Select Medical Holdings Corporation (NYSE:SEM) Q4 2022 Earnings Call Transcript

Select Medical Holdings Corporation (NYSE:SEM) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation’s Earnings Conference Call to discuss the Fourth Quarter 2022 Results and the Company’s Business Outlook. Speaking today are the company’s Executive Chairman and Co-Founder, Robert Ortenzio; and the company’s Executive Vice President and Chief Financial Officer, 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: Thank you, operator. Good morning everyone, welcome to Select Medical’s earnings call for the fourth quarter 2022. As I have done in previous calls, I’ll first give some overall commentary on the quarter before providing some details on each of our four operating division. After that all turn it over to Martin Jackson, who will provide further detail on our progress throughout Q4 and an outlook on labor cost for Q1 for the Critical Illness Recovery Hospital division. As most of you are aware and we’ve discussed in detail throughout 2022, our most significant headwinds has been staffing challenges in our critical illness recovery hospital division. This past quarter, we’ve seen some encouraging signs and results as we head into 2023.

Our critical illness recovery hospital division’s salary raises and benefits to revenue ratio improved each month throughout the quarter. I’m extremely pleased that our combined focus on recruitment, training and retention of personnel has begun to yield positive results. This would not have been possible without all the efforts of our company colleagues during an extremely challenging macro labor environment. The progress achieved reducing labor costs has resulted in an 80% improvement in our Q4 critical illness recovery hospital division’s adjusted EBITDA compared to the same quarter prior year. Our focus on labor continues to yield positive results in 2023. As previously highlighted, we believe one of our company’s greatest strengths is our diversification.

Even as the critical illness recovery hospital division struggled with labor headwinds, both our inpatient rehab and Concentra divisions continued to exceed expectations this past quarter. Inpatient rehab division exceeded prior year Q4 revenue occupancy adjusted EBITDA. We recently announced a definitive agreement with our joint-venture partner OhioHealth to acquire reunion rehabilitation hospital in Dublin, Ohio, which will feature 40 private rooms will be renamed OhioHealth Rehabilitation Hospital. We’ve also reached an agreement to enter into a joint-venture with Atlantic Care, a leading multiservice healthcare system in South Jersey to build a new inpatient rehabilitation hospital. Contingent upon regulatory approval the hospital will be called back Institute for Rehabilitation and is slated to be there in late 2024 or 2025.

As previously noted on our last call, we are expanding our partnership with UPMC to open a second inpatient rehab hospital in Central Pennsylvania. The development pipeline for inpatient rehab division remains strong and the division is poised for a successful 2023. Concentra had another successful quarter has done a tremendous job offsetting decline in COVID related testing and evaluation services from prior year with increased workers’ comp volume in their existing centers. Concentra workers’ comp volume continues to be strong in 2023. This past quarter Concentra opened three denovo clinics, two in Pennsylvania and one in Green Bay, Wisconsin, with the new joint-venture partner. Concentra also acquired a center in Tulsa, Oklahoma, along with transitioning 18 outpatient work net centers and three outpatient physical therapy centers from our outpatient rehabilitation division into 17 full-service Concentra centers in Pennsylvania and New Jersey.

Concentra has a strong pipeline of development opportunities we signed purchase agreements for threefold in acquisitions in Pennsylvania and Connecticut, expected to close-in Q1 along with signed leases for three new medical centers in Ohio, Virginia and Florida that we expect to open in the latter half of 2023. In addition, there are several more acquisitions in denovo opportunities in advanced stages that should provide further growth throughout the rest of 2023. Our outpatient rehabilitation division surpassed prior year revenue for the quarter, but did experienced elevated cost margins in labor and other operating expenses compared to Q4 prior year. Thus far in 2023, we have seen improvement and positive results in both our outpatient volume and cost margins when compared to the same-period prior year.

