Q1 2024 Select Medical Holdings Corp Earnings Call
Okay.
Speaker Change: Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2024 results and the company's business outlook.
Speaking today.
Executive Chairman: What are the company's chief Executive Chairman and co founder.
Robert Ortenzio, and the company's senior executive Vice President of strategic Finance and operations Martin Jackson.
It will give you an overview of the quarter and then open the call for questions.
Before we get started we would.
To remind you that this conference call maybe 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'll turn the call over to Mr. Robert Ortenzio.
Uh huh.
Thank you operator, and good morning, everyone welcome to select Medical's earnings call for the first quarter of 2024.
I'll first provide some updates on the progress we have made regarding our previously announced plan.
Robert A. Ortenzio: The separation of select medicals wholly owned occupational health services business Concentrix.
February 27th we announced that we had received as expected a favorable private letter ruling opinion from the internal revenue service confirming the tax free status of the potential transaction.
Robert A. Ortenzio: On March 18th we announced that Concentrix had confidentially submitted a draft registration statement on form S. One with the SEC relating to the proposed initial public offering of its stock.
The IPO is expected to occur after he says he completes its review process and subject to market and other conditions.
We're pleased so far with the progress and expect the separation to be completed by the end of 2024.
Okay.
Overall, we had a very strong first quarter start off 2024.
Led by both our hospital division is generating very impressive results.
Adjusted EBITDA grew 22% and revenue grew 7% compared to Q1 of the prior year with all four operating divisions exceeding prior year revenue.
For the quarter total company adjusted EBITDA was $261 $9 million compared to $214 1 million in the prior year.
Our consolidated adjusted EBITDA margin was 14.6 for Q1.
<unk> 12.9 in the prior year.
The first quarter results of our critical illness recovery Hospital Division.
Our exceeded our expectations.
Robert A. Ortenzio: Adjusted EBITDA of $115 9 million was 51% higher than Q1 of the prior year with increases in revenue and sensors.
Robert A. Ortenzio: Along with a 6% reduction in salary wages and benefits to revenue ratio Marty Jackson to provide some additional detail regarding CRH has continued progress with labor within his commentary.
Martin F. Jackson: On April nine we opened our critical illness recovery hospitals Stinkpot rehabilitation unit in Chicago with Rush University system, adding 44 critical illness, and 56 rehab beds.
There was also a strong pipeline for additional growth opportunities under consideration.
On the inpatient.
Rehab development, Brian we are on target to open a 48 bed hospital in Jacksonville, Florida in Q3 2024, with our partner you asked help Jacksonville.
In the first half of 2025, we're opening our fourth rehab hospital with Cleveland Clinic.
Testing of 32 beds and we are slated to open our third hospital in Central Pennsylvania in partnership with U P. M. C. This will be a 20 bed rehabilitation hospital and will serve the expanding needs of the region.
Martin F. Jackson: In February it was announced that select medical and banner health are breaking ground on a fourth rehabilitation hospital as part of our joint venture.
A 56 bed hospital in Tucson, Arizona with a planned opening in the latter part of 2025.
Also in the latter part of 2025, we are expanding our Riverside Hospital in Virginia by 10 bad mood.
Martin F. Jackson: Moving on to 2026, we're opening a new 60 bed.
Martin F. Jackson: You have hospital in Southern New Jersey, Bacharach Institute for rehab and partnership with Atlanta care and are scheduled to open a new freestanding 63 bed rehab hospital in Ozark, Missouri with Cox health system.
Martin F. Jackson: Overall, we are very pleased with development results in the pipeline for our specialty hospital divisions between specific projects just mentioned as well as some other smaller expansions in distinct part units. We plan to add 537 additional beds to our operations from Q2 2024 through 2026.
The additional beds consist of 467 rehab beds, which includes 54 non consolidating beds and 70 L cockpit.
We also have a lot of activity in regards to development in our Concentrix and outpatient divisions.
And central or acquire a four center occupational medicine and practice in Hampton roads, Virginia market on February 24th.
And a second de Novo clinic in Fort Myers, Florida opened in March. We currently have six signed leases for de novo's slated opening throughout the remainder of 2024 and Q1 of 2025.
Martin F. Jackson: <unk> continues to maintain a strong pipeline of potential acquisition opportunities in various de novo sites under evaluation.
This quarter, our outpatient rehab division added five clinics be afford to novo's and one acquisition.
This offset the closure of 14 underperforming clinics and afford in a two clinics into existing operations upon lease exploration.
