and 13% in December.
Martin F. Jackson: Nursing sign on and incentive bonuses dollars also decreased by 5%.
Martin F. Jackson: And we had a 26% decrease in orientation hours.
Martin F. Jackson: Moving on to our financials in Q4 equity and earnings of unconsolidated subsidiaries was $10 2 million compared to $6 8 million.
Martin F. Jackson: In the same quarter prior year.
Martin F. Jackson: Net income attributable to Noncontrolling interest was $15 5 million.
Martin F. Jackson: Compared to $10 2 million in the same quarter prior year.
Martin F. Jackson: Interest expense was.
Martin F. Jackson: Was $58 million in the fourth quarter. This compares to $47 3 million in the same quarter prior year.
Martin F. Jackson: The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of 'twenty two.
Martin F. Jackson: 13.8% in November and 13% in December; nursing sign-on and incentive bonuses also decreased by 5%, and we had a 26% decrease in orientation. Moving on to our financials in Q4, equity and earnings of unconsolidated subsidiaries were $10.2 million compared to $6.8 million in the same quarter of the previous year. Net income attributable to non-controlling interests was $15.5 million compared to $10.2 million in the same quarter of the previous year, and interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter of the previous year. The increase in interest expense was attributable to an increase in interest rates.
Martin F. Jackson: At the end of the quarter, we had $3 7 billion of debt outstanding.
$984 million of cash on the balance sheet, our debt balance at the end of the quarter included $2 1 billion in term loans.
Martin F. Jackson: $280 million in.
Martin F. Jackson: Revolving loans, $1 2 billion or 6% quarter senior notes.
Martin F. Jackson: And $68 2 million.
Martin F. Jackson: Of other miscellaneous debt.
Martin F. Jackson: We ended the quarter with net leverage for our senior secured credit agreement of 454 times.
Martin F. Jackson: As of December 31, we had $434 million of availability on our revolver.
The interest rate on $2 billion of our term loans is capped at 1% Soper plus 300 basis points through September 30 of 2024.
Martin F. Jackson: For the fourth quarter operating activities provided us with $179 4 million and cash flows our day sales outstanding or DSO was 52 days as of December 31, 2023. This compares to 55 days at December 31 2022.
Martin F. Jackson: This was offset by a decrease in our revolving credit facility when compared to Q4 of 22. At the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans.
Martin F. Jackson: 252 days at September 32023.
Martin F. Jackson: Investing activities used $59 $6 million of cash in the fourth quarter. This includes $60 6 million.
Martin F. Jackson: $280 million in revolving loans, $1.2 billion in our six and a quarter senior notes, and $68.2 million of other miscellaneous debt. We end the quarter with net leverage for our senior secured credit agreement of 4.54 times. As of December 31st, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through September 30th, 2024. For the fourth quarter, Operating Activities provided us with $179.4 million in cash loans. Our Day Sales Outstanding, or DSO, was 52 days as of December 31, 2023. This compares to 55 days at December 31, 2022, and 52 days at September 30, 2023. Investing activities used $69.6 million of cash in the fourth quarter. This includes $60.6 million in purchases of property, equipment, and other assets and $9 million in acquisition and investment activity. Financing activities used $103.3 million of cash in the fourth quarter.
Martin F. Jackson: Purchases of property equipment, and other assets and $9 million in acquisition and investment activity.
Martin F. Jackson: Financing activities used $103 $3 million of cash in the fourth quarter.
Martin F. Jackson: This was primarily due to $60 million and a net payments on our revolving line of credit $60 million in dividends on our common stock.
Martin F. Jackson: <unk> $13 $4 million net payments on other debt, which included $5 $3 million of term loan payments and $12 5 million in net payments and distributions to non controlling interests.
Martin F. Jackson: As stated previously we did not purchase any shares under our board authorized repurchase program. This quarter last quarter. The board approved a two year extension.
Martin F. Jackson: The share repurchase program, which now remains in effect until December 31, 2025, unless further extended our earlier terminated by the board.
Martin F. Jackson: We are issuing our business outlook for 2024 and expect revenue to be in the range of $6 9 billion to $7 1 billion adjusted EBITDA.
Martin F. Jackson: It is expected to be in the range of $830 million to $880 million.
Martin F. Jackson: Finally, our expected range for earnings per fully diluted common share is.
Martin F. Jackson: 88 to $2 18.
Martin F. Jackson: We expect capital expenditures to be in the range of $225 million to $275 million for 2024.
Martin F. Jackson: This was primarily due to $60 million in net payments on a revolving line of credit, $16 million in dividends on our common stock, and $13.4 million in net payments on other debt, which included $5.3 million of term loan payments and $12.5 million in net payments and distributions to non-controlling interests. As stated previously, we did not purchase any shares under a board-authorized repurchase program this quarter. Last quarter, the board approved a two-year extension of the share repurchase program, which now remains in effect until December 31st, 2025, unless further extended or earlier terminated by the board. We are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion to $7.1 billion. Judge Ibeda's ruling is expected to be in the range of $830 million to $880 million. And finally, our expected range for earnings per fully diluted common share is $1.88 to $2.18. Additionally, we expect capital expenditures to be in the range of $225 million to $275 million for 2024.
Speaker Change: This concludes our prepared remarks and at this time, we'd like to turn it back over to the operator to open up the call for questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Operator: Please standby, while we compile the Q&A roster.
Operator: Our first question comes from the line of Justin Bowers from Deutsche Bank.