The division has 43 executed leases for denovo clinics, which are scheduled to open throughout 2023. There are also many additional opportunities that are under consideration. Overall, when compared to prior year Q4 we experienced revenue growth of 1.4% and a 7.6% increase in adjusted EBITDA. The impact of the restatement of the Medicare reinstatement of Medicare sequestration was $9 million headwind when comparing Q4 to prior year same-period. For the quarter, total company adjusted EBITDA was $148.9 million compared to $138.4 million in the prior year. Our consolidated adjusted EBITDA margin was 9.4% for Q4 compared to 8.9% the prior year. CARES grant income was recognized in Q4 of this year as well as Q4 prior year. This quarter, we recognized only $630,000 grant income compared to $8 million prior year Q4.

This point, I’ll provide some further data points as commentary on each of our operating divisions. Our critical illness recovery hospital division, adjusted EBITDA margin was 8% for the quarter compared to 4% in prior year Q4 and 2% in Q3 of 2022. Our salary wages and benefits to revenue ratio improved 10% compared to prior year and 8% compared to prior sequential-quarter. Nursing agency rates decreased 33% and nursing agency utilization decreased 52% when compared to prior year Q4. Nursing agency rates increased 7% while nursing agency utilization decreased 17% compared to Q3 2022. Orientation hours increased 28% compared to prior year Q4, but decreased 22% compared to Q3 2022. Nursing sign-on an incentive bonuses dollars decreased 35% from prior year Q4 and 24% from prior quarter.

Revenue decreased 3% compared to prior year quarter, primarily related to volume, occupancy decreased from 71% to 70%, while our revenue per patient day remained consistent compared to prior year. Thus far in 2023, we have seen an increase in occupancy compared to the same-period prior year, as ICU volumes within our referral short-term acute-care hospitals have increased. On the development front in January, we opened a rehab distinct part unit in our Springfield, Missouri critical illness recovery hospital and in February, we opened a 31 bed satellite of our current fleet hospital critical illness hospital. We’ll be opening three hospitals with JV partners in the first half of this year in Jackson, Tennessee; Tucson, Arizona; and Alexandria, Virginia.

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We also have an agreement to open a critical illness recovery hospital with a rehab distinct part unit in Chicago with our joint venture partner Rush University System for Health in 2024. As previously noted, our inpatient rehabilitation hospital division continues to perform very well compared to prior year Q4. Revenue increased 10% with patient volumes increasing by 4%. Occupancy was 85% compared to prior year, which was 83%. Revenue per patient day increased $123 from $1,888 to $2011. The adjusted EBITDA margin for inpatient rehab was 23.6% for Q4 compared to 18.2% in the prior year. Concentra continued their strong performance with revenue increasing over prior year by 1% in-spite of the decline in demand for COVID related testing and evaluation services.

Prior year Q4. These services generated $10.4 million in revenue and $4 million in adjusted EBITDA compared to $1.6 million in revenue and $600,000 in adjusted EBITDA in Q4 of this year. The revenue decline from COVID testing services was offset by positive performance in our centers. Center volume increased over prior year in both were comp and consumer health that was offset by reduction employer services visits resulting in a visit decrease of less than 1%. Concentra adjusted EBITDA margin was 15% compared to 17% in prior year Q4. Our outpatient rehabilitation division experienced an increase of 1% in net revenue with patient volumes, increasing by 3% compared to same quarter prior year. Net revenue per visit remained flat at $102, in spite of a 3% decline in Medicare reimbursement rates.

Adjusted EBITDA margin decreased compared to prior year with the decrease in margin to 6% from 10%. The decrease in adjusted EBITDA margin is primarily related to an increase in both labor and other operating costs. The increase in labor is primarily attributed to a decrease in clinical productivity in Q4 compared to prior year. The increase in other operating expenses is primarily comprised of an investment in our outpatient electronical medical record systems along with travel expenses returning to pre pandemic levels. Thus far in Q1 of this year, we have seen improvements in volume, revenue and expense margins compared to the same-period prior year. Earnings per fully-diluted share were $0.22 in the fourth quarter compared to $0.37 per share in the same quarter prior year, prior year Q4 had a tax benefit-related to our purchase of centers remaining membership interest along with lower interest expense on our debt, which had a positive impact on Q4 prior year EPS.