The pipeline for future growth remains strong with 20 executed leases for de Novo clinic scheduled to open later this year. Many other acquisitions that go well opportunities are currently under consideration.
Martin F. Jackson: Now I will provide some further data points on the results of each of our operating divisions as I mentioned, our critical illness recovery Hospital Division had a very strong quarter revenue increased 10% with a 51% increase in adjusted EBITDA compared to the same quarter prior year critical illness incurred $2 2 million of startup losses really.
Martin F. Jackson: The new hospitals, this quarter compared to $1 9 million in the same quarter prior year.
Martin F. Jackson: While our occupancy was slightly down for same quarter last year average daily census increased 2%.
Martin F. Jackson: Our rate per patient day increased 8% the increase in rate was primarily driven by an increase in our case mix index.
Martin F. Jackson: Medicaid supplemental payments that were partially offset by an increase in taxes and favorable payer contract negotiations.
Our adjusted EBITDA margin was 17, 7% for the quarter compared to 12, 9% in prior year Q1.
Critical illness experienced a 6% reduction in their salary wages.
Martin F. Jackson: Salary wages and benefit to revenue ratio compared to prior year Q1, with nurse agency utilization decreasing 20%.
In agency rates decreasing by 7% compared to same quarter prior year orientation hours decreased 9% compared to prior year Q1, nursing sign or incentive bonus decreased 26% from prior year Q1.
Martin F. Jackson: In April.
<unk> issued their <unk> proposed rule for 2025 and if adopted.
An increase of two 4% in the standard federal payment rate and an increase in the high cost outlier threshold.
The final rule is expected in late.
Late July early August after the required comment period.
Our inpatient rehabilitation Hospital Division also had a very strong quarter with a 15% increase in revenue and a 30% increase in adjusted EBITDA compared to Q1 prior year.
Average daily census, increased 7% and our rate per patient day increased 7%.
Our occupancy of 87% was higher than prior year of 86%.
Adjusted EBITDA margin for inpatient rehab was 23, 1% for Q1, which was higher than prior year margin of 24.
Martin F. Jackson: In March CMS issued.
The rehab proposal for fiscal year 2025.
If adopted would see an increase of one 8% in the standard federal payment rate.
I always expected in late July early August after the required comment period.
And sentra.
First an increase of 2% net revenues and 3% and adjusted EBITDA over prior year same quarter increase.
The increase in revenue was driven primarily by a 4% increase in rate.
Our workers comp volume remained strong with an increase of 3%, but was offset by a 6% decrease in employer base visits which are reimbursed at lower rate and it's led to an overall visit decline of 2%.
Player demands for drug screens, and physicals trended downward our onsite revenue grew by 9% as concentric added 11, new onsite clinics.
Acacia since Q1 of last year, and we are seeing higher revenue per site.
<unk> adjusted EBITDA margin was in line with prior year at 26%.
Our outpatient rehab division.
Experienced an increase of 2% and revenue with patient volumes increasing by 4%.
Offsetting the volume increase was a decrease in net revenue per visit from 101 per visit to $99.
Our volume continues to maintain an upward trend while the rate decreases are primarily due to a decline in the outpatient Medicare fee schedule.
Payer mix shifts.
The outpatient division's adjusted EBITDA decreased by 17% compared to prior year and the adjusted EBITDA margin went from 10, 2% to eight 2%.
Martin F. Jackson: In March the president signing appropriation bill that mitigated a three 4% reduction in Medicare physician fee schedule that went into effect in January.
Sign law includes a 1.68% increase.
In the fee schedule based conversion factor for the remainder of the year. The net result of this change is a 2% reduction in Medicare fee schedule for the year as opposed to the original three 4% cut.
Earnings before per fully diluted share or <unk> 75 for the first quarter compared to 56 cents.
Per share in the same quarter prior year adjusted earnings per fully diluted share were <unk>, 77% for the first quarter, which excludes consent for separation transaction costs net of tax.
In regards to our allocation of deployment of capital.
The directors declared a cash dividend 12, and a half cents payable on May 32020 for stockholders of record as of the close of business on May 16th 2024.
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.
Martin F. Jackson: Concludes my remarks, I'll turn it over to Marty Jackson for some.
Martin F. Jackson: Additional financial details before we open the call up for questions.
Thanks, Bob Good morning, everyone.
