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Select Medical Holdings Corporation (SEM) is a prominent healthcare services provider in the United States, operating since 1997. The company specializes in managing critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers. SEM offers a wide range of healthcare services, including intensive physical rehabilitation, occupational health services, and consumer health services, across 46 states and the District of Columbia.
- Critical Illness Recovery Hospital - Operates hospitals that serve patients recovering from critical illnesses with complex medical needs, typically admitted from general acute care hospitals.
- Concentra - Provides occupational health services, physical therapy, and consumer health services through occupational health centers and contract services at employer worksites.
- Outpatient Rehabilitation - Offers physical, occupational, and speech rehabilitation services through a network of clinics.
- Rehabilitation Hospital - Manages hospitals providing intensive physical rehabilitation care, with patients usually admitted from general acute care hospitals.
What went well
- Outpatient rehabilitation margins improved due to reductions in contract labor costs and increased clinical efficiency, aided by new technology, which is expected to further enhance margins going forward.
- Management anticipates reducing Salaries, Wages, and Benefits expense as a percentage of revenue through successful commercial contract negotiations yielding mid-single-digit rate increases and higher patient volumes, particularly as Medicare Advantage plans align with traditional Medicare criteria.
- Select Medical has a robust development pipeline, especially in inpatient rehabilitation hospitals, and plans to deploy capital opportunistically while maintaining leverage at 3x, providing flexibility for growth.
What went wrong
- Select Medical is facing challenges in its Long-Term Acute Care (LTAC) segment, with threshold levels making the business tougher. The CEO mentioned they are being more judicious on capital deployment in LTAC, indicating possible future underperformance in this segment.
- The company is decreasing its investment in the LTAC segment, focusing more on opportunities in the inpatient rehab side, which may limit future growth in the LTAC division.
- Select Medical closed an underperforming LTAC hospital in Ohio, suggesting performance issues in certain assets.
Q&A Summary
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Capital Deployment & Leverage
Q: What's your capital deployment strategy post spin?
A: Management intends to maintain leverage at 3x. With a robust development pipeline, they plan to allocate capital opportunistically, focusing on development projects while balancing deleveraging through free cash flow and potential stock buybacks. Maintaining a 3x leverage ratio is a priority to preserve flexibility. -
SWB as Percentage of Revenue Outlook
Q: Can SWB as % of revenue improve further?
A: They believe SWB as a percentage of revenue can decrease next year. This year, they expect it to end around 57% , compared to 54-55% in the first quarter. Improvement will be driven by mid-range single-digit increases in commercial contract rates and volume increases, especially from improved Medicare Advantage admissions due to CMS mandates. -
Outpatient Rehab Margin Improvement
Q: What's the outlook for outpatient rehab margins?
A: Significant margin improvement is anticipated next year in the outpatient rehab segment. This will be achieved through enhanced clinical efficiency via internally developed technology, allowing therapists to see more patients per day. A major system release at year-end is expected to be a "game changer". -
LTAC Development Plans and Strategy
Q: What's your approach to LTAC development?
A: The company focuses on LTAC growth through partnerships and hospital-within-a-hospital models, which are less capital intensive. They plan to be judicious with capital deployment in this area, preferring opportunities that require less capital, though some de novos will still occur. -
IRF Rates Update
Q: Are Medicare IRF base rates around 3%?
A: Yes, management confirms that the Medicare Inpatient Rehabilitation Facility rates are in the 3% range , aligning with the final rule's net market basket adjustment. -
LTAC Occupancy Trends and Outlier Thresholds
Q: How are LTAC occupancy trends and outlier thresholds affecting you?
A: Occupancy rates were higher than the prior year's same quarter, which pleased management. The seasonal decline is normal for the third quarter and not related to staffing issues. Operators have effectively managed high-cost outliers, with minimal impact observed. -
Closure of an LTAC Hospital
Q: Was there a reduction in LTAC hospitals?
A: Yes, they closed one LTAC hospital in Ohio due to consolidation. -
Contract Labor Costs in Outpatient Rehab
Q: Are you seeing higher contract labor costs?
A: They've seen a sequential decline in agency staffing costs, which has helped margins. Additionally, technology improvements are expected to enhance clinical efficiency in the future.
- Given your plan to reduce SWB (Salaries, Wages, and Benefits) as a percentage of revenue to around 57% this year, what specific initiatives are you implementing to achieve further reductions next year, and how sustainable are these improvements?
- With the closure of an LTAC hospital in Ohio due to consolidation and noticing a reduction in your LTAC hospital count, what is your long-term strategy for the LTAC division, especially considering challenges with threshold levels and high-cost outliers?
- You have outlined significant capital expenditures, planning to add 569 additional beds through operations by 2026, primarily in the inpatient rehab division. How do you intend to finance these developments while maintaining your target leverage ratio of 3x, and what returns do you expect from these investments?
- In the outpatient rehab division, margins have improved due to efficiency efforts and technology implementation. Can you elaborate on how your internally developed system is enhancing clinical efficiency, and what impact do you expect this to have on future margins?
- Following the Concentra IPO and the planned distribution of your remaining interest to shareholders, how will the loss of Concentra's revenue and adjusted EBITDA impact your overall financial performance, and what strategies are in place to mitigate this effect?
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Revenue: $6.95 billion to $7.15 billion.
- Adjusted EBITDA: $865 million to $885 million.
- Fully Diluted EPS: $2.01 to $2.12.
- Adjusted EPS: $2.09 to $2.20.
- Capital Expenditures: $200 million to $250 million.
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Revenue: $6.9 billion to $7.1 billion.
- Adjusted EBITDA: $845 million to $885 million.
- Fully Diluted EPS: $1.95 to $2.19.
- Adjusted EPS: $1.96 to $2.20.
- Capital Expenditures: $225 million to $275 million.
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: FY 2024
- Guidance:
- Revenue: $6.9 billion to $7.1 billion.
- Adjusted EBITDA: $845 million to $885 million.
- Fully Diluted EPS: $1.95 to $2.19.
- Adjusted EPS: $1.96 to $2.20.
- Capital Expenditures: $225 million to $275 million, with $123 million allocated towards maintenance.
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: FY 2024
- Guidance:
- Revenue: $6.9 billion to $7.1 billion.
- Adjusted EBITDA: $830 million to $880 million.
- Earnings per Fully Diluted Common Share: $1.88 to $2.18.
- Capital Expenditures: $225 million to $275 million.