Select Medical (NYSE:SEM) Holdings Corporation (NYSE: SEM) has announced robust financial growth in the third quarter of 2024, with a notable 6% increase in both consolidated revenue and adjusted EBITDA compared to the same quarter last year. The company successfully launched the initial public offering (IPO) of Concentra, issuing over 23 million shares and maintaining a majority stake. With plans to distribute its remaining interest in Concentra to shareholders by year-end, Select Medical remains attentive to market conditions.
Key Takeaways
- Consolidated revenue and adjusted EBITDA increased by 6% year-over-year.
- Select Medical completed Concentra's IPO, issuing 23,250,000 shares, retaining 81.74% ownership.
- A 14% revenue increase in the inpatient rehab division and a 12% rise in adjusted EBITDA, despite new facility startup losses.
- The critical illness recovery division saw a 3% revenue increase and a 9% rise in adjusted EBITDA.
- A new 48-bed rehab hospital is under development in Jacksonville, Florida, with additional facilities planned in other states.
- Outpatient rehab division revenue grew by 7%, driven by higher patient volumes and improved net revenue per visit.
- Earnings per share (EPS) increased to $0.43, up from $0.38 in Q3 2023.
- A cash dividend of $0.125 declared, payable on November 26, 2024.
- Consolidated debt decreased by $498 million, with a net leverage improvement to 3.06 times.
Company Outlook
- Select Medical revised its 2024 revenue outlook to a range of $6.95 billion to $7.15 billion, with adjusted EBITDA projected between $865 million and $885 million.
- Capital expenditures are expected to be between $200 million and $250 million.
- The company aims to maintain a leverage ratio around 3 times, considering various capital deployment options.
Bearish Highlights
- Startup losses of $3.7 million from new facilities in the inpatient rehab division.
- Day sales outstanding (DSO) increased slightly to 55 days.
Bullish Highlights
- Successful IPO of Concentra and plans to distribute remaining interest to shareholders.
- Multiple development projects underway, promising growth in bed capacity and service offerings.
- Improved operational efficiency and margin enhancement expected in the next year.
Misses
- A slight increase in day sales outstanding (DSO) to 55 days.
Q&A Highlights
- Martin Jackson projects SW&B as a percentage of revenue to end the year around 57%, improved from earlier in the year.
- Robert Ortenzio emphasized the enhancement of outpatient rehab margins through a significant technology release at year-end.
Select Medical's third-quarter performance has demonstrated the company's ability to grow and expand in a competitive healthcare market. With strategic developments in place and a focus on operational efficiency, Select Medical is poised for continued progress. The company's commitment to shareholder value is evident in its handling of the Concentra IPO and its forthcoming distribution plans. As Select Medical navigates the evolving healthcare landscape, it remains a notable player in the industry.
InvestingPro Insights
Select Medical Holdings Corporation's robust financial performance in Q3 2024 is further supported by data from InvestingPro. The company's market capitalization stands at $4.68 billion, reflecting its significant presence in the healthcare sector.
InvestingPro data shows that Select Medical's revenue for the last twelve months as of Q2 2024 was $6.87 billion, with a healthy revenue growth of 5.92% over the same period. This aligns well with the company's revised 2024 revenue outlook of $6.95 billion to $7.15 billion mentioned in the article.
The company's profitability is underscored by its P/E ratio of 17.29, which is considered relatively low. This is particularly noteworthy given the company's strong financial performance and growth prospects. An InvestingPro Tip highlights that Select Medical is trading at a low P/E ratio relative to its near-term earnings growth, suggesting potential undervaluation.
Another InvestingPro Tip indicates that the stock generally trades with low price volatility. This characteristic may appeal to investors seeking stability, especially in light of the company's consistent performance and strategic moves such as the Concentra IPO.
It's worth noting that InvestingPro offers 13 additional tips for Select Medical, providing investors with a comprehensive analysis of the company's financial health and market position. These insights can be valuable for those looking to make informed investment decisions in the healthcare sector.
Full transcript - Select Medical Holdings Corp (SEM) Q3 2024:
Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to Discuss the Third Quarter 2024 Results and the Company's Business Outlook. Speaking today are the company's 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 conference over to Mr. Robert Ortenzio.