Justin D. Bowers: Hi, good morning, everyone.
Justin D. Bowers: Could you talk about some of the moving parts in the guide.
Justin D. Bowers: And then any.
Justin D. Bowers: Any additional.
Justin D. Bowers: Color you can give us by segment.
Justin D. Bowers: Would be appreciated as well.
Justin D. Bowers: How youre thinking about.
Justin D. Bowers: Some of the segments playing out for the year.
Yes, Justin this is Marty.
Martin F. Jackson: The outlook that we provided is really a function of taking a look at the four business segments.
Martin F. Jackson: Look at some of the headwinds as well as the tailwind obviously the inpatient rehab.
Martin F. Jackson: Is doing quite well can center is doing quite well, we did have some headwinds though in the both are.
Martin F. Jackson: Our critical illness recovery hospitals with regards to the high cost outlier.
Operator: This concludes our prepared remarks, and at this time, we'd like to turn it back over to the operator to open up the call for questions. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Martin F. Jackson: And we had cuts on the Medicare portion of our outpatient rehab.
Martin F. Jackson: And all of that is reflected.
Martin F. Jackson: In the outlook.
Martin F. Jackson: I think you can expect to that the Chris.
Martin F. Jackson: Critical illness recovery hospitals, and outpatient rehab was a little bit muted because of that but both.
Martin F. Jackson: In patient rehab and Concentrix.
Operator: Please stand by while we compile the Q&A roster. Our first question comes from the line of Justin Bowers from Deutsche Bank. Hi, good morning, everyone. Could you talk about some of the moving parts in the guide and then any additional color you can give us by segment would be appreciated as well, how you're thinking about some of the segments playing out for the year. Yeah, Justin, this is Marty.
Martin F. Jackson: Continues to do quite well both in terms of revenue growth and EBITDA growth.
Speaker Change: Okay understood and I just wanted to ask one.
About a couple about <unk> and then one on outpatient rehab.
Speaker Change: I think you said that <unk> is tracking towards 55% SW be in first quarter I just wanted to clarify.
Speaker Change: I heard that correctly and then.
Speaker Change: Is that.
Martin F. Jackson: The outlook that we provided is really a function of, you know, taking a look at the four business segments, taking a look at some of the headwinds as well as the tailwinds. Obviously, inpatient rehab is doing quite well. Concentra is doing quite well.
Is that in sort of the implication there that that volumes are up.
Speaker Change: Sequentially.
Speaker Change: And then just one more do you have do you have another <unk> coming online in 'twenty.
Speaker Change: 2024 this year.
Speaker Change: So I guess a bit of a three parter.
Speaker Change: Sure.
Speaker Change: The first part of the question with the 55% and yes, you did hear that correctly, we are trending towards 55%.
Martin F. Jackson: We did have some headwinds, though, in both our critical illness recovery hospitals with regard to the high cost outlier, and we had cuts in the Medicare portion of our outpatient rehab. So, and all of that's reflected, you know, in the outlook. So I think, you know, you can expect that the Critical Illness Recovery Hospitals and Outpatient Rehab was a little bit muted because of that, but both... Inpatient Rehab and Concentra continue to do quite well, both in terms of revenue growth and EBITDA. Okay, understood. And I just want to ask one about a couple of things about LTAC and then one about outpatient rehab.
Speaker Change: We have seen volumes up in the first quarter.
Speaker Change: And we do have a hospital coming on.
Speaker Change: Critical illness recovery hospital.
Speaker Change: In Q2.
Speaker Change: Okay.
Speaker Change: Got it.
Speaker Change: Then just on outpatient rehab I know that.
Speaker Change: There's obviously, there's been some headwinds with Medicare to bite us.
Speaker Change: You guys have been.
Speaker Change: Shopping somewhat operationally as well over the last I think Florida four to six quarters.
Speaker Change: Yes.
Speaker Change: Is that segment likely like.
Speaker Change: Are you expecting margins to improve in that segment this year.
Speaker Change: And sort of any thoughts on the trajectory to get back to.
Martin F. Jackson: So I think you said that LTAC is tracking towards 55% SWB in the first quarter. I just want to clarify that I heard that correctly. And then is that sort of the implication there that volumes are up sequentially? And then just one more, do you have another LTACH coming online in 2024 this year? I guess a bit of a three-parter.
Speaker Change: Low to mid teens.
Margin that you guys target.
Speaker Change: Yes.
Speaker Change: As I mentioned before we did have the cuts from Medicare and that had a that muted the growth. There. We do expect we're seeing clinical efficiencies improve.
Speaker Change: And we expect within <unk>.
Speaker Change: Probably within the next two to three years that we will be in that low to mid range.
Martin F. Jackson: Sure. The first part of the question was 55 percent, and yes, you did hear that correctly. We are trending towards 55 percent. We have seen volumes increase in the first quarter. And we do have a hospital coming on as critical in this recovery hospital in Q2. Okay, got it.
Speaker Change: Teens as far as margins are concerned.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks, I'll jump back in queue.
Speaker Change: Thanks, Justin.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Kevin Fischbeck from Bank of America.
Kevin Mark Fischbeck: Great. Thanks.
Martin F. Jackson: And then just on outpatient rehab, I know that, You know, there's obviously been some headwinds with Medicare too, but you've, You guys have been chopping some wood operationally as well over the last, you know, I think four to four to six quarters, www.SurgicalScience.com Is that segment likely, like, are you expecting margins to improve in that segment this year? And sort of any thoughts on the trajectory to get back to, you know, that, you know, the mid-teens margin that you guys target?
