Q2 2025 Select Medical Holdings Corp Earnings Call
Good morning, and thank you for joining us today for Select Medical Holdings. Corporation earnings conference call to discuss the second quarter, 2025 results, and the company's business Outlook.
Presenting today are the company's executive chairman and co-founder Robert ortenzio.
The company's Executive Vice President and Chief Financial Officer. Michael mollow Testa.
Also in the conference line is the company senior Executive Vice President of strategic finance and operations. Martin Jackson.
Management will give you an overview of the quarter and then open the call for questions.
Before we get started, we would like to remind you that this conference call may contain for looking statements regarding future events or 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.
And 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.
Mr. Robear ortenzio.
Thank you, operator. Good morning everyone. Welcome to select Medical's. Earnings. Call for the second quarter 20125.
I'd like to begin today's call by sharing that US News and World Report recently released its list of the nation's best Rehabilitation hospitals. And I'm pleased to report that 8 of our hospitals, which operate across 15 locations were recognized among the country's best.
Cancer Institute for Rehabilitation at number 4 was once again ranked as one of the top 5 rehab hospitals in the nation, earning a spot on the list for the 33rd consecutive year.
Our other ranked hospitals include Baylor, Scott and White Institute for rehabilitation Dallas at number 8.
Cleveland Clinic. Rehab hospital at number 20.
California. Rehab institute at number 24. Banner Rehabilitation Hospital at number 26.
And Ohio Health Rehabilitation Hospital at number at number 31.
this year also, marked the first recognition for Baylor, Scott and White Institute for rehabilitation hospitals at Frisco at number 36
And Penn State Health, Rehabilitation Hospital at number 47.
These rankings underscore the strength and consistency of our services and reflect our ongoing commitment to delivering high-quality care to patients and the communities. We we serve
I'm also pleased to report that we have continued success and executing our development strategy, this past quarter and our rehab division, we recently opened our second hospital with UPMC, in central Pennsylvania, adding a 12 bed acute rehab unit in Tallahassee, Florida, and expanding our acute. Rehab Hospital in Pensacola Florida with 8 additional beds.
In addition we launched a 12 bed, neurotrans care unit with SSM Health in Missouri.
Within our outpatient rehab division, we continue to expand our footprint and grew our Clinic count by 8. This past quarter,
Looking ahead, we remain focused on advancing our development Pipeline and growing our presence. In key markets, particularly within the Inpatient Rehab division where we continue to see growing demand for our services.
We expect to add 382 rehab beds.
which are, which 294 will be consolidating and 88 non consolidating and 30 critical illness beds between now and the end of the first half of 2027,
This expansion will be achieved through a combination of new openings and bed additions and markets with strong volume and occupancy rates.
In Q3, we plan to open a 45-bed hospital in Temple, Texas, and add a 30-bed critical illness recovery hospital in Memphis, Tennessee.
Later this year, we plan to open our fourth Cleveland Clinic rehab hospital as well as a 32 bed. Acute rehab unit in Orlando, Florida and complete a 10 bed, expansion and 1, other of our existing rehab hospitals,
we anticipate opening at additional 3 re rehab hospitals during 2026 including our fourth in partnership with Banner Health. In Tucson Arizona.
58 beds at a new freestanding 63 bed. Rehab Hospital in Ozark, Missouri with Cox Health Systems and a 60 bed Rehab Hospital branded as Atlantic Care. Rehabilitation Hospital in New Jersey.
We also intend to add another acute rehab unit and 2, neurotransmitter units in 2026.
And in 2027, we plan to open a 76 bed facility in Jersey City which will operate under the Kesler brand.
And expand one of our existing hospitals. We expect to continue to fill our pipeline with additional growth opportunities, as our inpatient rehab pipeline remains very strong, with many opportunities currently under evaluation.
In parallel with our growth initiatives, we remain committed to delivering value to our shareholders this quarter. We repurchased over 5.7 million shares of our stock at an average price per share of $14.86, under our board-authorized stock repurchase program, for a total purchase price of $85.1 million.
In addition, our board of directors.
Strong operational performance and shareholder value, including strategic Investments for growth.
At reduction additional share repurchases and cash dividends.
Returning to our second quarter Financial results.
