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Select Medical Holdings Corp  (NYSE:SEM)
Q1 2019 Earnings Call
May. 03, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the First Quarter 2019 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 start, 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 holding -- of the company including without limitation statements regarding operation results, growth opportunities and other statements that refer to Select Medical plans, expectations, strategies, intentions and beliefs. Those 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.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's first quarter earnings conference call for 2019. Before I outline our operational metrics I want to provide you with some summary comments and updates since we presented last quarter. Overall, we were pleased with the consolidated results for the quarter. Our critical illness recovery hospitals performed well this quarter as they were able to maintain adjusted EBITDA and margins with four less owned hospitals, including our temporarily closed Panama City Hospital.

We're also faced what we believed to be a tough comperative quarter with much less flu volume this year as compared to last year. And our revenue per day was up despite a reduction in Case Mix Index compared to the same quarter last year. Our in face rehabilitation segment had nice growth in terms of both revenue and volume. We also realized double-digit growth in same-store hospital adjusted EBITDA. During the quarter, we did experience an increase in start-up losses as well as an unexpected bad debt in one of our joint ventures, which negatively impacted our adjusted EBITDA. We weren't disappointed with our out patient we have segment as it missed our expectations for the quarter. This was primarily due to an increase in clinical staffing to meet expected volume increase increases that did not materialize in the quarter.

The lack of volume and overall impact of increasing staffing costs reduced our clinical productivity. Having said that, we have seen a nice increase in volumes in the month of April. And finally, in our Concentra segment, we continue to see growth related to the addition of U.S. HealthWorks on February 1, 2018 as well as capturing synergies associated with integrating U.S. HealthWorks in the Concentra.

During the first quarter, we opened a 50 bed Rehabilitation Hospital in partnership with the University of Florida Health System in Gainesville. We also added a new critical illness recovery hospital in partnership with UC San Diego Health in the first quarter. We have rehabilitation hospitals under construction in Las Vegas, in partnership with Dignity Health, is scheduled to open the second quarter and in Newport News Virginia in partnership with Riverside Health scheduled to open in the third quarter.

Our development pipeline remains robust. Now let me take you through our operational metrics for the first quarter. Overall, our net revenue for the first quarter increased 5.7% to $1.32 billion in the quarter. Net revenue in our critical in this Recovery Hospital segment in the first quarter, declined slightly to $462 million compared to $465 million in the same quarter last year. The decline was primarily attributable to a reduction in patient volumes driven by three hospitals we closed since the first quarter last year as well as the temporary closure of our Panama City Florida Hospital.

Patient days, were down 2.9% compared to the same quarter last year, with just over 258,000 patient days in the first quarter. Occupancy in our critical illness recovery hospital segment was 71% in both the first quarter of this year and last year. Partially offsetting our volume decrease decline was a 1.7% improvement in rate to $1,759 per patient day in the first quarter. Now revenue in our rehabilitation hospital segment in the first quarter increased 8.1% to $189 million compared to $175 million in the same quarter last year. Patient days increased 7.7% to almost 83,000 days. Net revenue per patient day was up slightly to $1,633 per day in the first quarter compared to $1,623 per day in the same quarter last year. Net revenue in our outpatient rehab segment in the first quarter increased 7.7% to $277 million compared to $257 million in the same quarter last year. Patient visits were down slightly with $2.05 million visits in the first quarter, compared to $2.07 million visits in the same quarter last year. This decline in visit was attributable to the sale of clinics to non-consolidating subsidiaries, which negatively impacted visits by 99,000 visits compared the same quarter last year. However, we had an increase in revenues related to management fees and labor pass through services provided to our non-consolidating joint ventures in the first quarter compared to the same quarter last year. Revenue from management fees increased $1.5 million and Labor passed through increased $17 million, when compared to the same quarter last year.

Our net revenue per visit was $103 in both first quarter of this year and last year. Net revenue in our Concentra segment for the first quarter increased 11.3% to $396 million, compared to $356 million in the same quarter last year. The increase was primarily driven by the addition of U.S. HealthWorks, which was acquired in February 1st of last year. For the first quarter, revenue from our centers was $360 million and the balance of approximately $36 million was generated from onsite clinics, community-based outpatient clinics and other services.

