Select Medical Holdings Corp
NYSE:SEM
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
22.6
40.0718
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Select Medical Holdings Corp
You don't have any saved screeners yet
Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Third Quarter 2020 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 call over to Mr. Robert Ortenzio.
Thank you, Operator. Good morning, everyone and thanks for joining us for Select Medical's third quarter earnings conference call for 2020.
Before I outline some of our operational metrics, let me start by reiterating one of the things I said on our last quarter's earnings call which is how proud I am of the operational leadership and clinical excellence I have seen throughout organization during these unusual times. We continue to have a group of clinicians and support staff focusing our organization on the priority of providing the highest quality care while keeping our patients and staffs safe.
We continue to learn, adapt, evolve and innovate to address the changing needs in our businesses in today's unique environment. I couldn't be more pleased with both our operational and financial performance in the quarter.
I also wanted to make it clear that our third quarter results did not include any additional grant income. In fact we recorded a net reduction of $1.2 million of grant income in the quarter. Similar to the second quarter we've included our third quarter monthly revenue volume and occupancy statistics in our 10-Q and earnings release which illustrates a very nice improvement in each of our business segments as our operational operating divisions rebound from the lows we saw early in the COVID pandemic.
Our critical illness recovery hospitals realized a significant increase in our year-over-year occupancy rates growing from 67% in Q3 of 2019 to 71% for this past quarter. This volume growth coupled with strong expense management contributed to the 470 basis point improvement in our margins in the third quarter in this segment.
Our rehabilitation hospitals have also experienced meaningful occupancy growth in the third quarter growing from a 75% occupancy rate in Q3 of 2019 to an 82% occupancy rate this quarter despite the fact that we have some markets that have not fully rebounded from frequent pre-COVID levels. We continue to experience higher costs to treat patients yet we've been able to manage 250 basis point margin improvement in the third quarter to 23.7%.
While volumes continue to be our biggest challenge in our outpatient rehabilitation and Concentra segments, we saw meaningful improvement in the third quarter in both segments. Our outpatient rehab business has seen a significant improvement from the height of the lockdown in April and May when we were seeing over 45% negative volume variance from the same period prior year.
In September our negative volume variance for our outpatient business was down to 1.6% compared to September of 2019. Concentra was also experiencing a similar volume improvement with their September volume variance down 4.3% from September 2019 and a high-volume variance of 41.3% this past April.
By all accounts, this was a terrific quarter for our company. Our inpatient business segment saw a double-digit growth in their combined revenue and both our outpatient business segments made great strides in regaining previously volume norms.
Overall our net revenue for the third quarter was up 2.2% to $1.42 billion in the quarter. Net revenue in our critical illness recovery hospital segment in the third quarter increased 12.2% to $519 million compared to $463 million from the same quarter last year. Patient days were up 8.1% compared with the same quarter last year with over 279,000 patient days.
Net revenue per patient day increased 4.1% to $1,845 per patient day in the third quarter. Case mix index was up from 1.26 in the third quarter of last year to 1.31 in the most recent quarter. Net revenue in our rehabilitation hospital segments in the third quarter increased 8.5% to $188 million compared to $173 million in the same quarter last year. Patient days were up 7% compared to same quarter last year, and net revenue per patient day increased 3% to $1,775 per day in the third quarter.
Net revenue in our outpatient rehab segment in the third quarter declined 9.5% to $140 million compared to $265 million in the same quarter last year. Patient days were down 10% compared to the same quarter last year was 1.98 visits in the third quarter.
Our net revenue per visit was a $104 in the third quarter compared to $103 in the same quarter last year. Net revenue shortfalls to prior year's improvement each month during the quarter was September down only 2.5% compared to the same month last year. Volumes ended along the same lines as revenue for the same monthly periods when compared to the same month last year with visits down only 1.6% in September when compared to the same month last year.
Net revenue and our consensus segment for the third quarter declined 7.1% to $392 million compared to $422 million in the same quarter last year. For the occupational health centers patient visits were down 10.3% with 2.8 million visits in the quarter. Net revenue per visit in the centers was $121 in the third quarter compared to $120 in the same quarter last year.
Total company adjusted EBITDA for the third quarter was up 16.7% to $213.2 million compared to a $182.7 million in the same quarter last year. Our consolidated adjusted EBITDA margin was up with a 15% margin for the third quarter compared to 13.1% for the same quarter last year. Adjusted EBITDA results for the third quarter included a net reduction of $1.2 million of grant income recognized from the Provider Relief Funds.