Robert Ortenzio: Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for third quarter 2024. As most of you are aware, this quarter, we successfully completed Concentra's initial public offering. Concentra issued 23,250,000 shares and now trades under the symbol CON on the New York Stock Exchange. Select Medical now owns 81.74% of Concentra's stock. We expect to distribute its remaining interest in Concentra to our shareholders by the end of the year, contingent upon receiving the waiver of the IPO lockup, which is based on market conditions. As noted on last quarter's earnings call, Concentra entered into financing arrangements, which included a new senior credit facility consisting of an $850 million seven-year term loan, a $400 million five-year revolving facility, which was undrawn at closing, and $650 million of 6.875% senior notes due 2032. The majority of the net proceeds of Concentra's IPO and related debt transactions were used by Select to pay down debt. Concentra will be holding their Q3 conference call later this morning at 10.30 Eastern time, where they will provide more detailed information regarding their performance for the third quarter. On the development front in September, Select Medical opened a 48-bed inpatient rehab hospital in Jacksonville, Florida with our partner, UF Health. The joint venture hospital is branded UF Health Rehabilitation Hospital North and resides in the new tower of UF Health North. We're also pleased to announce a few new inpatient rehab projects, including an acquisition of a 50-bed hospital in Oklahoma City. It is scheduled to close in December. The hospital will be a joint venture with our current partner, SSM. Early next year, we also plan on opening a 54-bed rehab hospital in Temple, Texas. Contingent upon regulatory approval, we plan on opening a new 68-bed facility in Jersey City, which is Hudson (NYSE:HUD) County, New Jersey, branded as Kessler in late 2026. We have a number of development projects in line for 2025 and 2026 in the inpatient rehab division. We're on track to open our second hospital with UPMC in central Pennsylvania in Q2 of 2025, and our fourth inpatient rehab with Cleveland Clinic in Fair Hill, Ohio in Q3 of 2025. In Q1 of 2026, we are slated to open our fourth rehabilitation hospital as part of our joint venture with Banner (NASDAQ:BANR) in Tucson, Arizona, and a new freestanding 63-bed rehab hospital in Ozark, Missouri with CoxHealth Systems. In Q4, 2026, our new 60-bed rehab hospital in southern New Jersey, Baccarat Institute for Rehab, in partnership with AtlantiCare, is scheduled to open. Between the specific projects just mentioned, as well as some other smaller expansions and new distinct part rehab units and existing hospitals, we plan to add 569 additional beds to our operations for the remainder of 2024 through 2026. The additional beds will consist of 543 inpatient rehab beds, which include 112 non-consolidating beds and 26 long-term acute care hospital beds. There are also a number of other opportunities under consideration which would further increase our Select specialty hospital footprint. This quarter, our outpatient rehab division added nine clinics via eight de novos and one clinic acquisition. This offset the closure of four terminated management agreements, three underperforming clinics and the forwarding of two clinics into existing operations upon lease expiration. The pipeline for future growth includes six executed leases for de novo clinics scheduled to open later this year, as well as 12 for 2025. We also plan to acquire two clinics later this year. Overall, we had a strong third quarter of 2024 with all four divisions exceeding prior year Q3 results in both revenue and adjusted EBITDA. The hospital divisions continued to exceed expectations with the inpatient rehab division returning double-digit growth in both revenue and adjusted EBITDA for the third consecutive quarter this year. Overall, our consolidated adjusted EBITDA grew 6% from $193.8 million to $205.5 million with an adjusted EBITDA margin of 11.7% compared to 11.6% in prior year Q3. Revenue grew by 6% compared to Q3 of the prior year. Our critical illness recovery hospital division continues to perform well, with a 3% increase in revenue and a 9% increase in adjusted EBITDA compared to the same quarter prior year. Critical illness incurred $2.5 million in startup losses related to new hospitals this quarter compared to $5 million in the same quarter prior year. Current quarter startup losses primarily relate to the opening of RUSH Specialty Hospital in Chicago in April. Our occupancy and average daily census both increased by 1% from same quarter last year, occupancy up from 64%. Our rate per patient day increased 2%. Our adjusted EBITDA margin was 8.7% for the quarter compared to 8.2% in the prior year Q3. Critical illness experienced a slight reduction, three-tenths of a percent, in their salary, wages and benefit to revenue ratio compared to prior Q3 with a 58% margin. We have seen nursing agency rates stabilize while utilization continues to decrease from prior year. We also continue to see decreases in nursing orientation hours, 13% reduction from prior year Q3, and sign on and incentive bonus dollars, an 18% reduction from prior year Q3. Our inpatient rehab hospital division had a very strong quarter, with a 14% increase in revenue and a 12% increase in adjusted EBITDA compared to Q3 prior year. Inpatient rehab incurred $3.7 million of startup losses this quarter, primarily related to the opening of the UF Health Jacksonville in late September and our RUSH Specialty Hospital Rehab Unit in April. We did not incur any startup losses within the rehab division in prior Q3. Average daily census increased 4% and our rate per patient day increased 6%. Our occupancy of 82% was 2% lower than prior year 84%, which is a result of our new hospitals. The adjusted EBITDA