For the full-year. Earnings per fully-diluted share, or $1.23 compared to $298 per share in the prior year. In regards to our allocation and deployment of capital already our Board of Directors declared a cash dividend of $0.125 cents payable on March 15, 2023 to shareholders of record as of the close of business on March 3, 2023. This past quarter, we did not repurchase shares under our board-authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt and development opportunities. That concludes my prepared remarks and with that, I’ll turn it over to Martin Jackson for some additional financial details and then we’ll open the call up for questions.

Martin Jackson: Thanks Bob. Good morning, everyone. Consistent with the prior two quarters, I’d like to provide some additional details with the progress we’ve made regarding our labor costs within the critical illness recovery hospital division. This past quarter, we had a sequential reduction from Q3 to Q4 and our total RN agency costs and our utilization of agency. We did have a modest increase in our RN agency rate from Q3, Q4. The reductions we realized rate percent in agency costs. This representing a reduction of $2.5 million on quarter-over-quarter basis and 17% drop-in utilization of agency from 21.9% beyond 18.1%. Agency hourly rates increase sequentially by 7% from $86 to $92. Consistent with prior quarters, we did experience a reduction of our agency utilization as the quarter progressed from October to December of 13%.

Ending the last month of the year at 16.8%. We fluctuate within the quarter in both RN agency costs of $9.3 million in October, $9.5 million in November and this decreased $8.4 million in December. And our agency rates, which were $88 in October, $99 in November, and this decreased to $91 in December. This quarter we saw a 21% decline in orientation hours compared to Q3 of ’22. We experienced a 39% decline in orientation hours as the quarter progressed from October to December. Other areas, we saw improvement compared to sequential compared to the sequential-quarter wasn’t declining nursing sign-on an incentive bonus offers of 24%. And area of opportunity we mentioned last quarter was hospital administration costs and we did experience modest benefit from the third-quarter.

We expect a continued decline in this area over the next several quarters. Overall, our SW&B to net revenue ratio improved over 8% compared to the third-quarter from 64.7% to 59.8%. We experienced a 11% reduction in our SW&B to revenue ratio from October to December, it dropped from 62.7% down to 55.8%. With the strides we’ve made in the past quarter and the progress we have seen thus far this quarter we are confident in our ability to achieve our previously-stated target for critical Illness recovery hospital SW&B to revenue ratio of 55% to 57% for the first-quarter of this year. Moving on to our financials. In Q4, equity in earnings unconsolidated subsidiaries were $6.8 million, this compares to $11.2 million in the same quarter prior year, primarily decline in earnings was the result of decreased earnings of a few of our unconsolidated joint-ventures.

Net income attributable to noncontrolling interest was $10.2 million, this compares to $60.5 million in the same quarter prior year. The decrease is primarily due to our purchase of the membership interest in Concentra in Q4 of 2021 between 100% of the voting interest. Interest expense was $47.3 million in the fourth-quarter. This compares to $33.3 million in the same quarter prior year. The increase in interest expense was primarily attributable to an increase and the one month LIBOR rate compared to Q4 of 2021, as well as borrowings made on our revolving credit facility. The interest-rate on $2 billion of our term loans is capped at 1% LIBOR plus 250 basis-point spread through September 30 of 2024, which provides us with the level of protection and predictability moving forward the current interest-rate environment.

At the end-of-the quarter, we had $3.9 billion of debt outstanding, $97.9 million of cash on the balance sheet. Our debt balance at the end-of-the quarter included $2.1 billion of term loans, $445 million in revolving loans, $1.2 billion in the 6.5% senior notes and $104.7 million in other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.96 times. As of December 31st, we had $148 million of availability on our revolving loans. For the fourth-quarter, operating activities provided $12.5 million in cash-flow of which included $1 million recouped in the quarter related to repayment of Medicare advances. As of the end of 2022, all Medicare advances have been repaid. Our operating cash-flow in the quarter was also reduced by $53 million for repayment of deferred like taxes all of which have been repaid.