On a consolidated basis, our revenue grew nearly 5% to $1.3 billion, and our adjusted EBITDA increased to $125.4 million from $124.7 million in the prior year.
Earnings for common share from continuing operations, Rose 88% to 32, cents from 17, cents per share in the same quarter prior year.
I'd now like to highlight key financial results by segments, starting with our Inpatient Rehab Hospital division, which delivered another exceptional quarter Revenue, Rose 17% year-over-year to 313.8 million with adjusted ebit da increasing nearly 15% to 71 million and our adjusted e but that margin declining slightly to 22.6% from 23.1%. In the prior year, our occupancy rate was lower than prior year at 82% and is reflected of the early stage operations of our new hospitals.
Our same store occupancy rate remains stable at 86%.
In April, CMS issued their proposed rule. If adopted, this rule would see an increase of 2.4% in the standard federal payment rate. We expect the final rule to be posted in early August.
And our outpatient Rehabilitation division Revenue, increased 3.8%, which was driven by a corresponding 3.8% in patient, volume compared to Prior year.
Our net revenue per visit remains stable at 100% in our commercial Managed Care rate. These improvements are offset by a 3.2% reduction in Medicare physician fee schedule rates.
Reduction in Medicare rate caused a 32% decline during the quarter.
And adjusted, EBA increased 6.1%. Year-over-year with divisions. Adjusted ebit. The margin increasing.
To 9.3% from 9.1%.
Before speaking to the performance of the critical illness, recovery Hospital Division. I wanted to address the headwinds We are continuing to face with eltech reimbursement system.
The goals of the 2013 eltech criteria policy which we supported focused on carrying for high Acuity. Patients those with a minimum 3-day ICU, stay with lower Acuity patients being treated in lower cost setting.
since the enactment of the criteria, the eltech industry has seen a 56 reduction 56% reduction in Medicare spent
The enactment of criteria at additional regulatory changes has resulted in the closure of over 100 ltac hospitals, which represents a 24% closure rate.
The high cost high cost outlier threshold targets established more than 20 years ago at 8% preceded. The implementation of eltech criteria and was developed using a significantly different and less acute, patient population than the industry is caring for today.
this is resulted in a significant reduction in reimbursement for the higher Acuity patients in the high-cost outlier status has been further magnified by the 20% transmitted
We are committed to engaging in dialogue with Regulators regarding potential short and long-term policy reforms. We're hopeful. These discussions will lead to positive changes that will enable us to continue to provide, excellent care to hi cutie patients with complex medical needs.
Moving on to the financial results for the critical illness. Recovery Hospital, division Revenue was 601.1 Million this quarter which is a decline of 1% from the same quarter last year. The decrease continues to reflect the impact of the increase. In high-cost outlier threshold and the implementation of the 20% transmittal rule.
Patient volumes remain relatively stable year-over-year with our occupancy rate. Improved to 69% from 67% in the prior year.
Our salary wage and benefits, Revenue ratio, Rose slightly to 58% and our adjusted e. But that declined 22% year-over-year, which was primarily due to the regulatory changes. I mentioned earlier.
Our adjusted ebit on margin was 9.4% for the quarter compared to 11.9% in the prior year.
Yesterday afternoon, CMS issued the final ltac rules for fiscal year 2026. These rules which become effective October 1 include an increase in the standard federal rate of 2.9%, Which is higher than the 2.7%.
From 77,048 to 78936, Which is less than the 14 1994.
the MSL Tech drg relative weight and expect the length of stays will also updated in the final rule,
This concludes my remarks and I'm going to turn it over to Mike moloa for some additional Financial details before we open the call for questions.
Thank you, Bob and good morning everyone. At the end of the quarter, we had 1.9 billion of debt outstanding and 52.3 million of cash on the balance sheet.
Our debt balance at the end of the quarter included, 1.04 billion in term loans, 250 million, in revolving loans,
550 million in 6 and a quarter percent senior notes, due to their 2032 and 33 million of other miscellaneous debt.
We ended the quarter with net leverage for our senior secured credit agreement of 3.57.
As of June 30th, we had 319.1 million of availability on our revolving loans.
The interest rate on our Term Loan is so far, plus, 200 basis, points and matures on December 3rd 2031.
