Earnings Call Transcript - SEM Q2 2024

Operator, Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the second quarter 2024 results and the Company's business outlook. Speaking today are the Company's Executive Chairman and Co-Founder, Robert Ortenzio, and the Company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the Company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select 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 over to Mr. Robert Ortenzio.

Robert Ortenzio, Executive Chairman and Co-Founder

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the second quarter 2024. Before I address our second quarter results, I wanted to highlight a few items. First, we successfully completed Concentra's initial public offering on July 26. The extraordinary efforts of many of our Concentra and Select colleagues throughout the process are greatly appreciated. Concentra issued 22,500,000 shares at an IPO share price of $23.50 and now trades under the symbol CON on the New York Stock Exchange. The underwriters of the IPO transaction have a 30-day option to purchase an additional 3,375,000 shares of Concentra common stock. Select Medical still owns 82.23% of Concentra's stock, or 80.09% if the underwriters exercised their full allotment. Select expects to distribute its remaining interest in Concentra to its shareholders within 12 months of the IPO as required by the private letter ruling from the IRS. In connection with the planned separation, Concentra entered into financing arrangements, which included a new senior credit facility, consisting of an $850 million seven-year term loan, a $400 million five-year revolving facility, which was undrawn at closing, and $650 million of 6.875% senior notes due 2032. The majority of the net proceeds from the Concentra IPO-related debt transactions were used by Select to pay down debt. Concentra will be hosting their first conference call later this morning at 10:30 Eastern Time, where they will provide more detailed information regarding their performance and insight into their business. On another positive note, US News & World Report recently issued its annual best hospitals list. I'm pleased to share with you that six Select Medical rehabilitation hospitals at 12 locations have been ranked among the top in the nation for 2024-2025. They are Number 4, Kessler Institute for Rehabilitation; Number 14, Banner Rehabilitation Hospital; Number 20, Baylor Scott & White Institute for Rehabilitation in Dallas; Number 23, California Rehabilitation Institute in Los Angeles; Number 24, Cleveland Clinic Rehabilitation Hospital; and Number 38, OhioHealth Rehabilitation Hospital in Columbus. This marks the 32nd consecutive year that Kessler Institute has been named among the nation's best hospitals for rehabilitation and the fourth year in a row for Baylor Scott & White Dallas and OhioHealth. This recognition highlights the commitment of each hospital to providing high-quality care to patients and their families every day. It also demonstrates the dedication of every team member to our culture of delivering an exceptional patient experience. On the development front, we opened a new critical illness recovery hospital with a distinct-part rehabilitation unit in Chicago with RUSH University system, adding 44 critical illness and 56 rehabilitation beds on April 9th. We are on target to open a 48-bed rehabilitation hospital in Jacksonville, Florida later this year with our partner, UF Health Jacksonville. The joint venture hospital, branded as UF Health Rehabilitation - North, will be located in a new tower of UF Health. There are many other exciting development projects we have in the works for 2025 and 2026 in the inpatient rehabilitation division. To recap, in 2025, we're opening our fourth rehab hospital with Cleveland Clinic in Fairhill, our second hospital with UPMC in Central Pennsylvania, and our fourth rehab hospital as part of our joint venture with Banner in Tucson, Arizona. In 2026, we are planning to open a new 60-bed rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab in partnership with AtlantiCare, and we have scheduled to open a new freestanding 63-bed rehab hospital in Ozark, Missouri with CoxHealth system. Overall, we are very pleased with the development results and the pipeline for our specialty hospital divisions. Between the specific projects just mentioned, as well as some other smaller expansions in new distinct part units in existing hospitals, we plan to add 449 additional beds to our operations from the remainder of 2024 through 2026. The additional beds consist of 423 rehab hospital beds, which includes 54 non-consolidating beds and 26 long-term care beds. There are also many other opportunities under evaluation that would further increase our Select Specialty Hospital footprint. This quarter, our outpatient rehab division added 15 clinics via eight de novos and three acquisitions, totaling seven clinics. This is offset by the closure of five underperforming clinics and the fold-in of seven clinics into existing operations upon lease expiration. The pipeline for future growth remains strong, with 16 executed leases for de novo clinics scheduled to open later this year, along with one clinic acquisition in North Jersey. Moving on to the second quarter results, we continue 2024 with another strong quarter. The hospital divisions continued to exceed our expectations