margin for inpatient rehab was 21.3% for Q3, which was lower than prior year margin of 21.7%, again, due to new hospital startup losses. Our same store adjusted EBITDA margin was 23.4% for the quarter. Concentra experienced increases of 3% in both net revenue and adjusted EBITDA over prior year same quarter. The increase in revenue was driven primarily by a 4% increase in rate, which was attributable to workers' comp state fee schedule increases. Consistent with the first half of the year, Concentra's workers' comp volume remained strong with increase of 2% from prior year Q3. This volume was offset by 4% decrease in employer-based visits, which are reimbursed at lower rates. The demand for employer-based visits have normalized as the labor force has stabilized compared to the COVID years where we experienced significant churn in labor force. Concentra's adjusted EBITDA margin was 20.7% for the quarter compared to 20.9% same quarter prior year. Our outpatient rehab division experienced an increase of 7% in revenue with patient volumes increasing by 6% and our net revenue per visit increasing from $100 prior year Q3 to $101 Q3 of this year. Our volume continues to maintain an upward trend and net revenue per visit has increased with continued improvement in commercial and managed care rates, offset by the decrease in our Medicare rates. The outpatient division's adjusted EBITDA increased by 7% compared to prior year, and the adjusted EBITDA margin increased from 9% to 9.1%. The outpatient team continues to focus on improving patient access, productivity, and staffing. EPS was $0.43 per share for the third quarter compared to $0.38 per share in the same quarter prior year. EPS was $0.50 per share compared to adjusted EPS of $0.46 per share Q3 of the prior year. In regards to our allocation and deployment of capital, our board of directors declared a cash dividend of $0.125 payable on November 26, 2024 to stockholders of record as of the close of business on November 13, 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. In closing, I'd like to acknowledge the passing this past week of my father, my co-founder, and our chairman emeritus, Rocco Ortenzio. Rocco was a visionary and force in the healthcare industry for over six decades, the last 28 years at Select Medical, where he was instrumental in guiding our company's success. He will be deeply missed, but his legacy of leadership will carry forward. That concludes my remarks, and I'll now turn it over to Marty Jackson for some additional financial details before we open the call up for questions.
Martin Jackson: Thanks, Bob. And good morning, everyone. I will begin by providing additional details on the progress we continue to make regarding our labor costs within the critical illness recovery hospital division. Overall, our SW&B as a percentage of revenue ratio was 58.1% this quarter, which is a decrease from 58.4% in Q3 of prior year. In the third quarter of this year, we again saw decreases in the agency cost and utilization from the prior year of Q3. Compared to Q3 of 2023, RN agency costs decreased by 4% and utilization decreased from 15.4% to 14.7%. Agency utilization also dropped 6% from the sequential quarter of Q2, which was 15.7%. The agency rate for RNs remained consistent with prior year at $78 an hour. Nursing sign-on and incentive bonus dollars decreased by 18% from Q3 of prior year from $7.8 million to $6.4 million. Finally, we saw a decrease of 13% in our orientation hours. We're very pleased with the continued progress we have made in regards to these labor costs. On July 26, Concentra entered into financing arrangements, as Bob had mentioned, on their $850 million seven-year term loan, $400 million five-year revolver, which is undrawn, and $650 million 6.875% senior notes, which is due to 2032. Using these proceeds from the Concentra IPO and debt transactions, Select made voluntary prepayments of $1.6 billion on our term loan and $300 million repayment on our revolving credit facility. At the end of July, we also decreased our revolving credit facility by $220 million from $770 million to $550 million. And as of September 30th, we had almost $500 million of availability on our revolver. The net decrease in our consolidated debt balance in Q3 was $498 million. At the end of the quarter, we had consolidated debt balances outstanding of $3.1 billion, $191.5 million of cash on the balance sheet. Our consolidated leverage at the end of the quarter was 3.38 times compared to 4.13 times last quarter. Total Select debt at the end of the quarter included $1.2 billion, the 6.25% senior notes, $373 million in term loans, and $10 million on our revolver. And we also had $48 million of other miscellaneous debt. Select ended the quarter with net leverage for our credit agreement of 3.06 times. Total Concentra debt at the end of the quarter includes $850 million term loan, $650 million of the 6.875% senior notes, $7.6 million of other miscellaneous debt. Concentra ended the quarter with net leverage at 3.7 times. Effective with September 30th, 2024 reporting, Concentra has been designated an unrestricted subsidiary under the Select credit agreement, and Concentra activity is no longer included in the Select credit agreement computations. Interest expense was $55.4 million in the third quarter as compared to $50.3 million in the same quarter prior year. The increase in interest expense was principally due to the accelerated recognition of the gain on our interest rate hedge, $13.7 million in the second quarter due to the expected prepayment of our term loan, which occurred in Q3. This increase was mitigated by the net debt reduction and lower interest rates on Concentra debt. For the third quarter, operating activities provided $181 million in cash loan. Our day sales outstanding, our DSO, was 55 days. As of September 30th, 2024, this compares to 52 days