Kevin Mark Fischbeck: Maybe just to go back to the guidance.
Kevin Mark Fischbeck: The range I guess from a percentage perspective looks a little wide.
What are the things that you think are kind of the things that could push you to the high end or the low end of the.
Kevin Mark Fischbeck: The guidance range.
Speaker Change: I think the primary.
Speaker Change: Item for US Kevin is the potential impact on the high cost outliers on the critical illness recovery hospitals.
Speaker Change: And Thats why.
Speaker Change: We were pretty pretty wide on the range.
Speaker Change: Okay.
Speaker Change: And then I guess.
Martin F. Jackson: As I mentioned before, we did have the cuts from Medicare, and that muted the growth there. We do expect, we're seeing clinical efficiencies improve, and we expect within, probably within the next two or three years, we will be in that low to mid-rate team as far as margins are concerned. Okay, thanks, I'll jump back in queue.
Speaker Change: That you made in Q4 on the labor side of things happened with volume being a little bit weak.
Speaker Change: Want to see.
Speaker Change: It seems you should be easier to staff and where volumes are a little bit light it sounds like you're expecting volumes to kind of come back is there.
Operator: Thanks, Justin. Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck from Bank of America. Great, thanks.
Speaker Change: Anything you need to do on the hiring side or any trends you can point to on the hiring side to kind of say as volumes normalize.
Kevin Mark Fischbeck: Maybe just to go back to the guidance, you know, the range, I guess, from a percentage perspective, looks a little wide. What are the things that you think are kind of the things that could push you to the high end or the low end of the guidance range? I think the primary item for us, Kevin, is the potential impact on the high-cost outliers in the critical illness recovery hospitals. And that's why we were pretty high on the radar.
Speaker Change: Are you still able to make progress on the on the temp staffing side of things.
Speaker Change: Yeah for us.
Speaker Change: What we've seen is we are back to <unk>.
Speaker Change: Pre pandemic.
Speaker Change: With regards to our staffing if you recall we talked about.
Speaker Change: On average pre pandemic.
Speaker Change: Our.
Speaker Change: Different buckets of nurses are in so we have our full time nurses, that's pretty much back to.
Martin F. Jackson: Okay. And then, you know, I guess the improvement that you made in Q4 on the labor side of things happened with volume being a little bit weak. Want to see, you know? It seems it should be easier to staff when volumes are a little bit light. It sounds like you're expecting volumes to kind of come back. Is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say, as volumes normalize, you'll still be able to make progress on the temporary staffing side? Yeah, for us.
Speaker Change: Where we've been pre pandemic, we think we're seeing PRN actually increase which is a good thing.
And historically, we've been in that 15% to 18% as far as the agency nursing and we're down to 13% 14%.
Speaker Change: So then what's the.
Speaker Change: I think all that bodes well.
Speaker Change: So if you're if you're kind of back from a staffing level, what's the lever to get you know.
Speaker Change: Further down as a percentage of SWM, because it just occupancy leveraged from that or is it.
Martin F. Jackson: You know, what we've seen is we're back to pre-pandemic. With regard to our staffing, if you recall, we talked about, you know, on average pre-pandemic with our different buckets of nurses are in. So you know, we have our full-time nurses, that's pretty much back to where we were pre-pandemic; we think we're seeing PRN actually increase, which is a good thing. And, you know, historically, we've been in that 15 to 18% as far as agency nursing, and we're down to 13-14%. The, what's the, um... I think all of that would go well.
Speaker Change: Right Yeah. It really is its volume.
Speaker Change: Volume will do wonders to get that to get that percentage down.
Speaker Change: Volume is going to increase your top line.
Speaker Change: Okay, and then maybe.
Speaker Change: The.
Speaker Change: The Concentrix spin off it sounds really interesting I was wondering if you could just maybe.
Speaker Change: Provide us remind us kind of how youre thinking about the growth of Concentrix.
Speaker Change: And what that company might look like as a stand alone company you've done a really good job, bringing the margins up in that business is there still room on the margin side or is it more about organic growth de novo's and tuck in acquisitions, how should we think about the growth of that business or that cause a separate company.
Martin F. Jackson: But then, so if you're kind of back from a staffing level, what's the lever to get, you know..., further down as a percentage of FW&B? Is it just occupancy and leverage from that, or is it rates? Yeah, it really is.
Speaker Change: Well as Bob.
Robert A. Ortenzio: It's volume; volume will do wonders to get that percentage down. Yeah, I mean, volume is going to, you know, increase your top line. Okay, and then maybe, you know, the concentra spin-off sounds really interesting. I was wondering if you could just maybe provide or remind us kind of how you're thinking about the growth of concentra and what that company might look like as a standalone company. You've done a really good job bringing the margins up in that business. But is there still room on the margin side? Or is it more about organic growth de novo?
Speaker Change: I think consensus is just a.
Bob: Fabulous company because that because of.
Bob: They're they're they're dominance in that occupational medicine space and their various levers they have to grow I mean, they can grow by de novo they can grow by acquisitions, either in new markets or existing markets. So.
Bob: They have a lot of levers that they can to kras and I think that they enjoy solid margins now I am not sure that I could sit here and project that their margins are going to go very much higher than they are right now but.
Robert A. Ortenzio: Kentucky Acquisitions. How should we think about the growth of that business as a separate company? Well, I think Concentra is just a fabulous company because of their dominance in that occupational medicine space and their various levers they have to grow. They can grow de novo.