For the centers, patient visits increased 12.2% to just over2.9 million visits compared to just under 2.6 million visits in the same quarter last year. Our net revenue per visit was a $124 in both the first quarter of this year and last year. Total company adjusted EBITDA for the first quarter increased 4.2% to $170.1 million, compared to a $163.2 million in the same quarter last year. Our consolidated adjusted EBITDA margin was 12.8% for the first quarter compared to 13% for the same quarter last year. In our critical illness recovery hospital segment, adjusted EBITDA was $73 million in both the first quarter this year and last year. Adjusted EBITDA margin for the segment was 15.8% in the first quarter, compared to $15.7 in the same quarter last year. Adjusted EBITDA was adversely affected by the temporary closure of our Panama City, Florida Hospital. Our rehabilitation hospital segment, adjusted EBITDA was $25.8 million in the first quarter compared to $26.8 million in the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 13.7% in the first quarter compared to 15.3% in the same quarter last year.

The decline in adjusted EBITDA margin and margin were primarily the result of losses in our start-up hospitals and $1.5 million of additional bad debt that I previously mentioned. Adjusted EBITDA start-up losses were $2.8 million in the first quarter, compared to $8,00,000 in the same quarter last year. Outpatient rehab adjusted EBITDA was $29 million in the first quarter compared to $30.5 million in the same quarter last year. Adjusted EBITDA margin for the outpatients segment was 10.5% in the first quarter compared to 11.9% the same quarter last year. The labor pass through which equally increases both our revenue and expense, so carries no margin -- marginal contribution, impacted margins by 150 basis points in the first quarter this year compared to 90 basis points last year. Excluding the Labor pass through margins would have been 12% in the first quarter compared to 12.8% in the same quarter last year.

Concentra adjusted EBITDA was $66.3 million for the first quarter, compared to 57.8 million in the same quarter last year. Adjusted EBITDA margin was 16.7% in the first quarter compared to 16.2% in the same quarter last year. The increase in Adjusted EBITDA is primarily the result of the acquisition of U.S. HealthWorks which we acquired February 1st 2018.

Earnings per fully diluted share was $0.30 for the first quarter compared to $0.25 for the same quarter last year. Adjusted earnings for fully diluted share was $0.27 per diluted share for the first quarter compared to $0.29 in the same quarter last year. Adjusted earnings per fully diluted share excludes, non-operating gains related tax effects in the first quarter this year and excludes a loss on an early retirement of debt non-operating gain and U.S. HealthWorks acquisition costs and their related tax effects in the first quarter last year.

On April 19th, the proposed inpatient rehab rules for fiscal 2020 were posted by CMS, on April 23rd proposed long-term care hospital rules for fiscal 2020 were posted by CMS. As you know we generally don't comment publicly on the proposed regulations. We're actively evaluating and provide comments to CMS as appropriate in the process. At this time, I'll turn over to Martin Jackson for his some additional financial details before we open the call up for questions.

Martin F. Jackson -- Chief Financial Officer

Thanks, Bob. Good morning, everyone. For the first quarter, our operating expenses which include our cost of services and general and administrative expense of $1.16 billion and 87.7% of net operating revenue. For the same quarter last year, operating expenses were $1.1 billion and 87.6% of net operating revenue. Cost of services were $1.13 billion for the first quarter compared to $1.07 billion in the same quarter last year. As a percent of net revenue, cost of services were 85.5% for the first quarter compared to 85.1% in the same quarter last year. G&A expense was $28.7 million in the first quarter. This compares to $31.8 million in the same quarter last year. G&A as a percent of net revenue was 2.2% in the first quarter. This compares to 2.5% of net revenue for the same quarter last year. G&A expands in the first quarter last year included $2.9 million in U.S. HealthWorks acquisition costs, excluding those costs G&A an expense as a percent of net revenue would have been 2.3% in the first quarter last year.

As Bob mentioned total adjusted EBITDA was $170.1 million and adjusted but our margin was 12.8% for the first quarter as compared to the total adjusted EBITDA of $163.2 million and adjusted EBITDA margin of 13% in the same quarter last year. Excluding the effect of the labor pass through for the entire Company, adjusted EBITDA margins would have been 13.7% in the first quarter of this year, compared to 13.6% in the same quarter last year. Total revenue related to the labor pass through was $80.1 million in the first quarter this year. This compares to $55.2 million in the same quarter last year.

Depreciation and amortization was $52.1 million in the first quarter. This compares to $46.8 million in the same quarter last year. The increase in depreciation and amortization expense was primarily the result of the U.S. HealthWorks acquisition. We generated $4.4 million in equity and earnings of unconsolidated subsidiaries during the first quarter. This compares to $4.7 million in the same quarter last year. The reduction in equity and earnings was driven by two new JVs, where we have a minority position, that had losses during the first quarter of this year.