Our day sales outstanding or DSO was 55 days at 31st 2022 compared to 52 days at December 31st, 2021 to 53 days at September 30th, 2022. Investing activities used $57.2 million of cash-in the fourth-quarter. This includes $55.3 million the purchase of property and equipment. $5 million net acquisition and investment activities, less $3 million of the proceeds from the sale of assets for fourth quarter. Financing activities provided $34.4 million of cash from the fourth-quarter. This was primarily due to $65 million net borrowing on our revolving lines of credit, offset in-part by dividends on our common stock of $15.9 million. As stated previously, we did not repurchase any shares under our board authorized repurchase program this quarter. But have the capacity to purchase an additional close to $400 million shares.

This program remains in effect until December 31st, 2023, unless further extended or earlier terminated by. We are issuing our revenue outlook for 2023 and expect revenue to be in the range of $6.5 billion to $6.7 billion. Capital expenditures are expected to be in the range of $190 million to $210 million for 2023. We will address our business outlook for adjusted EBITDA and earnings per share — per common share, later in the year, as labor market further stabilizes and is more predictable. This concludes our prepared remarks. At this time if you’d like to turn it back over to the operator for the call for questions.

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Q&A Session

Operator: Our first question or comment comes from the line of Justin Bowers from Deutsche Bank. Mr. Bowers, your line is open.

Justin Bowers: Hi good morning everyone. So just starting with LTAC, it sounds like there’s a lot of development activity going into 2023 and into 2024. Can you just give us a sense of how much – how many additional beds are planned for 2023? And then I just wanted to clarify what the SW&B was in 4Q and then the exit rate in December, I think you said 55.8%. Is that sort of where you’re trending now in the segment for — during the first couple of months?

Robert Ortenzio: Thanks, Justin, it’s Bob. Let me address the first part of your question, which is development on the critical illness. Yes, I think that over the last year, we have seen an increase in development opportunities and deals that we’re signing. Interestingly, many of those, you’ll notice are also joint ventures, which is a bit of a departure of what we’ve seen in the past. To your specific question, I don’t have exactly the number of beds that will come on. But around probably, you’ve got to think about 110 to 120 new beds that will be coming on with current signed deals. And our expectation, just based on what we’re seeing out there is that we may see more development opportunities on the critical illness side.

In the norm, they will be a hospital within a hospital, but there may be an occasional freestanding. But if we do a freestanding, it will typically be in conjunction with a, rehabilitation hospital distinct part units. So if you look at the model for that, not necessarily of this size, but if you look at our project in Chicago with Rush, that is what we’re characterizing as a post-acute care building that has both rehab and critical illness beds in the building. And we have a few more of those that are in progress in the development pipeline throughout the country. So I do think that, that’s a testimony to an appreciation of the role that LTAC or, in our case, critical illness plays in the continuum of care in a post-pandemic world where you have a greater recognition of the importance to decompress the intensive care units of large acute care hospitals, and they are more interested in having those in their market and in their continuum of care on a go-forward basis.

So on the salary, wage, I’ll turn it over to Marty and let him address the second part of your question.

Martin Jackson: Yes, Justin, on the SW&B as a percentage of revenue, we are experiencing what we saw in January and for the most part of February, we are in that 55% to 57% range.

Justin Bowers: Got it. And then maybe just a follow-up on outpatient rehab. It sounds like volumes and margins are improving year-over-year. And the question would be is – do we expect that trajectory to persist in 2023? And sort of what changes have you made in the segment there to ensure that, that happens?

Martin Jackson: Yes, on the outpatient side, what we’ve seen is we’ve had some difficulty actually throughout the entire year of ’22 with a lot of COVID call-offs. And what we’ve seen is that’s really trending downward now. So with that trending downward, we’ll be able to see – we believe a lot more patients. I think the other thing is just the clinical efficiency, which we’ve really focused a lot on, which is when we talk about that, we’re really talking about visits per therapist per day. We’re seeing that increase.

Robert Ortenzio: Yes, I think it’s proper your characterization of us feeling confident about the trajectory and what we see in the early part of the year gives us some good confidence that we have some good momentum on the outpatient side.