Bob: They do have a lot of opportunities for growth.
Speaker Change: We're pretty excited.
Speaker Change: Concentric as you know all these years that we've had it in I'm pretty enthusiastic about their prospects as a standalone company.
Robert A. Ortenzio: They can grow through acquisitions, either in new markets or existing markets. They have a lot of levers that they can pull, and I think that they enjoy solid margins now. I'm not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they do have a lot of opportunities for growth. So we're pretty excited to have Concentra, as you know, all these years that we've had it, and I'm pretty enthusiastic about their prospects as a stand-alone company. All right, great. Thank you. Thank you. One moment for our next question, www. SurgicalScience.com: Our next question comes from the line of Ben Hendricks from RBC Capital Markets. Thank you very much.
Speaker Change: Alright, great. Thank you.
Speaker Change: Thank you one moment for our next question.
Okay.
Speaker Change: Our next question comes from the line of Ben Hendrix from RBC capital markets.
Ben Hendrix: Hey, Thank you very much you guys are continuing to deliver a really impressive margin in the inpatient rehab business, despite what looks like a fairly aggressive.
Ben Hendrix: <unk> strategy I was wondering if you could kind of go into a little bit more into your development pipeline, how youre thinking about that and if there is any risk that we could see some.
Ben Hendrix: Some drag on the margin over the next several quarters.
Speaker Change: Given the expansion thanks.
Speaker Change: Yes.
Pointed out we are a pretty feel pretty good about the development pipeline for our inpatient rehab given given our our strategy. Our strategy is our new development is.
Robert A. Ortenzio: You guys are continuing to deliver a really impressive margin in the inpatient rehab business, despite what looks like a fairly aggressive development strategy. I just wonder if you could kind of go into a little bit more about your development pipeline, how you're thinking about that, and if there's any risk that we could see some, some drag on the margin over the next several quarters, given the expansion. You know, as you pointed out, we are pretty, feel pretty good about the development pipeline for inpatient rehab given our strategy. You know, our strategy is that our new development is in partnership with large acute care systems. So, in some respects, we don't have complete control over the cadence of when those hospitals go on.
Speaker Change: In partnership with.
Large acute care system. So in some regards we don't have complete control over the cadence of when those hospitals come on now as you know that we our policy is not to announce.
Speaker Change: Sure.
Speaker Change: Our rehab projects until there until they're signed and commenced but we did go a little bit further on disclosure today, when I talked about the <unk>.
Speaker Change: Hospitals in 2024 that we had hoped to have under construction are complete so that's 533.
Speaker Change: Rehab beds.
Speaker Change: And <unk>.
Speaker Change: Much smaller number of critical illness beds in 2024.
Speaker Change: Any drag on.
Robert A. Ortenzio: Now, as you know, we, we, our policy is not to announce our rehab projects until they're signed and commenced. But we did go a little bit further on disclosure today when I talked about the hospitals in 2024 that we had hoped to have under construction or complete. So that's 533 rehab beds and a much smaller number of critical illness beds in 2024. Any drag on earnings as a result of that development can be assumed to be factored into the guidance. So I think that we're of a size and the platform there that we feel we can bring these on board and not really compromise our growth rate in that division. Thanks. Just if I may ask a different question here, we're getting some questions about the recently announced subpoena in California for Concentra, and I know these types of things pop up from time to time, but is there anything unique or notable about this subpoena, and is there any potential for it to delay your timeline on the spend?
Earnings as a result of that development you can assume is factored into the guidance.
Speaker Change: So.
Speaker Change: So I think that were of a size in the platform. There is that we feel we can we can bring these on and not really compromise our growth rate in that division.
Speaker Change: Sure.
Speaker Change: Thanks, and just if I may ask a different question here, we're getting some questions about the recently announced subpoena in California for Concentrix and I know these types of things pop up from time to time.
Speaker Change: Was there anything unique or.
Speaker Change: Notable about the subpoena and is there any potential for it to delay.
Speaker Change: Your timeline on the spin.
Speaker Change: No.
Speaker Change: Do not believe that it will have any delay on the on the.
Speaker Change: On the separation of Concentrix.
Speaker Change: S based subpoenas you can get for all kinds of reasons. This one comes from.
Speaker Change: California State Department of insurance.
And you can have.
Speaker Change: Investors in healthcare are used to the various <unk> that are oftentimes announced because of whistle blower suits and that could happen.
Robert A. Ortenzio: No, we do not believe that it will have any delay on the separation of concentra, you know, these subpoenas you can get for all kinds of reasons. This one comes from the California State Department of Insurance, you know, and you can have, you know, I think investors in healthcare are used to the various QUETAMs that are oftentimes announced because of whistleblower suits. And that can happen in state agencies as well as federal ones. You know, we never like to get them, but and I'm a little bit late to say that these are routine, but they have become routine over the years.
Speaker Change: And state agencies, as well as as well as federal.
Speaker Change: Hi.
Speaker Change: We never like to get them.
Speaker Change: Little to say that these are routine but.
Speaker Change: They have become routine over the years and so.
Speaker Change: Wait wait.
Speaker Change: Disclosed it as we feel is our obligation, but beyond that I really can't predict the outcome.
Speaker Change: I can tell you that we will we will vigorously defend.