Our critical illness recovery hospital segment adjusted EBITDA for the third quarter increased 55.2% to $88.8 million compared to $57.2 million in the same quarter last year. Adjusted EBITDA margin for the segment was 17.1% in the third quarter compared to 12.4% in the same quarter last year.
Adjusted EBITDA and margin growth were driven primarily by our net revenue growth which was partially offset by increased operating expenses as a result of COVID. Our rehabilitation hospital segment adjusted EBITDA up for the third quarter increased 21.4% to $44.6 million compared to $36.8 million in the same quarter last year.
Adjusted EBITDA margin for the rehab hospital segment was 23.7% in the third quarter compared to 21.2% in the same quarter last year. Adjusted EBITDA margin growth were driven primarily by net revenue growth which was partially, partially offset by continued year-over-year shortfalls in our hospitals in New Jersey and South Florida as well as higher operating expenses as a result of COVID.
Our outpatient rehab segment adjusted EBITDA for the third quarter was $30.6 million compared to $40 million in the same quarter last year. Adjusted EBITDA margin was 12.8% in the third quarter compared to 15.1% in the same quarter last year.
Adjusted EBITDA and margin decline continue to be adversely impacted by volume declines related to COVID. Our Concentra adjusted EBITDA for the third quarter increased 3.7% to $80.5 million compared to $77.7 million in the same quarter last year.
Adjusted EBITDA margin was 20.6% in the third quarter compared to 18.4% in the same quarter last year. While we continue to experience volume shortfalls, we made significant reductions were possible in our operating expenses during the quarter which drove an improvement in both adjusted EBITDA and margin in the quarter compared to the same quarter last year.
Earnings per fully diluted share were $0.57 in the third quarter growing almost a 148% over prior year same period earnings of $0.23. Adjusted earnings per fully diluted share was $0.56 per diluted share for the third quarter compared to $0.33 in the same quarter last year. Adjusted earnings per fully diluted share excludes the non-operating gains and the related tax effects in the third quarter of this year and the loss on retirement of debt and related costs in the third quarter last year.
At this point, I'll turn over to Marty Jackson for some additional financial details and then we'll open the call up for questions.
Thank you, Bob and good morning everyone.
For the third quarter our operating expenses which include our cost of services in general and administrative expense was $1.2 billion and 85.4% of net operating revenue. For the same quarter last year operating expenses were $1.2 billion and 87.4% of net operating revenue.
Cost of services was $1.18 billion for both the third quarter of this year and the same quarter last year and as a percent of net revenue cost of services were 82.9% for the third quarter compared to 84.9% in the same quarter last year.
G&A expense was $35.5 million in the third quarter. This compares to $34.4 million in the same quarter last year. G&A as a percent of net revenue was 2.5% in both third quarter of this year and same quarter last year.
As Bob mentioned total adjusted EBITDA was $213.2 million and adjusted EBITDA margin was 15% in the third quarter compared to total adjusted EBITDA of $182.7 million and adjusted EBITDA margin of 13.1% in the same quarter last year.
The adjusted EBITDA results in the third quarter included a net reduction of $1.2 million in other operating income related to grant income recognized under the provider relief funds as you may recall we recorded $55 million in other operating income in the second quarter related to these grants.
On September 19th HHS released a post payment notice on reporting requirements associated with these payments which we viewed as a change to the previously issued guidance and caused us to change our grant income recognition related to these payments.
On October 22nd HHS released another post payment notice which again changed our view on grant income recognition of these payments which will be reflected in the coming quarters. Depreciation and amortization was $50.1 million in the third quarter compared to $52.9 million in the same quarter last year. We generated $8.8 million in equity and earnings of unconsolidated subsidiaries during the third quarter compared to $7 million in the same quarter last year.
We also had non-operating gains of $5.1 million in the third quarter this year. Interest expense was $34 million in the third quarter. This compares to $54.3 million in the same quarter last year. The decline was the result of a reduction in variable interest rates as well as the refinancing activity we did during the second half of last year.
We've reported income tax expense of $31.6 million in the third quarter this year which represents an effective tax rate of 23.2% compared to tax expense of $12.8 million an effective tax rate of 22.6% in the same quarter last year.
Net income attributable to non-controlling interest were $27.5 million in the third quarter compared to $13.3 million in the same quarter last year. The increase was in part due to the gain on the sale of the consensus seed box business which we sold on September 1st as well as improved performance in several of our inpatient rehab joint ventures for the quarter.