Martin F. Jackson: I will begin by providing some additional details on the progress we continue to make regarding labor cost within the critical illness recovery Hospital Division.
Overall, our SWM as a percentage of revenue ratio exceeded our expectations at 52, 9% this quarter, which is a decrease from 56, 2% in Q1 of prior year.
In the first quarter of this year, we saw a decrease in the agency costs and utilization for prior year Q1.
Compared to Q1 of 'twenty three.
Our and agency costs decreased by 23% and utilization decreased.
<unk> to 14% from 18%.
The hourly agency rates or Rins also decreased by 7% from $83 to $77 nursing sign on an incentive bonuses dollars decreased by 26% from Q1 of prior year down from.
Martin F. Jackson: Down to $7 6 million from $10 $3 million for the prior year same quarter.
Finally, we saw a decrease of 9% and our new hire orientation hours.
Moving on to our financials in Q1 equity and earnings of unconsolidated subsidiaries were $10 4 million as compares to $8 $6 million in the same quarter prior year.
Net income attributable to Noncontrolling interest was $23 million compared to $14 5 million in the same quarter prior year.
Interest expense was 50.
$8 million in the first quarter. This compares to $48 $6 million in the same quarter prior year.
Martin F. Jackson: The increase in interest expense was principally due to the increase in the borrowing spread on our term loan resulting from the amendment to our senior secured credit agreement.
At the end of the quarter, we had $3 8 billion of debt outstanding and $93 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2 billion in term loans $510 million in revolving loans $1 $2 billion in our six and a quarter senior notes.
Martin F. Jackson: And $77 $6 million of other miscellaneous debt.
During the first quarter, we prepaid $79 million on our term loan under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of four four times.
We estimate approximately $95 million of our incremental borrowings in the quarter were related to the change held cyber incident.
Our estimated net leverage would have been four three times without the incremental borrowing borrowings related to the cyber incident.
As of March 31, we had $202 $4 million of availability on our revolving loans.
The interest rate during $2 billion of our term loans is capped at 1% sulfur plus 300 basis points.
Through September 32024.
For the first quarter operating activities used $66 $7 million in cash flow.
Our days sales outstanding was 58 days as of March 31, 24. This compares to 54 days at March 31, 23, and 52 days.
Martin F. Jackson: At the end.
Fiscal year 2023.
The increase in DSO was principally attributable to the change held cyber incident.
Investing activities used $57 $7 million of cash in the first quarter. This includes $52 5 million in purchases of property equipment.
Martin F. Jackson: And other assets and $5 2 million in acquisition and investment activities.
Martin F. Jackson: Financing activities provided $133 million of cash in the first quarter.
This was primarily due to $230 million in net borrowings on our revolving line of credit at $8 7 million and net borrowings and other debt less the $79 million in term loan repayments $16 million and dividends of our common stock and $8 $8 million net payments and distributions to noncontrolling.
Chris.
They did previously we did not repurchase any shares under our board authorized repurchase program this quarter.
Last year the board approved a two year extension of the share purchase repurchase program, which remains in effect until December 31, 2025, unless further extended where earlier terminated by the board.
We updated our business outlook for 2024, we expect revenue to be in the range of $6 nine to $7 $1 billion adjust.
Martin F. Jackson: Adjusted EBITDA to be in the range of $845 million to $885 million fully diluted earnings per share to be in the range of $1 95 to $2 19.
And adjusted earnings per share to be in the range of.
Martin F. Jackson: $1 96 to $2 20.
Capital expenditures are expected to be in the range of $225 million to $275 million for 24 for year 'twenty four.
And $123 million of that is allocated towards maintenance, which is consistent with prior years the balance of that would be in development.
This concludes our prepared remarks and at this time, we would like to turn it back to the operator to open up the call for questions.
Martin F. Jackson: 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 again.
Operator: Please standby, while we compile the Q&A roster.
Yeah.
Operator: Our first question comes from Justin Bowers with DB. Your line is open.
Hi, Good morning, everyone. Bob Thank you for the comprehensive update on development activities.
Justin D. Bowers: I missed rush can you just give us an update on.
On the new hospital.
With that system.
Sure we built a new hospital with in partnership with Roche, which is a new building on their campus, which is composed of both rehab hospital.
Lab Hospital.
Justin D. Bowers: And Al TAC Hospital, they the way the regulations work, it's technically an <unk> hospital.
Distinct part.
Justin D. Bowers: Rehab unit, but it opened.
I think this past month, and we're going through the <unk>.