Robert A. Ortenzio: And so, we disclosed it as we feel it is our obligation, but beyond that, I really can't predict the outcome, but I can tell you that we will vigorously defend our business practices in California with Concentra. Thank you.
Speaker Change: Our business practices.
Speaker Change: In California with Concentrix.
Speaker Change: Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next.
Speaker Change: Question comes from the line of Bill Sutherland from the benchmark company.
Operator: One moment for our next question. Our next question comes from the line of Bill Sutherland from The Benchmark Company. Oh, thank you. Good morning, guys.
William Sutherland: Thank you good morning, guys, Hey, Bob you mentioned that volumes were starting to improve quarter to date for.
William Sutherland: For critical illness.
Robert A. Ortenzio: Hey, Bob, you mentioned that volumes were starting to improve quarter to date for critical. Can you just give us a little more color on that and maybe how you think about the sustainability? Well, I can't give you much more color on that. I mean, you know, we're trying to give a little bit more disclosure. And, you know, for us to give you how the first quarter is shaping up is, as you know, probably a little unusual for us. But we were pleased that volumes, volumes, volumes are up now. It is seasonal. This is the time.
William Sutherland: Can you just give us a little more color on that and maybe.
William Sutherland: How do you think about the sustainability.
Bob: Well I can't give you much more color on that.
Speaker Change: We are.
Speaker Change: Trying to give a little bit more disclosure and for us to give how the first quarter is shaping up is as you know probably a little unusual for us, but we were pleased that volumes volumes volumes are up now. It is seasonally this is the time I know those volumes can be affected by lots of things.
Speaker Change: But it was it was pretty broad based and across across the country for our critical illness hospitals. So I thought that was noteworthy.
Robert A. Ortenzio: And those volumes can be affected by lots of things. But it was was pretty broad-based and across the country for our critical illness hospital, so I thought that was noteworthy.
Speaker Change: It's hard to say without more current data, whether it's because you have more respiratory cases or whether there is.
Speaker Change: Covid or other.
Robert A. Ortenzio: I mean, it's hard to say without more current data whether it's because you have more respiratory cases or whether there's COVID or other, and other acute illnesses that are driving that volume. You know, normally, our critical illness volumes go up when the ICUs at acute care hospitals go up. So when we look at our volumes, I think you can assume that, in large measure, it's because volumes at our referral hospitals in their ICUs are up as well. Sustainable, you know; I'd like to think so. I mean, I don't think there's anything to suggest that there has been an outbreak of health in the United States.
Speaker Change: Other acute illnesses that are driving that volume.
Speaker Change: Normally our.
Speaker Change: Critical on this volumes go up when the ICU that acute care hospitals volumes go up so.
Speaker Change: When we look at our volumes I think you can assume that in large measure its because volumes at our referral hospitals and their IC used are up as well so sustainable.
Speaker Change: I'd like to think so I mean, I don't think Theres anything that suggests that there has been a.
Speaker Change: Outbreak of health in the United States I think will continue to see patients that are particularly with with an aging population that have the kind of respiratory conditions that land them in ICU and make them appropriate for our level of care. So.
Robert A. Ortenzio: I think we'll continue to see patients that, particularly in an aging population, have the kind of respiratory conditions that land them in ICUs and make them appropriate for our level of care. But as you've seen over the years, that census can go up and down, and Q1 is seasonally one of the better quarters because of the winter and the colder months. Yeah, it was just interesting on a year over year basis. So, because you were kind of flattish last year.
Speaker Change: I'd like to think so but as you've seen over the years that that sensus can go up and down and Q1 is seasonally one of the better quarters because of the because of the winter in the colder months.
Speaker Change: Yes. It was just it was interesting on a year over year basis. So because you are kind of flattish last year last.
Speaker Change: Last year, yes.
Speaker Change: At Quebec and Sentra.
Robert A. Ortenzio: At Concentra, I'm curious if you can give us a little more color on the blend, you know, the blend of the business and why the employer visits side is not as strong and and what might be the outlook for that. I know it helps with me to be up to date. Yeah, Bill. This is Marty.
Speaker Change: Curious if you could give us a little more color on.
The.
Speaker Change: The blend of the business and why the employer visit side as is.
Speaker Change: Not as strong Ams.
Speaker Change: And what might be the outlook for that I know it helps the mix.
Speaker Change: Just curious.
Speaker Change: Yeah.
Speaker Change: Yes Bill.
Martin F. Jackson: This is Marty.
Martin F. Jackson: Yeah, the employer side, there's, you know, the different things that they have there, or the different activities they perform, such as pre-employment, physicals, drug testing. You know, to a certain extent, it has to do with drug testing being down a little bit. And I think that may have to do with some of the, we've increased some of our prices. And there are some There is a lot of price elasticity associated with that product, but that's what makes it so popular.
Martin F. Jackson: Yes, the employer side, there is the different things that they add there.
Martin F. Jackson: Are there different activities they perform.
Martin F. Jackson: As pre employment Fisher.
Martin F. Jackson: Physicals drug testing.
Martin F. Jackson: To a certain extent it has to do with the drug testing is down a little bit and I think that may have do with some of the we've increased some of our pricing.
Martin F. Jackson: And there is some.
Martin F. Jackson: There is a lot of price elasticity associated with that product.
Martin F. Jackson: But it has a pretty.
Martin F. Jackson: Yeah, yeah, there is, you know, as you probably know, the Department of Transportation requires drug testing for all truck drivers. So that's certainly been good. And there is some, you know, as far as employment is concerned. Employment has been pretty steady. Okay. I'm thinking about outpatient rehab for a second and the revenue per visit. And I know the pressure there from Medicare. How do you think things could go this year for that? I think we'll see.
