Select Medical - Q1 2024
May 3, 2024
Transcript
Operator (participant)
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 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. 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 call 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 first quarter of 2024. I'll first provide some updates on the progress we have made regarding our previously announced plan to pursue the separation of Select Medical's wholly-owned occupational health services business, Concentra. On 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. On March 18th, we announced that Concentra had confidentially submitted a draft registration statement on Form S-1 with the SEC relating to the proposed initial public offering of its stock. The IPO is expected to occur after the SEC 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.
Overall, we had a very strong first quarter start off 2024 led by both our hospital divisions 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 compared to 12.9% in the prior year. The first quarter results of our critical illness recovery hospital division far exceeded our expectations. Adjusted EBITDA of $115.9 million was 51% higher than Q1 of the prior year, with increases in revenue and census along with a 6% reduction in salaries, wages, and benefits to revenue ratio. Marty Jackson will provide some additional detail regarding CIRH's continued progress with labor within his commentary.
On April 9th, we opened a critical illness recovery hospital for the distinct part rehabilitation unit in Chicago with Rush University System for Health, adding 44 critical illness and 56 rehab beds. There is also a strong pipeline for additional growth opportunities under consideration. On the inpatient rehab development front, we are on target to open a 48-bed hospital in Jacksonville, Florida in Q3 2024 with our partner, UF Health Jacksonville. In the first half of 2025, we're opening our fourth rehab hospital with Cleveland Clinic, consisting of 32 beds, and we are slated to open our third hospital in Central Pennsylvania in partnership with UPMC. This will be a 20-bed rehabilitation hospital and will serve the expanding needs of the region. 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.
This will be 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 beds. Moving on to 2026, we're opening a new 60-bed rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab, in partnership with AtlantiCare, and are scheduled to open a new freestanding 63-bed rehab hospital in Ozark, Missouri, with CoxHealth. Overall, we are very pleased with the development results and 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 LTAC beds.
We also have a lot of activity in regards to development in our Concentra and outpatient divisions. Concentra acquired a four-center occupational medicine 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 novos slated open throughout the remainder of 2024 and Q1 of 2025. Concentra continues to maintain a strong pipeline of potential acquisition opportunities and various de novo sites under evaluation. This quarter, our outpatient rehab division added five clinics via four de novos and one acquisition. This offset the closure of 14 underperforming clinics and the forwarding of two clinics into existing operations upon lease expiration. The pipeline for future growth remains strong, with 20 executed leases for de novo clinics scheduled to open later this year.
Many other acquisitions and de novo opportunities are currently under consideration. Now I'll 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 related to new hospitals this quarter compared to $1.9 million in the same quarter prior year. While our occupancy was slightly down from same quarter last year, average daily census increased 2%. Our rate per patient day increased 8%. The increase in rate was primarily driven by an increase in our case mix index, Medicaid supplement 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 salaries, wages, and benefits to revenue ratio compared to prior year Q1, with nurse agency utilization decreasing 20% and agency rates decreasing by 7% compared to same quarter prior year. Orientation hours decreased 9% compared to prior year Q1. Nursing sign-on incentive bonus decreased 26% from prior year Q1. In April, CMS issued their LTAC proposed rule for 2025, and if adopted, would see an increase of 2.4% in the standard federal payment rate and an increase in the high-cost outlier threshold. The final rule is expected in 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 20.4%. In March, CMS issued the rehab proposed rule for fiscal year 2025, and if adopted, would see an increase of 1.8% in the standard federal payment rate. Final rule is expected in late July, early August, after the required comment period. Concentra experienced an increase in 2% in net revenues and 3% in adjusted EBITDA over prior year same quarter. 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-based visits, which are reimbursed at lower rates.
This led to an overall visit decline of 2% as the employer demands for drug screens and physicals trended downward. Our on-site revenue grew by 9% as Concentra added 11 new on-site clinic locations since Q1 of last year, and we are seeing higher revenue per site. Concentra's adjusted EBITDA margin was in line with prior year at 20.6%. Our outpatient rehab division experienced an increase of 2% in 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 and 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 8.2%.