Net income attributable to Select Medical was $76.9 million in the third quarter and fully diluted earnings per share was $0.57, excluding the non-operating gains and the related tax affects our adjusted earnings per share was $0.56. The end of the third quarter we had $3.4 billion of debt outstanding and $640 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2.1 billion in term loans, $1.2 billion and 6.25 senior notes and $75 million of other miscellaneous debt. We ended the third quarter with net leverage for our senior secured credit agreement of 3.66. This reduction in net leverage was the result will result in 25 basis point reduction in our borrowing spread on our credit facility debt to LIBOR plus 2.25%.
Operating activities provided $134.5 million of cash flow in the third quarter, investing activities provided $18.4 million of cash in the third quarter the provision of cash was driven by proceeds from the sale of businesses, $70.9 million offset by $34.3 million and purchase of property and equipment and $18.2 million in acquisition and investment activities during the quarter. Financing activities use $22.9 million of cash in the third quarter.
Our total available liquidity at the end of the third quarter was over $1.1 billion including $640 million of cash and close to $500 million in revolver availability under the select in Concentra credit agreements.
Additionally, in our earnings press release we include our updated business outlook for the calendar year 2020. We expect net revenue to be in the range of $4.44 billion to $5.5 billion. We expected the adjusted EBITDA to be in the range of $745 million to $765 million.
We expect fully deluded earnings per share to be in the range of $1.65 to $1.75 and adjusted earnings per share of $1.61 to $1.71, which excludes the non-operating gains on sale of businesses and the related tax effects.
This concludes our prepared remarks. And at this time, we'd like to turn it back over to the operator to open up the call for questions.
[Operator Instructions] Your first question comes from Frank Morgan with RBC Capital Markets.
Obviously, we appreciate the guidance for the fourth quarter. But I'm just - and the details about the monthly trends and so far this year. But just curious do you have any initial color on maybe how October trends are looking across your business? That's my first question.
Yes, Frank, we do. You know October is trending nicely on the inpatient side. We're seeing a little bit north of an 8% growth on a year-over-year basis for both the LTAX and the URS. And we continue to see nice trends on the outpatient side.
And I guess in light of the trends that you're seeing, when we think about, I know understanding you're not giving guidance for next year yet, but it would be fair to you say the second half of the year sort of is a starting point when we build our 2020, 2021 numbers? And then my last question is, when I think about this strong volume recovery you've seen, really what are you attributing that to, is that just mostly COVID business or non-COVID business, just any color around what's driving the net growth? Thanks.
Well, let us respond to the last part of your question. While we are seeing COVID patients, the majority of the increase is really part of this whole COVID pandemic that we've experienced and the relationships that we continue to improve with our referral sources.
I think if you talk to our operators, they will tell you that our referral sources now understand that we can handle patients that are critically complex patients that are very, very ill. And so we've really seen that expand during this third quarter.
And Frank as the way we think about next year, I mean, you know our budgeting process and our forecast projections internally that we're doing. Next year is a tough year to do because I think there's a lot of uncertainty out there. I mean I could give you a number of alternate ideas about what it might look like. I mean if we have a real acceleration of the pandemic as some people are calling for between now and the end of the year, will it carry over into the first quarter, the first half of next year. I guess it could and, in that scenario, we probably have a little bit of a different thinking on the businesses.
But you know what we've seen is - is that if while we're still in the pandemic our outpatient businesses are recovering as people are - if I can use the term learning to live with the virus, as the virus is around, we're going to continue to see strength as we've seen on the inpatient side of the business. If we have absolute lockdowns in some markets then you're obviously going to see a bigger reduction on the outpatient.
So my best guess is it's going to be somewhere in between the - my judgment is that the pandemic will still be around through the first part of next year as we get closer to a vaccine. But on the other hand it's hard to envision the absolute strict lockdowns that we saw back in March and April. So that's - it's a not a direct answer to your question but that's just how we're thinking about our forecasts and projections that we're looking at for next year.
Your next question comes from Justin Bowers with Deutsche Bank.
I'll just continue on Frank's question and ask it a little bit differently. But if we think about kind of the relationships that you guys have in hand store established in the Altech business you know as a result of the pandemic and you know if we go back to a "normalized environment" you know next year. And we think about kind of 2019 is a starting point in the OpEx. Is it fair to think about kind of growing like the base business or increasing the occupancy from that starting point given all that's transpired this year?
No. I'd probably encourage you to think about it a little differently. I would think of 2020 as the starting point, and you could go you know flat or up or down on that. I mean, I do think and I said this on our last call that the position of our critical illness recovery hospitals in the continuum of care in most of our markets I believe will be enhanced and has been enhanced either with or without COVID. And I think that is just a reflection on the role that is played and the higher visibility of our type of critical illness recovery hospital in our local markets.