Martin F. Jackson: Standard I mean steady demand side.
Martin F. Jackson: Drug testing.
Speaker Change: Yes, yes, there is.
As you probably know there is department of transportation requires drug testing for all truck drivers. So that's certainly been good and there is some.
Speaker Change: As far as the employment employment has been pretty steady.
Speaker Change: Okay.
Speaker Change: Thinking about outpatient rehab for a second and the revenue per visit and I know the pressure there from Medicare.
How do you think things could go this year for that number.
Speaker Change: So I think we're going to see yes.
Martin F. Jackson: Yeah, I think we're going to see net revenue per visit increase. You know, our expectation is to see that increase at least a couple of dollars, you know, whether it's two or three dollars, OK, by the end of the year. Right. And then kind of just kind of a more high-level question, Bob, I'm looking at this, a big expansion plan for beds for the rehab hospital relative to critical illness. And I'm wondering if this is just timing, or this is kind of a board management view.
Speaker Change: Yes, I think we're going to see net revenue per visit increase.
Speaker Change: Hi.
Speaker Change: Our expectation is to see that increase at least a couple of dollars, whether it's two or $3.
Speaker Change: Okay.
Speaker Change: By the end of the year.
Speaker Change: Great.
Speaker Change: And then kind of just kind of a more high level question, Bob I'm looking at this.
Speaker Change: The expansion plan for debts for rehab hospital relative to its critical illness.
Speaker Change: I'm wondering if this is just timing or this is kind of a board and management view of.
Robert A. Ortenzio: Capital allocation, you know, relative to, you know, given the margin profile of a rehab hospital and the, I think, the market growth opportunities. Yeah, I mean, it's a good question about how we think about allocating capital. It's really all an allocation of capital assessment. You know, rehab, and critical illnesses are historically in our largest division; we have a footprint of over 107 hospitals. I see that there are, and there will always be, I think, opportunities there.
Speaker Change: Capital allocation relative to you know given the.
Speaker Change: The margin profile of rehab hospital, and the I think the market growth opportunities relative to critical illness.
Speaker Change: Yes.
Speaker Change: It's a good it's a good question about how we think about allocating capex you are truly all in allocation of capital.
Speaker Change: Attachment.
Speaker Change: Rehab.
Speaker Change: The critical illnesses.
Speaker Change: Historically being our largest division we have.
Speaker Change: Footprint of our 107 hospitals.
Speaker Change: I see that there are there will always be I think opportunities there. Although we have thought some reimbursement headwinds in the critical illness and this high cost outlier threshold issue that we've talked about it as certainly a headwind that's not to say that rehab hospitals will not have headwinds in the future, but I think the way we look.
Robert A. Ortenzio: Although, you know, we have brought some reimbursement headwinds into the critical illness category, and this high cost outlier threshold issue that we've talked about is certainly a headwind. But that doesn't mean that rehab hospitals will not have headwinds in the future. But I think the way we look at it is, as we work with the kind of large partners of the type that we have signed, when you have those opportunities to do those deals, I think those are the ones that become a priority for our capital. And typically, they involve using capital to build new hospitals, which are not inexpensive.
Speaker Change: At it is as we work with that kind of large partners of the type that we have signed when you have those opportunities to do those deals I think those are the ones that become a priority for our capital and typically they involve.
Speaker Change: Using capital to build new hospitals, which are not inexpensive.
Robert A. Ortenzio: The critical illness opportunities do come about, and we tend to treat those are the ones that are absolutely the most compelling. So we will continue to do that and add new hospitals to critical illness. But when we have an opportunity to work with a great partner as well as the profile, the ones that we have for inpatient rehab, we certainly want to move on those, and our development pipeline that we've been working on for years and years and years is just very robust right now, and there are some great opportunities to sign some rehab deals with just some great partners. And what we've seen over the history of the company is that these partnership deals and returns, and growth within the partnerships are absolutely compelling.
Speaker Change: The critical illness opportunities do come about and.
Speaker Change: We tend to triage those are the ones that are absolutely. The most compelling. So we will continue to do that and add new hospitals to critical illness, but when we have an opportunity to work with a great partner.
Speaker Change: As the profile of the ones that we have for inpatient rehab.
Speaker Change: We certainly want to move on those and our development pipeline that we've been working for years and years and years is just this is very robust right now and there are some great opportunities to sign some rehab deals with system, great partners and what we've seen over the history of the company is.
Speaker Change: These partnership.
Speaker Change: Deals and returns and growth within the partnerships is absolutely compelling and.
Robert A. Ortenzio: And I think because of the way we structured those with the partners, they tend to have a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds if and when they come, you'll be able to navigate them better with a very large system. And I think the other thing that's not particularly well recognized is not only the signing of new partnerships but the growth within the partnerships. And I mentioned today that we are getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic in their market. And so these opportunities just are really compelling, and sometimes building replacement facilities or taking units out of hospitals in partnership and building those are just really great deals.
Speaker Change: So we will and I think because of the way we structured those with the partners they tend to have.
Speaker Change: <unk>, a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds if and when they come youll be able to navigate them better with that.
Speaker Change: With a very large system and I think the other thing, it's not particularly well recognized as not only the signing of the new partnerships, but the growth within the partnerships and I mentioned today that we are.
Speaker Change: Getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic.