Interest expense was 30 million in second quarter compared to 28 million in the same quarter prior year.
For the second quarter, operating activities generated 110.3 million of cash flow.
our days sales outstanding or DSO for continuing operations, with 62 days of June 30th, 2025 compared to 60 days at June 30th, 2024 and 58 days at the December, 31st 2024,
Investing activities, use 64.7 million of cash in the second quarter for purchases of property and equipment.
Financing activities, use 46.5 million of cash and the second quarter, which includes the 85.1 million of shares. Repurchased under our stock repurchase program.
7.9 million in dividends paid on our common stock.
12 million in net, distributions and purchases of non-controlling interests.
And a 2.6 million payment on our Term Loan.
This was all set by 70 million in net barring on our revolving line of credit.
We are reaffirming our business outlook for 2025.
We expect Revenue to be in the range of 5.3 billion to 5.5 billion, adjusted IBA to be in the range of 510 to 530 million.
And adjusted earnings per common, share to be in the range of 1 n to 119.
We are narrowing our expectation of capital expenditures which we now project to be in the range of 180 million to 200 million.
This concludes our prepared markets. And at this time we would like to turn it back to the operator. So open up the call for questions.
Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press star 1, 1 1 on your telephone and wait for your name to be announced to withdraw your questions. Simply press 1 1 1, again please, stand by. While we compile the canvas turn,
Now, first question, coming from the line of and hems with mizuho yen is Nelson.
Great, thank you. Um, I just want to talk about, um, how the Evo per segment came in line, versus your internal expectations and specifically with the critical illness. Um, I, I guess I expected a, um, an improvement in the year-over-year, decline in ibida. Um, did that come in line or worsen your expectations and um, also with guidance, can you talk about? I know you either way, you are just leaving a guidance but maybe any changes um, within that guidance would be great. Thanks.
Hi. An um critical illness came in for our internal expectations, slightly lower, but then again we continue to see impatient rehab at see our expectations.
And then going forward, that's kind of built into our our guidance. So overall, uh, we're comfortable with our reaffirm guidance.
All right, um okay. And then with um inpatient we have, I know there's a few states that might list the inpatient. We have gone, hopefully over the next year in North Carolina and being a big 1. Um, what is your strategy going forward in those states that will have um, a more favorable seal in environment for Inpatient Rehab. Thanks.
Remove their Co requirements.
For us, it really won't change our strategy. We we would spend more time in North Carolina, but we would, we would continue to stay true to our joint venture strategy. So while, uh, if you see a sunset for example, in North Carolina, you, you wouldn't expect us to see us go in, tie up, land and immediate at least start construction. We would, uh, probably follow our model of engaging with some of the major systems in that state, uh, that would be interested in growing their post-acute network with rehab, uh, potentially critical illness and, and outpatient.
Thank you.
Thank you.
our next question coming from the lineup, Justin bars with gotcha Bank Hill and is now open
Hi, good morning everyone. So an outpatient rehab, uh, making some progress there. I would up 6%. Year-over-year, can you talk about um how you expect that business to um evolved throughout the rest of the year? And then, you know, in the midterm where you think, um, you know, maybe down margins can settled for that business.
Hi, Justin. We we we continue to expect our patient to improve and I think if we communicate about 4 that Improvement will continue throughout the year and, you know, our initiative with scheduling really should take off towards the end of the year and the early part of next year and, you know, we should start exceeding that, um, approach that 10% even a margin, uh, because right now we're slightly below it. I think, you know, it's slight improvement from 91 to 93 this last quarter, but we should continue to see Improvement.
And Justin. It's Bob.
Continue to be very bullish on the prospects for our outpatient division, on a go forward basis. We we have been working on implementing some, some really good system upgrades in that platform. And, you know, with a, with a platform that that spans as many states as or were in with 2000 plus clinics, you know, the incremental Improvement that we can put over that platform through systems efficiencies can can really uh, drive performance of margin and ebit dog growth. So, um, I I'm, I'm, I'm pretty bullish about our prospects there on a go forward for the balance of this year, and particularly into, and through 2026. Even with the Medicare headwinds that we're seeing on the Medicare fee schedule,
Understood and then with um with the outlier threshold, can you help us understand the impact there? Um, in in 2q or or maybe throughout the year and then what what some of those policy initiatives are that? Um, if they could
could maybe, um, you know, impact the CMS's approach to this longer term.