In March, the president signed an appropriation bill that mitigated the 3.4% reduction in Medicare physician fee schedule that went into effect in January. The newly signed 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 3.4% cut. Earnings per fully diluted share were $0.75 for the first quarter compared to $0.56 per share in the same quarter prior year. Adjusted earnings per fully diluted share were $0.77 for the first quarter, which excludes Concentra separation transaction cost net of tax. In regards to our allocation of deployment of capital, the board of directors declared a cash dividend of $0.12 payable on May 30th, 2024, 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. This concludes my remarks. I'll turn it over to Marty Jackson for some additional financial details before we open the call up for questions.
Martin Jackson (SEVP of Strategic Finance and Operations)
Thanks, Bob. Good morning, everyone. I'll begin by providing some additional details on the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our SW&B as a percentage of revenue ratio exceeded our expectations of 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 agency costs and utilization from prior year Q1. Compared to Q1 of 2023, RN agency costs decreased by 23%, and utilization decreased to 14% from 18%. The hourly agency rate for RNs also decreased by 7% from $83-$77. Nursing sign-on and incentive bonuses decreased by 26% from Q1 of prior year, down to $7.6 million from $10.3 million the prior year same quarter. Finally, we saw a decrease of 9% in our new hire orientation hours.
Moving on to our financials in Q1, equity in earnings of unconsolidated subsidiaries were $10.4 million. This compares to $8.6 million in the same quarter prior year. Net income attributable to non-controlling interest was $20.3 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. 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 6.25% senior notes, and $77.6 million of other miscellaneous debt. During the first quarter, we prepaid $79 million on our term loans under the terms of our credit agreement. We ended the quarter with net leverage for our senior secured credit agreement of 4.4x. We estimate approximately $95 million of our incremental borrowings in the quarter were related to the Change Healthcare cyber incident. Our estimated net leverage would have been 4.3x without the incremental borrowings related to the cyber incident. As of March 31st, we had $202.4 million of availability on our revolving loans. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through September 30th of 2024.
For the first quarter, operating activities used $66.7 million in cash flow. Our day sales outstanding was 58 days as of March 31st, 2024. This compares to 54 days at March 31, 2023 and 52 days at the end of fiscal year 2023. The increase in DSO was principally attributable to the Change Healthcare cyber incident. Investing activities used $57.7 million of cash in the first quarter. This includes $52.5 million in purchases of property, equipment, and other assets and $5.2 million in acquisition and investment activities. 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 and $8.7 million in net borrowings on other debt, less the $79 million in term loan repayments, $16 million in dividends of our common stock, and $8.8 million net payments and distributions to non-controlling interest.
As stated 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 repurchase program, which remains in effect until December 31st, 2025, unless further extended or earlier terminated by the board. We updated our business outlook for 2024. We expect revenue to be in the range of $6.9-$7.1 billion, adjusted EBITDA to be in the range of $845-$885 million, fully diluted earnings per share to be in the range of $1.95-$2.19, and adjusted earnings per share to be in the range of $1.96-$2.20. Capital expenditures are expected to be in the range of $225-$275 million for 2024, for year 2024, 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.
Operator (participant)
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 one again. Please stand by while we compile the Q&A roster. Our first question comes from Justin Bowers with DB. Your line is open.
Justin Bowers (Equity Research Analyst)
Hi. Good morning, everyone. Bob, thank you for the comprehensive update on development activities. I missed Rush. Can you just give us an update on the new hospital with that system?
Robert Ortenzio (Executive Chairman and Co-Founder)
Sure. We built a new hospital in partnership with Rush, which is a new building on their campus, which is composed of both a rehab hospital and LTAC hospital. The way the regulations work, it's technically an LTAC hospital with a distinct part rehab unit, but it opened, I think, this past month, and we're going through the six-month qualification period for LTAC, but the rehab hospital is filling up nicely.
Justin Bowers (Equity Research Analyst)
Okay. Great. Thank you. And then, Marty, just pivoting to critical illness, can you just talk about the efforts you guys have done with labor? You had some really nice improvement there on the SW&B ratio.