Speaker Change: And their market and so these these opportunities.
Speaker Change: Just are a really compelling and sometimes building replacement facilities or taking units out of hospitals and partnership and building those.
Speaker Change: Or just really really great deals. So I think you'll continue to see growth in both but perhaps a bit more of an acceleration of the inpatient rehab and with the with the planned <unk>.
Robert A. Ortenzio: So I think you'll continue to see growth in both, but perhaps a bit more of an acceleration in the inpatient rehab. And with the planned separation of Concentra, you know, as we look at the growth rate for the company, we'll see it in outpatient rehab, inpatient, and in critical wellness. But rehab is a good opportunity.
Speaker Change: Operations of Concentrix.
Speaker Change: As we look at the growth rate for the company will see it in outpatient rehab inpatient and in the critical illness, but the.
Speaker Change: Rehab is a good opportunity.
Operator: All right. Thanks, Bob. Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice from UBS.
Speaker Change: Okay.
Speaker Change: Got it thanks Bob.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of a J rice from UBS.
A.J. Rice: Hi, everybody. A couple questions, maybe. I just want to make sure I understand the talk a couple of times in response to questions about the outlier threshold increasing on critical access facilities or Cortical Illness Facilities.
Speaker Change: Okay.
Justin D. Bowers: Hi, everybody.
Justin D. Bowers: Couple of questions maybe.
Justin D. Bowers: I just wanted to make sure I understand on the.
Justin D. Bowers: You talked a couple times.
Justin D. Bowers: Two questions about the outlier threshold, increasing on the critical access.
Facilities.
Justin D. Bowers: Our critical illness facilities.
Justin D. Bowers: What.
Martin F. Jackson: That went into effect, I think, October 1. Do you get a pretty good read right away as to how that impact is? I guess I'm trying to figure out why it still is a big swing factor in the guidance if you've got a quarter's experience already. A.J., it really takes some time to evaluate something that significant with regard to the high-cost outlier. I mean, we went from 38, a little bit north of $38,000, up to $59,000. So, and remember, the length of stay of our patients is not five to six days; it's over 30 days. I think the other thing, A.J., is that with our kind of robust systems and data collection, we understood the impact way in advance of it going into effect.
Justin D. Bowers: That went into effect October one.
Justin D. Bowers: Do you get a pretty good read right away is too.
Justin D. Bowers: That impact is I guess I'm trying to figure out why it still is a big swing factor in the guidance, if you've got a quarter's experience already.
Justin D. Bowers: A J it really takes some time.
Justin D. Bowers: To evaluate something that significantly with regards to the high cost outlier I mean, we went from 38 little bit north of $38000 up to $59000 and remember the length of stay of our patients is not 5% to six days.
Justin D. Bowers: It's over 30 days I think the other thing Jay is.
Justin D. Bowers: It's not hard for us with our kind of robust systems and data collection to understand the impact we understood the.
Justin D. Bowers: Understood the impact way in advance of it going into effect. It's a question of how your mitigation strategies are going to work and so it's not so much understanding the impact but over the course of this year, how will how successful will the operators be it.
Robert A. Ortenzio: It's a question of how your mitigation strategies are going to work. And so, it's not so much understanding the impact, but over the course of this year, how successful will the operators be in the mitigation? And that tends to play out and is not as easy as you would think because, you know, you want to keep your referral sources happy, but at the same time, you have to appreciate that the more high-cost outliers that you hit, the more losses you're going to sustain.
Justin D. Bowers: The mitigation in it that is it.
Justin D. Bowers: It tends to play out and it is not us.
Justin D. Bowers: Easy as you would think because it's you want to keep your referral sources happy but at the same time.
Justin D. Bowers: You have to appreciate that the more high cost outliers that you hit the more of the losses youre going to sustain so.
Robert A. Ortenzio: So, you know, I think that is a reason why we've left ourselves some room for guidance. Okay. Can you, uh, you probably have given this before.
Justin D. Bowers: That is the reason why we've left ourselves some room on the guidance.
Speaker Change: Okay can you.
Robert A. Ortenzio: Can you just remind me, um... What percentage of your admissions or your volume, however you want to describe it, end up falling into that status typically? I know it'll change with the increased threshold, but can we give it an order of magnitude of how many? What percentage of your patients are impacted by that business? Yeah, A.J., it varies pretty significantly hospital by hospital and then on average also. So we really have not provided that because of that variation. But I can tell you that as we look across the entire industry, Select Medical probably has more high cost outliers than the average of the rest of the industry because we take higher acuity patients. You'll recall that our strategy long held was not to take site-neutral patients and to only take the highest-acuity patients.
Speaker Change: You probably have given this before can you just remind me.
Speaker Change: What percentage of your.
Speaker Change: Admissions or your volume or however, you want to describe it.
Speaker Change: And falling into that status tips.
Speaker Change: Typically I know it will change with increased threshold, but can we get an order of magnitude of harmony.
Speaker Change: What percentage of your patients are impacted in that business.
Yes, a J it varies pretty significantly hospital by hospital and then on average also.
Justin D. Bowers: So we really have not provided that because of that variation I can tell you that.
Justin D. Bowers: As we look over the entire industry select medical probably has more higher cost outliers than the average of the rest of the industry, because we take higher acuity patients youll recall that our strategy.
Justin D. Bowers: Long held was not to take site neutral patients and only take the highest acuity patients. So we believe that that was the intent of the 2014 crore.