The six month qualification period for Al Tac, but the rehab hospital is filling.
Filling up nicely.
Okay, great. Thank you and then Marty just pivoting to a critical illness can you just talk about.
The efforts you <unk> you.
Guys is done.
With labor you had some really nice improvement there.
On that <unk> ratio.
Yes, Justin our operators have done a terrific job.
Justin D. Bowers: Reducing the reliance on the agency nurses.
Most of the nurses that we we.
We would like to have full time, we have higher so orientation hours have gone down.
So all in all it's just been terrific.
We've talked about potentially getting back to that 50% to 53% range, but we thought it would take us another year to get there.
And again the operators have done.
Terrific job on their staffing.
Okay and then in the prepared remarks, you said the agency costs were down 23%. So that's.
That was roughly about $18 million during the quarter is that the right ballpark 18 or 19.
Sure.
Staffing <unk> costs were.
Yes, that's right they dropped from.
About.
$24 million down to 18.
Okay.
And then just.
One last one you mentioned some Medicaid.
Payments is there can you size that for us and is there any.
Yes.
Yeah.
It is about.
$4 million to $5 million net.
Justin D. Bowers: After taxes.
Okay got it thank you I'll jump back in queue.
Great. Thanks Joseph.
Thank you.
Our next question.
Our next question comes from Ben Hendrix, with RBC capital markets. Your line is open.
Hey, Thanks, guys and congratulations on the quarter I just wanted to.
Ask about $3 8 billion and that are ahead of the spin we get a lot of questions about our balance sheet allocation between spin Cowen remain co I just wanted to get your latest thoughts there considerations and how you're thinking about the balance. Thank you.
Justin D. Bowers: Yes.
Justin D. Bowers: Have indicated publicly is that you can think about this in terms of both entities will ultimately have about four times leverage.
Uh huh.
On the balance sheet or on a gross basis.
Little bit less on the net side.
Thank you and and then also just we've heard one of your peers on the inpatient rehab side talk about strategies.
<unk> D.
Pre claim.
The review choice demonstration and how there are relationships are with fiscal intermediaries in the <unk> business just wanted to get your thoughts on positioning around that if your footprint is impacted.
How your relationships are with fiscal intermediaries and if you've given any thought to kind of how to approach the review choice. Thanks.
Obviously, I think our relationships are good but good bad relationships. It's all about how you fared through the audits.
It does impact our platform and we've had extremely.
Extremely good resolved with all the review choice demonstration audits are so it's not.
Not been an issue.
Thank you.
Thank you one moment for our next question.
Okay.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Hi, This is Matt on for Kevin Fischbeck with Bank of America.
My first question was just regarding how Q1 EBITDA was $40 million above consensus but.
You raised the midpoint of the EBITDA guidance by $10 million. So is it fair to say that Q1 results searches closer to your internal expectations.
Justin D. Bowers: Compared to where consensus was and what are the sources of the beat so why are you not also raising revenue guidance.
Yes.
Justin D. Bowers: I mean, our expectations.
Speaker Change: First of all.
Is the thought process for us was really.
The spread was rather large what we did was we increased the lower limit by $15 million.
We're taking a look at the remaining three quarters in and to the extent that we continue to exceed like this we'll make adjustments as those quarters.
Speaker Change: As we see what those quarters are around how we're performing.
Speaker Change: Alright, and just a follow up or I guess, not really follow up really a different question.
On a critical illness margins, improving 480 bps year over year, despite the Medicare reimbursement pressure. So what would you say would be the main drivers for that.
Sounds good.
Speaker Change: There's a couple of different drivers to that it was really we had we had some nice increases in volume we had nice increases in case mix index, which increased the rate.
And then I'd say by far the largest impact came from.
Controlling costs on the on the salaries wages and benefits side, you saw a nice drop in our SWM as a percentage of revenue and that was a big driver of that improvement in margins.
Alrighty, thanks, so much.
Thank you one moment for our next question.
Our next question comes from a J rice with UBS. Your line is open.
Hi, everybody.
Albert J. William Rice: Just a fine point on the comments around the supplemental payment program is this the first quarter you recognize that and is that $4 million an annualized number for that program or are you going to have $4 billion incremental every quarter. This year.
Okay, we have recognized before right a J.
But as they become more mature we're able to recognize on a month to month basis, and Thats, what youre seeing there.
Albert J. William Rice: And so the.
Second third and fourth quarter, we'll have roughly around $4 million benefit from this program.