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah, Justin. Our operators have done a terrific job reducing the reliance on agency nurses. Most of the nurses that we would like to have full-time, we have hired, so orientation hours have gone down. So all in all, it's just been terrific. We've talked about potentially getting back to that 52%-53% range, but we thought it would take us another year to get there. And again, the operators have done a terrific job on their staffing.
Justin Bowers (Equity Research Analyst)
Okay. And then in the prepared remarks, you said agency costs were down 23%. So that was roughly about $18 million then during the quarter. Is that the right ballpark, 18 or 19, or?
Martin Jackson (SEVP of Strategic Finance and Operations)
Staffing costs were yes, that's right. They dropped from about $24 million down to $18 million.
Justin Bowers (Equity Research Analyst)
Okay. And then just one last one. You mentioned some Medicaid subpayments. Can you size that for us, and is there any yeah?
Martin Jackson (SEVP of Strategic Finance and Operations)
It's about $4 million-$5 million net after taxes.
Justin Bowers (Equity Research Analyst)
Okay. Got it. Thank you. I'll jump back and queue.
Martin Jackson (SEVP of Strategic Finance and Operations)
Great. Thanks, Justin.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.
Ben Hendrix (VP)
Hey. Thanks, guys, and congratulations on the quarter. I just wanted to ask about the $3.8 billion in debt ahead of the spin. We get a lot of questions about balance sheet allocation between SpinCo and RemainCo. I just want to get your latest thoughts there, considerations, and how you're thinking about the balance. Thank you.
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah, Ben. What we have indicated publicly is that you can think about this in terms of both entities will ultimately have about 4x leverage on the balance sheet or on a gross basis, a little bit less on the net side.
Ben Hendrix (VP)
Thank you. And then also, just we've heard one of your peers on the inpatient rehab side talk about strategies around the pre-claim or the Review Choice Demonstration and how their relationships are with fiscal intermediaries in the IRF 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.
Robert Ortenzio (Executive Chairman and Co-Founder)
Obviously, I think our relationships are good, but good, bad relationships, it's all about how you fare through the audits. It does impact our platform, and we've had an extremely good result with all of the Review Choice Demonstration audits, so it's not been an issue.
Ben Hendrix (VP)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Kevin Fishbeck with Bank of America. Your line is open.
Mia Muñoz (Equity Research Analyst)
Hi. This is Mia Muñoz on for Kevin Fishbeck 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 were just closer to your internal expectations compared to where consensus was? And what are the sources of the beat, and so why are you not also raising revenue guidance?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah. I mean, our expectations, well, first of all, the thought process for us was really the spread was rather large. What we did was we increased the lower limit by $15 million, and we're taking a look at the remaining three quarters. And to the extent that we continue to exceed like this, we'll make adjustments as we see what those quarters are, how we're performing.
Mia Muñoz (Equity Research Analyst)
All right. Just to follow up or I guess not really follow up, but a completely different question. On critical illness margins, improving 480 basis points year-over-year despite the Medicare reimbursement pressure. What would you say would be the main drivers for that, and is there more room for improvement?
Martin Jackson (SEVP of Strategic Finance and Operations)
Well, there's a couple of different drivers to that. It was really 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 salaries, wages, and benefits side. You saw a nice drop in our SW&B as a percentage of revenue, and that was a big driver of that improvement in margins.
Mia Muñoz (Equity Research Analyst)
All righty. Thank you so much.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from A.J. Rice with UBS. Your line is open.
A.J. Rice (Managing Director)
Hi, everybody. Just a fine point on the comments around the supplemental payment program. Is this the first quarter you've recognized that, and is that $4 million an annualized number for that program, or are you going to have $4 million incremental every quarter this year?
Martin Jackson (SEVP of Strategic Finance and Operations)
Okay. We have recognized before AJ, but as they become more mature, we're able to recognize on a month-to-month basis, and that's what you're seeing there.
A.J. Rice (Managing Director)
And so the second, third, and fourth quarter will all have roughly about a $4 million benefit from this program?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah. That number right there was a one-time number.