Yeah, well, I'll speak to the policy initiatives as as you know, the the final rule for ltachs just came out uh yesterday. And we saw a, an improvement, a slight Improvement, an improvement nonetheless on the rate. And we saw a a pretty significant Improvement on the high cost outlier threshold which was telegraphed under the last Administration to go to over 90,000 dollars. And in the final rule here, it's in the 70,000. So you know, I'm encouraged by the uh, willingness of the current CMS Administration to be open to the feedback of providers. Um, and with us specifically and we have a submitted, a number of comment letters and have work to engage with CMS. And, and the only thing that I can say is I have found them much more open and transparent to discussion.
Then uh I had found uh, through the Biden CMS. So uh so you know there they're open to dialogue. That's the I mean and that's for us that's the best that we can hope for. You know I mean that you know success in our policy initiatives is not guaranteed, never has been but I'm encouraged by the fact that uh that there is an easier path to dialogue.
And Justin the the impact on the quarter it was around 60% of the the impact it was in q1. So as we expected, we're still going to face these headwinds uh, throughout the year. But I wouldn't be as significant as a q1 when we have higher volume and higher acuity.
Thank you, I appreciate it. I'll jump back in the queue.
Great. Thank you very much. Just to, uh, touch a little more on that last point there. Uh, if we could just keep your, your your take on kind of how we should think about seasonality with ltac margins, uh, knowing that we, we did enter a lower Acuity uh quarter and we saw, you know, a, a sequential decrease in margin. Um, you know how and then now that we've got kind of a more stable high cost outlier backdrop, going forward any way that we should. Just generally think about uh margin seasonality, uh going forward uh under the uh under the current rule. Thanks
Well, I don't think there's a change. When we say margin seasonality, I mean Q1 is always going to be our strongest.
Um quarter and it's the the grade is that, you know, last year, I think in 2024, where around 17% margin, we finished this year over 13% you know, Q2 and we we start seeing weakening as the quarter progresses, then Q3 that's normally our most challenging quarter and we start seeing census growth through the back, end of that quarter and in Q4 we start seeing a a ramp back up during the colder months. So while we're going to have, you know, margin suppression uh, from
2024, the seasonality aspect is relatively the same.
Great, thank you. And then can you honest how much, how much um startup cost you have? Uh included in guidance for the Earth segment, through the back of the Year. Thank you.
Uh, it's probably slightly, you know, around or a little less than $10 million for the back of the year. I think, you know, year-over-year, uh, you know, for Select Specialty Hospitals, we're pretty consistent from 2025 through 2024 around our piranha bases at the $20 million level.
Thank you.
Our next question coming from the lineup. Joanna, could you from Bank of America? Your line is now open.
Hey this is Walker on for Joanna. Um so with with q1 you flagged the 20% rule impacts uh the rule was issued as a surprise to the industry and there was some Traction in Congress to pull it back. Um what's been the progress on this and what should we expect? Moving forward?
Um,
I'm not sure that I could agree that there was traction in Congress to re uh to uh, pull back on the 20% transmitter. If that's what you're uh question was. I mean that
The first part of your comment was. Yes, the the 20% transmit came from what they call a sub regulatory. Uh and this was back in the last Administration, kind of the outgoing CMS.
That was not put through formal rulemaking uh and it came through what they call a transmitted. So that was a surprise and a disappointment to many of us in the industry because it doesn't give you any opportunity to comment. Um,
Normally it would be very difficult for the Congress to fix that. And there's really has not at least to this date, been much of a vehicle. Uh, even though you had the reconciliation that was what they call a pretty clean bill. So, um, I I think on on that, you know, working with CMS is probably going to be the only path that that we have on that. But you know, that's now been in place for close to 6 months. So, you know,
Well, we can always be hopeful you know, you know, hope is not a strategy. So we we are where we are right now and we've we've banked that transmit impact into our guidance. And we'll continue to look at all avenues to, um, to try to affect policy. But I just want to point out that the 20% transmitter is just part of a bigger high-cost outlier.