We have deeper relationships than we have, and we have greater confidence in us by more referral sources than we had in 2019. And I do not think that that will change. Now if there are fewer ICU patients in those hospitals, we may see a less volume. I mean I'm not saying that that's not possible, but I don't think that we're thinking about a return to the 2019.
And in fact, we are getting request to accelerate some of our development efforts in some markets with our critical illness recovery hospitals as a result of - I think a greater recognition of the important role that it plays in the continuum of critically ill patients.
Well, you just, you just answered my follow-up question as well on that response. So, I'll move on in. And I just, I'm just thinking about kind of use of capital and, and the balance sheet, I mean the growth in the EBITDA, the cash generation I mean I'm, I'm looking at you guys kind of going out of sub for net leverage level almost sustainably in 2021. Is that kind of the trajectory we're on and then you know how are you guys thinking about kind of capital over the next like say 12 months, 12 months to 18 months?
Yes. Justin, this is Marty. Certainly, as we indicated for the third quarter, we're at 3.66 times leverage right now. We'll go down. I would anticipate to probably in that 3.5 times range by the end of the year. And then next year, all of next year we will be under 4 times. Now, as you probably know the feds have changed how the payment for advance payments is going to occur, we will be paying back some of that money next year by our estimate it's probably in that $280 million of the $318 million, that's outstanding. We will still be below 4 times during that period of time.
In terms of use of capital next year I mean we think we'll continue to grow and invest in our outpatient not significant amounts of CapEx. But I think where our plan is to continue to add clinics either Denovo or small acquisitions we'll do some more development in the critical wellness area. Concentra will continue to add at clinics.
I wouldn't look for any major use of capital in M&A in 2021. I think we'll continue to focus on our four platforms and driving margins and volumes and watching the pandemic to make any adjustments to the business that we need to.
So I wouldn't look for anything major and then obviously in 2022 our plan is to make the final payment to bring in the minority interest in Concentra through the put call mechanism. So our plan is to bring the balance of the minority interest in Concentra in early 2022.
And Justin along with that - the acquisition of the balance of the JV ownership, we anticipate that would be probably in the $600 million range and as such most of that if not all of that cash would be on the balance sheet.
Your next question comes from Kevin Fischbeck, Bank of America.
I guess I just wanted to see if I can follow up a little bit more on the 2021 commentary, you know obviously a lot of puts and takes as far as you know the CARES money this year and sequestration in this year know potentially being headwinds to next year. But then as you mentioned the outpatient businesses is ramping up nicely. I mean, do you think that you could actually grow EBITDA off of these levels from here, or is it still too hard to make that determination into next year?
Yes. I think that we could get given the right set of circumstances. And I think that's - it is possible.
Okay. And you mentioned kind of a development pipeline on the critical illness recovery hospital. I guess I haven't historically given a lot of credit to the growth in that business. Could you talk about how you think about the long-term growth outlook on that business once we get to kind of a normalized COVID outlook?
As you might know, Kevin, we have a lot of partnerships around the country, joint venture partnerships that we've done that over the last 10 years and most of those were led with inpatient rehab partnerships. But as we've become more embedded in those systems and they tend to be some of the largest systems in the country. And our goal is to expand offerings. And so we're - we think that we have opportunities in markets where we already have a presence to add on additional service.
And in those markets where we have rehab joint ventures, we're looking to take advantage of perhaps adding some long-term acute care hospitals or our critical illness recovery hospitals in those markets. So we think that's an opportunity for us.
And can I guess…
Kevin, I think there is also opportunities to expand beds with existing LTACs that we have. So you know it's not just the new hospitals, Bob had mentioned, but it's also expansion of existing bank capacity.
And I guess what you guys did the, the RF JV it took a little while to kind of get that going and Alex going at a pretty nice clip. I mean, when do you think we might be able to kind of see that capacity start to, start to show up in the numbers?
Yes. Well you know the numbers speak for themselves.
Okay. So there's no like climbing as far as when like you do hospitals might be coming online?
We, we don't announce them until we've actually signed, I mean. You may have taken notice that recently we announced a new partnership with Rush University in Chicago. We think that's going to be a very big and very significant deal, and that includes both rehab critical illness recovery hospital and outpatient. So you know we, we have announced those and I think our expectations we will continue announces.
And then just maybe last question. You know I guess is anything RF growth is likely to be quite strong, I guess good visibility to that. But I guess trying to understand how you think about the long-term growth on again post normalized COVID, long-term growth rate for the outpatient rehab side and the Concentra side. How should we think about those businesses long-term growth opportunity? Thanks.