with the inpatient rehabilitation division returning double-digit growth in both revenue and adjusted EBITDA for the second straight quarter this year. Overall, our consolidated adjusted EBITDA grew 3% and revenue grew by 5% compared to Q2 of the prior year, with all four divisions exceeding prior year revenue. For the quarter, total Company adjusted EBITDA was $226.3 million compared to $219.5 million in the prior year. Our consolidated adjusted EBITDA margin was 12.9% for Q2 compared to 13.1% in the prior year. Our critical illness recovery hospital division continues to perform well with a 5% increase in revenue and a 10% increase in adjusted EBITDA compared to the same quarter in the prior year. Critical illness incurred $3.6 million of startup losses related to new hospitals this quarter compared to $5.1 million in the same quarter prior year. Current quarter startup losses primarily relate to the opening of RUSH Specialty Hospital in April. And while our occupancy was slightly down from the same quarter last year at 67%, down from 68%, our average daily census increased by 1%. Our rate per day increased by 4%. Our adjusted EBITDA margin was 11.9% for the quarter compared to 11.4% in the prior year Q2. Critical illness experienced a 1% reduction in their salary, wage and benefits to revenue ratio compared to prior year Q2 with a 56.1% margin. Nursing agency utilization decreased by 14%, and agency rates decreased by 4% compared to the same quarter prior year. Orientation hours decreased by 12% from prior year Q2. Nursing sign-on incentive bonuses decreased by 18% from prior year Q2. On the regulatory front, yesterday afternoon, CMS issued the final long-term care rules for fiscal year 2024, which will be effective October 1 of this year. The final rule includes a 2.6% increase in the federal base rate, which is higher than the proposed rule at 2.4%. The high-cost outlier threshold increased by $17,175 from $59,873 to $77,048, which was higher than the increased outlier in the proposed rule of $15,524. The MS-LTC-DRG relative weight and expected length of stay were also updated in the final rule. As previously mentioned, our inpatient rehabilitation hospital division had a very strong quarter with an 11% increase in revenue and a 13% increase in adjusted EBITDA compared to Q2 of the prior year. Inpatient rehab incurred $3 million of startup losses this quarter, primarily related to the opening of RUSH Specialty Hospital unit in April compared to no startup losses in the prior year. Average daily census increased by 7%, and our rate per patient day increased by 5%. Our occupancy of 84% was consistent with the prior year. The adjusted EBITDA margin for inpatient rehab was 23.1% for Q2, which was higher than the prior year margin of 22.7%. This week, CMS issued the final inpatient rehab rules for fiscal 2025, which will be effective October 1. The final rule includes a 1.97% increase in the standard federal payment rate, which is higher than the 1.79% included in the proposed rule. The high-cost outlier threshold increased by $1,620, which is slightly less than the $1,735 increase in the proposed rule. The CMG relative weights and average length of stay values were also updated in the final rule. Concentra experienced a 2% increase in net revenues and a 1% increase in adjusted EBITDA over the same quarter of the prior year. The increase in revenue was driven primarily by a 4% increase in rate, which was attributed to state fee schedule increases, along with a higher mix of workers' compensation visits. Consistent with the first quarter, Concentra's workers' comp volume remained strong with an increase of 2%. It was offset by a 4% decrease in employer-based visits, which are reimbursed at lower rates. Demand for employer-based visits has normalized compared to the COVID years, where we experienced a significant churn in the labor force. We expect a decrease in employer-based visits to level off in the near future. Concentra's adjusted EBITDA margin was 21.3% for the quarter compared to 21.5% in the same quarter of the prior year. Our outpatient rehab division experienced a 4% increase in revenue with patient volumes increasing by 4% and net revenue per visit of $100, consistent with the prior year. Our volume continues to maintain an upward trend, and net revenue per visit has stabilized with improvements in commercial managed care rates, offset by a decrease in our Medicare rates. The outpatient division's adjusted EBITDA decreased by 12% compared to the prior year, and the adjusted EBITDA margin went from 10.8% to 9.1%. Our outpatient team is focused on improving patient access, productivity, and staffing. Thus far in Q3, we have seen positive results when compared to prior year Q3 performance. Earnings per share and adjusted earnings per share were $0.60 for the second quarter compared to $0.61 per share in the same quarter of the prior year. In regards to our allocation and deployment of capital, our Board of Directors declared a cash dividend of $0.125, payable on August 30 to stockholders of record as of the close of business on August 14. This past quarter, we did not repurchase shares under our Board-authorized share repurchase program, and we continue to evaluate stock repurchases, reduction of debt, and development opportunities. That concludes my prepared remarks. I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.