A.J. Rice: We believe that that was the intent of the 2014 criteria. We built our clinical programs around being able to take care of those very complex patients. And this has been part of our efforts with CMS, because the high cost outlier increase in the threshold actually hurts those providers that are actually taking care of the very patients that the policy wants the LTACs to take care of. So ours tend to be higher, and so we're affected more. Okay, that makes sense. And I think in the fourth quarter, you called out that you had about $3 million in startup costs from development, and that's similar to what you had in the fourth quarter of 22. Have you talked about the total amount, given the development projects that are underway, joint ventures, et cetera, how much the 24 startup costs will be compared to what the startup costs ended up being in 23? Is it a headwind or a tailwind?
Justin D. Bowers: Criteria, we built our clinical programs around being able to take care of those very complex patients.
Justin D. Bowers: And so and this is Ben.
Justin D. Bowers: Part of our.
Justin D. Bowers: A part of our efforts with CMS is that the high cost outlier increase of the threshold actually hurts those providers that are actually taking care of the very patients that the policy once the L tax to take care of.
Justin D. Bowers: So.
Justin D. Bowers: Or it be tend to be higher and.
Justin D. Bowers: So we're affected more.
Speaker Change: Okay that makes sense.
Speaker Change: I think in the fourth quarter, you had called out that you had about $3 million of startup costs for development.
Similar to what you had in the fourth quarter.
Speaker Change: 'twenty two.
Speaker Change: Talked about the total amount given the development projects that are underway joint ventures et cetera.
Speaker Change: How much 24 startup costs will be compared to what startup costs ended up being up 20.
Speaker Change: <unk> 23 headwind tailwind, how does that shake out.
Martin F. Jackson: How does it shake out? I think for 24, our projected startup loss is $12.3 million, and that is reflected in the business outlook. And how does that compare?
I think for 'twenty for our.
Speaker Change: Projected startup loss of $12 $3 million and.
Speaker Change: That is reflected in the business outlook.
Speaker Change: And then how does that.
A.J. Rice: Off the top of your head, do you have any idea how that compares with 23? Yeah, it's a similar amount in 2023. Okay, all right. And then just some last questions. Marty called out that obviously some of these interest rate caps and swaps, etc. expire in September.
Speaker Change: Off the top of your head do you have how that compares with 23 is similar.
Speaker Change: Similar.
Speaker Change: Yes, it's a similar amount in 2023.
Speaker Change: Okay, Alright, and then just last question.
Speaker Change: Marty you called out.
Speaker Change: Obviously some of these interest rate caps and swaps et cetera expire in September.
Speaker Change: <unk>.
Martin F. Jackson: What is your assumption, what do you think about your outlook as to what happens in the fourth quarter with respect to your borrowing costs or what mitigation strategies are you thinking about or any comment on that? Yeah, AJ. We anticipate that we'll probably see about a $20 million increase in interest expense for the fourth quarter. On an EPS basis, that's about 12 cents a share. Okay. And is there anything, any way to mitigate that in any way, or not particularly that sort of thing? It is what rates are what rates are. Yeah, at this point in time, the only way to mitigate it is to have the indices come down, right? Okay, I was thinking maybe a pivot to paying down a retiring dad or something like that.
Speaker Change: What what is your assumption when you think about your outlook as to what happens in the fourth quarter with respect to your borrowing costs are what mitigation strategies that you are thinking about or any comment on that.
Speaker Change: Yeah, a J, we anticipate that we will see probably about a $20 million increase in interest expense for the fourth quarter.
Speaker Change: On an EPS basis, that's about <unk> 12, a share.
Speaker Change: Okay and is there anything.
Speaker Change: Any way to mitigate that in any way or not not particularly that sort of it is with rates our rates are.
Speaker Change: Okay.
Speaker Change: Yes at this point in time, the only way to mitigate it.
Speaker Change: The indices come down right.
Speaker Change: Okay I was thinking maybe.
Speaker Change: Our pivot to pay it down.
Tyra gas or something like that I know you said you didn't do any buybacks this quarter I don't know of anything like that.
Martin F. Jackson: I know you said you didn't do any buybacks this quarter, but we will be very opportunistic, as we always are, AJ, and take advantage of any opportunity we can to get that interest expense down. Yeah, well, we're looking at it at this point in time. We've got a good six months plus to think about what opportunities there are, and that, as Marty pointed out, that's $0.12 off the EPS that we reflected in the guidance because of the cap going off. Yeah. We will. We will find opportunities.
Speaker Change: Under review or or or.
Speaker Change: Bob.
Speaker Change: We will take any.
Speaker Change: We'll be very opportunistic as we always are a J and take advantage of any opportunity we can to get that interest expense down yes. We're looking at at this time, it's we've got a good six months plus.
Think about what opportunities they are and that is as Marty pointed out that's that's 12 cents of EPS.
Speaker Change: That we reflected in the guidance, which <unk>.
Speaker Change: As of the cap going off but will we will we.
Speaker Change: We will find opportunities.
Martin F. Jackson: Okay. All right. Thanks a lot. Thank you. At this time, I would now like to turn the conference back over to Mr. Ortenzio for closing remarks. No closing remarks. Thank you, Operator, and thanks, everybody, for joining us. This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Okay.
Speaker Change: Alright, Thanks, a lot.
Thank you at this time I would now like to turn the conference back over to Mr. Ortenzio for closing remarks.
Ortenzio: No closing remarks, thank you operator, and thanks, everybody for joining us.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
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