A.J. Rice (Managing Director)
Oh, okay. All right. And then on the I had a couple of business questions, but on the Concentra spend, I know you said reaffirm target is by the end of the year.
Any sense of when that silent filing is going to flip to public, and any plans on having that management team out on a roadshow, and when might that occur?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah. As you know, A.J., it's fully dependent on SEC and the comments that we get and the length of time that that takes. So as we get further clarity, we'll be able to give you a much better timeframe.
A.J. Rice (Managing Director)
Okay. Obviously, 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 now at a normalized level, and you're just it plays out at that level of contract utilization, etc.?
And then is there any comment on where your wage rates are trending for your permanent workforce in the critical illness division?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah. Yeah, A.J.. With regards to the RN 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 in those rates, but all in all, I think it's within a couple of bucks of each other. I think our full-time employee rates are in that 3%-4% range on an annual basis.
A.J. Rice (Managing Director)
Okay. And then maybe last question. I think you previously said one of the issues or challenges in the proposed rule or the rule last year was the LTAC outlier threshold increase. You obviously had a very good quarter in the LTAC business this quarter.
Are you seeing any impact on margins or volumes from that, and any early comment on the proposal for next year and how that might impact you?
Robert Ortenzio (Executive Chairman and Co-Founder)
Well, A.J., we normally don't say much about the proposed rule. While it's in a comment period, we'll be submitting comments. I will say that the continued increase in the fixed loss threshold amount is tougher on the providers that have the higher acuity, longer stay patients. We just continue to navigate that and continue to tweak our operations in order to accommodate for the changes and the directions that the policymakers are trying to push us. So as you saw in Q1 with the LTAC, that volume and expenses, and that salaries, wages, and benefits, and rate through acuity can really carry the day. So we obviously feel good about the performance and can continue to do that. Our business on that side of the business on the critical illness is better as the acute care hospitals have higher occupancies in their ICUs.
So that's what really is the main thing that drives that business.
A.J. Rice (Managing Director)
Okay. All right. Thanks so much.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from Bill Sutherland with The Benchmark Company. Your line is open.
Bill Sutherland (Equity Research Analyst)
Thanks. Good morning, everybody. Wanted to see if there was any more color you could provide about the trend in the employer demand for Concentra, the lower levels of screens and physicals?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah, Bill. The demand there really has to do with employment. As you know, I mean, during 2022 and 2023, there was much higher demand just because there was a lot more hiring going on. As hiring goes back to normal, you're going to see those drop. And that's something that we expected to see. I think the other point that I'll make there is that the types of activities that Concentra 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 unit pricing is on workers' comp.
Bill Sutherland (Equity Research Analyst)
Yeah. I get the positive mix is good. So I guess what you're saying, Marty, is that sequentially, this is going to probably just flatten out. It's just a year-over-year thing right now.
Robert Ortenzio (Executive Chairman and Co-Founder)
I think you could think about it that way. I don't think that it's not really a concerning issue at this point.
Bill Sutherland (Equity Research Analyst)
Okay. Back to LTAC for a sec. The CMI increase was impressive. Is that part of the seasonality of 1Q, or is that something that feels sustainable?
Martin Jackson (SEVP of Strategic Finance and Operations)
Yeah. Q1 typically has a higher CMI than normal, but the increase that we saw was based on a year-over-year, same-quarter basis. So we felt very good about that.
Bill Sutherland (Equity Research Analyst)
Yeah. I guess that goes back to your comment, Bob, about ICU capacity and so forth.
Robert Ortenzio (Executive Chairman and Co-Founder)
Well, yeah. And as you see in the first quarter, you're just going to have more of those respiratory cases. The winter months bring those, and you're going to see more volume in the ICUs, and consequently, you're going to see more volume to the LTACs.
Bill Sutherland (Equity Research Analyst)
Okay. That's all I've got. Thanks, everybody.
Martin Jackson (SEVP of Strategic Finance and Operations)
Great. Thanks.
Operator (participant)
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.
Robert Ortenzio (Executive Chairman and Co-Founder)
Thank you, everybody, for joining us and for your questions.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.