Oh.
Yes.
That number right there was a one time number.
Okay Alright.
Albert J. William Rice: And then on the.
Had a couple of business questions, but on the Concentrix spin.
I know you said reaffirm targeted by the end of the year any sense of when.
Those that.
Island filings going to flip to public and.
Any plans on.
Having that management team out on a road show and when might that occur.
Yes, as you know a J, it's really it's fully dependent on SCC in the comments that we get and the length of time does that takes so as we get.
As we get further clarity, we'll be able to give you a much better timeframe.
Albert J. William Rice: Okay.
Obviously.
Interviewer: A big win for the company in the quarter was on the Labor front as you said I'm wondering just if you look I know the year to year comps are still really good on the contract labor. If you look sequentially are you still from quarter to quarter seeing that come down or are you sort of know it up.
At a normalized level and Youre just.
Interviewer: Just where it plays out at that level.
Contract utilization et cetera, and then.
Is there any comment on where your wage rates are trending for your permanent workforce.
Interviewer: Critical illness Division.
Yeah, a J with regards to the <unk> rates.
We think that we're probably at the low end of the range right now we do believe that there'll probably be seasonality.
And those rates, but all in all.
Speaker Change: I think it's within a couple of bucks of each other.
Speaker Change: I think on the.
The our full time employee.
Speaker Change: Rates are in that 3% to 4% range on an annual basis.
Speaker Change: Okay, and then maybe.
Last question.
Speaker Change: On the.
Speaker Change: I think.
You've previously said one of the issues or challenges.
The proposed rule or the rule last year was the L Tagg outlier.
Threshold increase yes.
Obviously.
Had a very good quarter in this <unk> business. This quarter are you seeing any.
The impact on margins or volumes for that and any early comment on the proposal for next year and how that might impact you.
Speaker Change: Well.
Again, we normally don't say much about the proposed rule what it what it is in a comment period will be submitting comments I will say that the.
The continued increase in the fixed loss threshold amount is hopper on their providers that have the higher acuity longer stay patient and we just continue to navigate that.
And continue to tweak our operations in.
In order to accommodate for the changes that are in the direction that the policymakers are trying to push us so yes.
As you saw in Q1 with the <unk> that.
Volume and expenses.
Salary wages and benefit and ray to acuity.
Can really carry the day so.
We obviously feel good about their performance and can continue to do that and our our business on that side of the business on the critical illness.
Is better as the acute care hospitals have higher occupancies and their IC is so that's what really is the main thing that drives that business.
Okay, alright, thanks, so much.
Okay.
Speaker Change: Thank you one moment for our next question.
Our next question comes from Bill Sutherland with Benchmark Company. Your line is open.
Thanks.
Everybody.
I wanted to see if.
There was any more color you can provide about the.
Trends in the employer demand for Concentrix.
The lower levels of screens physicals.
Yes.
Speaker Change: Demand there really has to do with.
Speaker Change: Employment.
And as you know during 2002.
2022, and 23, there was much higher demand just because there was a lot more hiring going on is hiring goes back to normal you're going to see those drop and thats something that we expected to see I think the other point that I'll make there is that.
Speaker Change: Those.
The types of activities. The concentric does for employment hiring are really the lower end of the range things like drug testing, which are in the $40 range or physicals, which are much lower than what the <unk>.
Unit pricing is on workers' comp.
Yes again, the positive mix is good so I guess, what youre, saying.
Marty is that sequentially. This is kind of probably just flattened out it's just a year over year thing right now.
I think I think I think you can think about it that way.
I don't think that it is.
It's not really a concerning issue at this point.
Speaker Change: Okay.
Back to <unk>.
The CMI increase was impressive is that is that part of the seasonality of <unk> or is that something that's sustainable.
Yes, Q1, typically has a higher CMI.
Speaker Change: The normal but the increase that we saw was based on a year over year same quarter basis. So we felt pretty we felt very good about that.
And again that goes back to your comment Bob without ICU.
Capacity and so forth.
Well, yes, and as you see UC in the first quarter Youre, just going to have more of those respiratory cases, the winter months bring those and youre going to see you're going to see more volume in the Ics and consequently, youre going to see more volume to to the <unk>.
Okay.
Okay.
All I got thanks, everybody.
Great.
Thank you.
I'm showing no further questions at this time I would now like to turn it back to Robert Ortenzio for closing remarks.
And thank everybody for joining us and for your questions.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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