Uh challenge that the industry is facing as I made in my comments, which is as the number of cases in the eltech industry have overall gone down and those cases tend to have much higher CMI case. Mix index and higher measure of Acuity. The 8% outlier pool is going to continue to be a challenging uh element of the reimbursement system.
I hope that answers your question without getting too far in the weeds.
um, and then
Kind of changing it up. The on the final, I'll tag rag only called for the 2% increase in the outlier threshold. So it should be easier to manage than the 30% increase in a 4 year, 25. So we're assuming better margins in the critical illness, business in 4k 25.
The.
Reduction from the proposed.
The proposed 91,000 to 700,000 was certainly well. But I'm not sure. I could agree with the characterization that it'll make it easier in 20.
2025 2026, uh,
that that's still, that's still a challenge in number on the fixed loss threshold. Uh, so
You know, and we didn't, we didn't baked into our Guidance, the proposed rule nor do we ever, uh, provide, you know, bacon or guidance proposed rules. So, while we're, you know, very happy that it's not as punitive as the proposed rule. It is still represent a modest increase over where our current threshold limit is
Got it. Thank you guys.
Our next question, coming from the lineup AJ rice with UPS.
Uh, hi everybody. Um
Just to make sure I understand sort of the Dynamics in the critical access Hospital ltach business. Um,
so some of the, um, less intense patients are dropping off and not getting referred to ltac sounds. Like maybe there's, uh, some contraction of the people that providing the business. Can you just talk about? I know there's all a lot of focus on the outlier changes, Etc, and how that's affected the Dynamics. But if you strip all that back is the supply, what is happening with the overall Supply demand picture in that business? Uh, is there a meaningful reduction in capacity is there? Um,
Uh, a steady flow of patients, at least the kind that you want. Is that even picked up? Maybe it's, uh, you're one of the few outlets hanging in there. Any thoughts on that?
Oh, let me take a shot at that. AJ, you tell me if I'm I'm being responsive to your question, the supply, demand Dynamics for the critical illness recovery. Hospitals is is very strong and we think it'll be even stronger and that that's driven by demographics. It's uh, fueled by advances in medical technology. It's fueled by the need to
We can press icus, that are becoming increasingly crowded, particularly during those months where you see a lot of respiratory uh cases. So we are not short of demand, patient? Demand for our, our services. We of course, struggle with the same things everybody else struggles with which as more and more patients, Medicare patients, go to Medicare Advantage. We still face what we consider inappropriate denials or pre-authorization that, uh, uh, that delay delay or prevent admissions. But that, that is not a new problem. And that is a problem that we managed, we still have, you know, over 24%, 25% of our patient population and our critical illness recovery. Hospitals are Medicare Advantage and, uh, 30% probably Medicare fee for service. So, so that we, we
See that demand going forward, unabated? It's really our challenge has been the structure of the reimbursement system that, for, uh,
A company like ours that has 1 of the highest case. Mix indexes we tend to see the higher Acuity patients that are more likely to go through the fixed loss and end up in high cost outlier status.
So, if that's responsive. If not, please ask the follow-up question.
No, that's sort of what I'm looking for. Um,
Just generally speaking, again, we're talking about some of the top-level, revenue-driven things. What's happening with, um...
Some of your expenses I know mainly labor, I guess but uh across the different business lines. Um I'm a number of providers are showing Improvement there uh margin wise but what what's your Trend across your major business lines?
% piranha increases, that's migrated down to 3% and now, even a little bit below 3%. So, you know, and from that aspect, it's improving. I don't think we have the headwinds or the challenges we had with agency. And those elevated costs that we had in 2022 and part of 2023. Um, we did have some slight deterioration in our critical illness, labor margin, this quarter year-over-year but that was a function of really the pressures that we have on Revenue with the uh AC hco threshold. So that's where you saw that modest pick up of 1%.
Okay, that's great. Thanks so much.
Thank you.
I'm trying to know for the questions in queue. I will not send the call back over to Mr. Oronzio for any closing remarks
Take. Thank you, operator. Thanks everybody for uh, joining us, uh, for the call. And we look forward to updating you in next quarter.
thank you for your participation and you may now disconnect