Yes. I think on the outpatient side, I mean we expect to continue to see you know in the 6% to 7% top-line growth on the outpatient on a post-COVID. I mean we anticipate that we'll be able to bring back all of them. We had before, you saw that in September we were at negative variance of 1.6%. So the operators have done a terrific job getting that volume back.
And we think that in a post pandemic world there'll be opportunities both on the Concentra side and the outpatient side for us to add in markets where we currently have a presence and perhaps enter some new markets on both Concentra side and outpatient. So we think the future is very bright in both of those businesses.
Your next question comes from Bill Sutherland with The Benchmark Company.
Wanted to start, Bob you mentioned that on rehab hospitals I have in my notes that you might be opening a couple this quarter.
Yes Bill we are. We've got a banner that opened up where - we opened up one they started taking patients. I think it was last month and then we'll open up another hospital actually this week. So, yes, two better hospital…
Okay. Will there be - should we think about startup expenses Marty?
It's non-consolidating bill. So you'll see that only through equity in earnings.
Okay. The pressure that you called out Bob in South Florida and New Jersey and rehab hospital I'm sure that's got to be COVID related do you sense it's just - or is there any other color you want to provide or sort of give your sense of their recovery?
Yes, the operation South Florida has recovered fully, that was a factor that's passed quarter but was mitigated toward the end of the quarter and I would say that that market is back to being one of our strongest.
And then on the other we called - the other one we called out was on New Jersey, is recovering, I would say not fully back to the levels that it has been historically, but trending in the right direction. So I would characterize Florida as fully recovered and Jersey better but a little ways to go, but not material.
And then on the adjusted EBITDA margins which is spectacular given the backdrop. Is it - Marty, is that a good anchor for thinking about how 2021 - you know there's so many puts and takes but there's nothing specific to the quarter or the circumstances of I don't know, I know the length of stay is up but in the hospitals? But I'm just kind of trying to figure out if there's anything here that's unusual that we can't extrapolate from?
Yes. Bill, I'll tell you is that most EBITDA margins are fine. The one I would really focus on is Concentra you know, north of 20% margins we think is out of the norm. And they do have some - they were able to pick up some pretty high margin business during the third quarter. We anticipate that what we've talked about before is in that 17% to 18% range we think that that's a good number for Concentra.
And then finally I'm curious given all the - all the shift in many such - many sectors the more virtual types of care. I know you've had to use that in outpatient rehab, I'm not sure about Concentra. Do you think that's here to stay for your model Bob and is that a - does that permanently improve the cost structure?
You have - Bill we did see significant increases in April and May for telerehab and telehealth both on the outpatient side and on the Concentra side. That has substantially diminished over the past couple of months. I think we were - I think we were at 16, 17, 100 visits or visits a day and that's down in the 300 to 400 range now.
So you know I - we think that would you - would you really expect to see as people want to come in, they want to see the therapist and in particular physical therapies are a lot of - it's a lot of physical manipulation. So…
Right. It's not a natural, you're right.
Yes.
Your next question comes from A.J. Rice with Credit Suisse.
This is Rob Moonen for A.J. Rice. Great quarter. I just wanted to ask quickly, I see in Q4 you kind of have a step down in EBITDA and your guide and a little bit of a step down in margin. Is most of that coming from Concentra and the seasonality and then also it seems like in Q3 you really hold the line on the costs front just as a total company. Could you maybe discuss a few of the puts and takes that or the cost initiatives that you've been able to implement how sustainable some of those are going forward?
Sure. In answer to your first question, yes, the step down really is associated with the fourth quarter of Concentra, the margins always drop in the fourth quarter, it's just a seasonal issue. With regards to costs, a lot of that has to do with - operators have just done a marvelous job managing expenses. And one of the things when you take a look in particular on the in-patient side, when you see increased our volume occupancy rates are going up, a lot of those incremental dollars you'll see the - because the fixed costs are covered.
You're seeing some very, very nice expansion in the margins because of that. Number two is, it just seems you know when we take a look at salaries wages and benefits as a percentage of revenue. Salaries based on wages and benefits were down significantly. And a lot of that again we think has to do with increased volume.
And then just as a follow up I saw in the quarter you had $71 million from cash from asset business sales. I think this relates to the Concentra Department of Veterans Affair community-based outpatient clinics sale, divesting of some of these assets is that also helping margins at all there?
No. It really wasn't. I mean the margins were fine in that business, it was just a - it was a small business, that it's not really something that we were - we are focused on expanding.
There are no further questions at this time. I will turn the call back over to you.
Thank you. No concluding comments. Thanks for joining us and we'll look forward to updating you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.