We had a non-operating gain of $6.5 million in the first quarter of this year. Last year, we've recognized the loss on early retirement of debt of $10.3 million and non-operating gain of $400,000 in the first quarter. Interest expense was $50.8 million in the first quarter. This compares to $47.2 million in the same quarter last year. We recorded income tax expense of $18.5 million this year. This compares to $12.3 million in the same quarter last year. Net income attributable to Select Medical Holdings was $40.8 million in the first quarter and fully diluted earnings per share was $0.30. Excluding the non-operating gain and its related tax effects, our adjusted earnings per share was $0.27. At the end of the year. We had $3.3 billion of debt outstanding and $147.8 million of cash on the balance sheet. Our debt balance at the end of the year included $1 billion in select term loans, $160 million in select revolving loans. $710 million in the Select 6.375% senior notes, $1.1 billion in Concentra first lien term loans. $240 million in Concentra second lien term loans. $41 million in in unamortized discounts, premiums, and debt issuance cost that reduced the overall balance sheet liability. And we had $71 million of other miscellaneous debt. Our balance sheet now reflects an operating lease right of use asset and both the current and a non-current operating lease liability that we recognize in connection with the adoption of the new lease accounting standard.

Operating activities provided $41.8 million of cash flow in the first quarter. This compares to $50.7 million in the same quarter last year. Our day sales outstanding or DSO was 53 days at March 31, 2019, this compares to 51 days at December 31, 2018 and 56 days at March 31, 2018.

Investing activities used $82.8 million of cash in the first quarter. The use of cash was primarily related to $49.1 million in purchases of property and equipment and $33.7 million of acquisition and investment activity during the quarter. Financing activities provided $13.7 million of cash in the first quarter. We had net borrowings of $140 million on Select's revolving loans, a portion of which we used to prepay term loans of $98.8 million at Select, Concentra also prepaid $33.9 million in term loans during the quarter.

Additionally, in our earnings press release, we reaffirmed our business outlook for the calendar year 2019 provided earlier this year. We expect net revenue to be in the range of $5.2 billion to $5.4 billion. Adjusted EBITDA is expected to be in the range of $660 million to $700 million and fully diluted earnings per share is expected to be in the range of $0.97 to $1.13 in 2019.

This concludes our prepared remarks. And at this time, we'd like to turn it back over to the operator to open the call up for questions

Questions and Answers:

Operator

(operator instruction). Our first question comes from the line of Frank Morgan with RBC Capital Markets your line is open.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. I guess, I'll start with a high level and going back to the proposed rule or 2020. I know you don't want to go into a lot of detail there yet since it is just proposed but conceptually, when we looked at the public use file, it looked like you would fare much better under this estimated change from the Case Mix Group. I'm just curious just kind of a yes or no answer, did you find that to be more of a positive or do you think that's likely to be more of a positive? And if so structurally, why would that be the case? And then any particular areas that you would call out that you're likely to make some comments back to CMS zone on that'd be my first question?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Well, Frank. It's Bob, I'll let Marty comment on the rehab reg. I'll just make a comment on the proposed reg on the long term acute care. I mean I think based on regs we've seen in the past, the one we got was pretty I think kept with the stability in the industry. And there's a lot going on. What we had hoped for which is you know modest increases but more increases expected on the side of the LTACH compliant patient population than on the site neutral which is going to leave the phase in the blended rate. So obviously for us that's good and the fact that there is some increase in some stability. When I say stability, no more radical changes on the LTACH side, while the industry continues to adjust to criteria and loss of the blended rate. I think, it's a positive. So we obviously won't have as many comment -- much commenting on the LTACH rule as we've had in the past years, where we've had some pretty dramatic policy changes there. So I'm pleased that we're looking to see some stability in the LTACH base. And I'll let Marty comment -- give you any comment on the rehab rule.

Martin F. Jackson -- Chief Financial Officer

Frank, our initial evaluation on on the inpatient rehab is we are cautiously optimistic. It looks pretty good.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. Switching gears, I know this labor passed through thing is becoming on these unconsolidated JVs is becoming a bigger number. So would you mind just going back through that in kind of go through the mechanics of it and why it works the way it does? And because clearly that's becoming a bigger part of the story, we just put from an optics standpoint but we need to make sure we get it right. So any color or background, there would be appreciated?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yeah. Frank, we certainly appreciate the question. The labor pass through is really -- that growth is really a result of new JVs, where we have a minority ownership but we employ all the personnel. And these employee costs are charged back to the JVs at their costs. You saw a significant increase on same quarter year-over-year basis. And that's really a function of the Banner Health, the Ohio Health JVs and then growth in the Baylor JV, where we own minority positions in all three of those

Frank Morgan -- RBC Capital Markets -- Analyst

And then I know there was pulling the facilities out. I don't know if you said this in the prepared remarks, but do you have any kind of same-store numbers that you could adjust for the fact of pulling some of those ventures out or some of that business now. Any color there would be great. And I'll hop off. Thanks

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Frank could you. Before you hop off, can you repeat that question, I want to make sure that we understand?

Frank Morgan -- RBC Capital Markets -- Analyst

Yes. Just some of the the optics to the volume numbers. Did you give a same-store or a pro forma adjusted as if you'd had the same amount in both periods. I just didn't catch it. I wanted to just have a sense of how volumes were doing excluding the effect of the effect of some of those JVs?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Is that on the --are we talking inpatient or outpatient. If we're talking outpatient, we can certainly talk to you through that. I mean we have.

Frank Morgan -- RBC Capital Markets -- Analyst

Yes. We're talking outpatient.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yeah. On the outpatient side, we had basically contributed three. We had three JVs where we contributed into a minority position on clinic assets that represented about 99,000 of visits. So when you take a look at the overall visits, it looked as if it was a decline when in actuality, the underlying visits actually increased on the same-store basis excluding those joint venture or those clinics that we moved over to the joint ventures.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. That's what I needed. Thank you.

Operator

Our next question comes from the line of Peter Costello with Wells Fargo. Your line is open.

Peter Costello -- -- Analyst

Continuing on that a little bit. You'd expect to see that the equity in earnings would go up from these JVs and yet it was flat. Now you highlighted a couple of new JVs that caused some costs in the equity earnings line. Can you describe what were the total amount that cost? Did you give us that -- I don't know that this was disclosed that?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

The overall impact. The two JVs that we talked about on the critical illness recovery hospital side, it was a little bit north of $1.1 million loss. And then on the are the urb side, it was about $500,000 or $1.6 million.

Peter Costello -- -- Analyst

And so that ran through the equity in earnings line. To be clear?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

That's correct. Yeah. That that had a negative impact on the equity earnings line.

Peter Costello -- -- Analyst

Was there anything else that impacted that equity in earning line? Besides the negative --

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Those two were really the major reasons for the impact -- the negative impact.

Peter Costello -- -- Analyst

Okay. And then you know that last year first quarter, we saw that 71% occupancy and we thought that was tied to the flu I guess. And then now we're seeing the 71% occupancy again this quarter in the LTACH space. Is that really more -- we really didn't have as much of a flu season this year. So is that really the seasonal impact -- should we start to expect that to be your level of occupancy in the first quarter all the time or is this a new run rate level of occupancy that we should carry going forward in all quarters? Help us understand why it was so strong last year and versus why we're so strong this year?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Well the fact of the matter is,we've been talking about all of the work that the operators have been doing in educating our referral sources. And we really think that this 71% this year is really a function of some improvements that have been made. Some of that education is -- we're finally seeing additional referrals and conversion of those referrals.

Martin F. Jackson -- Chief Financial Officer

I remember last year at this time, when we were talking about the first quarter. We said the 71% -- we suggested the 71% was a result of really a dramatic flu season that impacted the census. There was no question that it did. So we did not have as severe a flu season that impacted this year's first quarter. But yet we still reached that increased occupancy. So from our standpoint -- from an operational standpoint, we feel as though it's an up quarter even though it's flat on occupancy. But you know the environment is a little different. So I feel good about the progress, we've made on developing census and filling unused beds, just based on the things that we've talked about in the past that the education of our referral sources and getting more of those higher acuity patients post their ICU stay. So I feel good about the progress, we've made here in the first quarter. Now having said that, there is still some -- there's still seasonality in this business on the critical illness side of business. There's still some seasonality in the business. But I do feel as though we're further along this year than we were a year ago.

Peter Costello -- -- Analyst

Terrific. That's helpful. Thank you.

Operator

Thank you. And our next question comes from the line of A.J. Rice with Credit Suisse. Your line is open.

A.J. Rice -- Credit Suisse -- Analyst

Shadows and suspense there for a minute. A couple of questions if I might, hello everybody. The outpatient rehab margin, you did talk about the adjustments, we needed to make because the labor pass through but I guess it was down 80 basis points on a normalized year-to-year basis. I know it can bounce around but seems a little bit of a bigger than usual move. Anything to highlight there as to what's happening?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yeah A.J., as we've also pointed out, is we had brought on additional clinical FTEs in anticipation of additional volume. If we had the same FTE clinical efficiency that we've had in the past that then differential represented about $2.4 million. That $2.4 million would have had, you know it would have had about a full 100 basis point impact or a 13% margin as opposed to a 12%.

A.J. Rice -- Credit Suisse -- Analyst

Okay, sure that make sences.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

As we said we've started to see that volume materialize in April and we anticipate getting back to those those operational efficiencies.

A.J. Rice -- Credit Suisse -- Analyst

Okay. With Concentra, you've now I guess anniversary the U.S. HealthWorks in acquisition. I guess I would -- I'm asking organic growth from here what do you think it looks like on the top-line or sort of a range or normalized run rate? In this I think, I have 16.7% margin of that business, is that -- I know there's some seasonality there and volatility, is a margin run rate sort of normalized or is there further improvement we'll see as you realize something like synergies or whatever?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

We think the 16.7% margin is is probably a margin you can expect to see moving forward in 3 of the 4 quarters. The fourth quarter is seasonally, the weakest quarter. So you won't see the margin in 16.7% in that quarters. That should be, I think historically it's been in the 10% to 12% range.

A.J. Rice -- Credit Suisse -- Analyst

Okay. And have I just top-line sort of organic growth for the combined entity now that you've anniversary U.S HealthWorks do you think. What would you say low-single digits?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yeah. Our estimate is probably in that 2% to 3% top-line growth.

A.J. Rice -- Credit Suisse -- Analyst

Okay. All right. And then the last question, I had was obviously we're a little bit ahead of this but Welsh Carson and Dignity, have the ability to put back to you a third of their position next year. Maybe we're wrong on this but I have a calculated $250 million to $300 million. If they decide to do that, I guess is there any early indication as to where what they might do? And second is it affecting anything you're doing in terms of capital allocation or position on the balance sheet today thinking about that?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Good question, A.J. I'll let Marty comment on the on the financing. As we sit here today, I think that you should expect that the minority partners which is Walsh Carson, Dignity and Cassie and Co will exercise their put for the 1st 3rd. I would be very surprised if they didn't. So I think that for modeling purposes you should assume that they do put their their first 1/3rd to us when they're able to do that.

Martin F. Jackson -- Chief Financial Officer

A.J. on the on the dollar amount we would certainly encourage you to look at the higher amount. I think it's going to be in the 300 plus range as far as the sport is concerned and we would anticipate at this current time paying that cash.

A.J. Rice -- Credit Suisse -- Analyst

OK. All right. So so you have the ability to tap the markets or you have liquidity to do that. You're saying?

Martin F. Jackson -- Chief Financial Officer

That's correct.

A.J. Rice -- Credit Suisse -- Analyst

OK. All right. Thanks a lot.

Martin F. Jackson -- Chief Financial Officer

Thanks A.J..

Operator

Our next line comes from the line. Our next question comes from the line of Kevin Fishback with Bank of America. Your line is open.

Kevin Fishback -- Bank of America -- Analyst

Great thanks. So the bad. You mentioned the bad debt charge. One of your J.B. partners in the in the (inaudible). What was that related to?

Martin F. Jackson -- Chief Financial Officer

Kevin that was related to a contract therapy where services contract therapy service. We were providing to a couple of nursing homes, those nursing homes are being reorganized at this time so we fully reserve them.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yeah I guess I guess I'll just I'll just add to that that you'll recall a number of years ago we had a contract therapy division which we sold and exited that business. This is just service that we were providing inside one of the joint ventures because of the kind of the local market. It's not a business line for us and I think as many of you know with the struggles that the skilled nursing industry has had some of the smaller players are struggling financially and you know our, our judgment was that some of these amounts are based on collectibles so we decided just take the write off in this quarter.

Kevin Fishback -- Bank of America -- Analyst

Great. And then I think I think you said double digit same store density EBITDA in the in the (inaudible) segment. I mean that's just a function of how many of these sites are still kind of in a in the start-up phase. I mean how long do you think you can keep you know the type of growth going.

Martin F. Jackson -- Chief Financial Officer

Well we think that double digit growth will continue over the next couple of years on the inpatient rehab it's really a function of the pipeline and really conversion of all those opportunities into new projects, new hospitals.

Duration: 46 minutes

Call participants:

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Martin F. Jackson -- Chief Financial Officer

Frank Morgan -- RBC Capital Markets -- Analyst

Peter Costello -- -- Analyst

A.J. Rice -- Credit Suisse -- Analyst

Kevin Fishback -- Bank of America -- Analyst

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