September 30th, 2023; 56 days on June 30th, 2024; 58 days as of March 31st, 2024. We continue to see improvement in our DSO every quarter as the claims processing backlog that resulted from the Change Healthcare (NASDAQ:CHNG) cyber incident resolves itself. We expect to continue to see improvement in Q4. Investing activities used $45.1 million of cash in the third quarter. This is primarily due to almost $51 million in purchases of property, equipment, and other assets, offset by sales of assets. Financing activities used $55.6 million of cash in the third quarter. We had $511.2 million in proceeds from the Concentra's IPO, almost $837 million in net proceeds from Concentra's term loan, and $637 million net proceeds from the issuance of Concentra senior notes. These proceeds were offset primarily by $1.6 billion payment on Select's term loan, $335 million net payments on our revolver, $16.2 million in dividends on our common stock, and $9.4 million in net payments on other debt. 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 31, 2025, unless further extended or earlier terminated by the board. We are updating our business outlook for 2024. We now expect revenue to be in the range of $6.95 billion to $7.15 billion, adjusted EBITDA to be in the range of $865 million to $885 million, fully diluted earnings per share to be in the range of $2.01 to $2.12, and adjusted earnings per share to be in the range of $2.09 to $2.20. Capital expenditures are expected to be in the range of $200 million to $250 million for this year. That 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: [Operator Instructions]. Our first question will be coming from Ben Hendrix of RBC Capital Markets.
Ben Hendrix: First to Bob, our deepest condolences for Rocco's passing. Our thoughts are certainly with you there. And the second question, I guess for Marty, I just wanted to get some more comments on LTAC occupancy trends. I think we may have misconstrued some seasonal occupancy trends as staffing related. It doesn't sound like that's the case. Maybe you could provide just some more detail and kind of what you're seeing from an occupancy standpoint in that segment versus your targets and if there's any outlier threshold influence there.
Martin Jackson: Ben, the occupancy rate for this past quarter, we were actually pretty pleased with it. It was higher than prior-year same quarter. And it really is seasonality of the third quarter. So it really didn't have anything to do with staffing issues. It's really just a function of the quarter.
Ben Hendrix: And anything that you can comment or observations on outlier thresholds impacting the segment at all.
Martin Jackson: Our operators have done a very good job managing through the high cost outlier. So we really haven't seen too much of an impact there.
Operator: Our next question will be coming from Justin Bowers of Deutsche Bank (ETR:DBKGn).
Justin Bowers: When I look at pro forma net leverage post spin, I arrive around a number of about 3x, maybe a little lower than that. The company is going to generate substantial amount of free cash flow, even after all the development projects that you laid out. Any thoughts or preferences on capital deployment, given what we know now, and is there sort of an optimal leverage range for the company or would you sort of even take that down to two or that level?
Robert Ortenzio: I think that I hate to say that the answer has kind of always been similar from Marty on capital deployment. We do kind of pride ourselves on our history of being opportunistic on our deployment. We are fortunate to have lots of opportunities in the development area, as you saw from my comments on some deals that we have, and there's others behind that. I would describe our development pipeline as quite robust right now. And then there is obviously the opportunity to de-leverage through free cash flow or have stock buybacks. All options are on the table, as we like to always have them. I will say that we have worked hard to drive our leverage down to 3 times, and we've gotten some uplift from the rating agencies, as you've seen. We're pleased with that and we would like very much and it's a priority to maintain that. So I think a 3 times leverage is very good for us, very positive, allows us to keep all of our options open. And I think as we go forward as a smaller company without Concentra, we want to maintain that flexibility. So I would say – that's a long answer to say 3 times is really where we want to be and we want to try to maintain that and then we want to be opportunistic in terms of where we allocate our free cash flow.
Justin Bowers: Just quick clarifications. On LTAC development, it sounds like there's – at least through 2026, there's one program that you have or project that you have line of sight on. Is that right? 26 additional beds.
Robert Ortenzio: Well, there are other opportunities. We've only listed one. We find, as that business is evolving with the threshold levels making that business even tougher, our operators are navigating. We have a very big platform. We are finding that a lot of our new LTAC development projects are bleeding into our partnerships, our existing ones and our new ones. As we continue to perform very well with our partners on inpatient and outpatient rehab, LTAC has become a part of that model, which we like. We will also do some de novos. But it is not a place where we won't spend capital, but as we look across our business segments and on the hospitals, bigger opportunities for capital deployment on rehab. And then also some on outpatient, although that's relatively modest. On the LTAC side, we would like to grow, but we're not looking to have really large capital deployment in that area. So another way of saying is we like the hospital within a hospital model, which is less capital intensive, so we will look for those opportunities. So the LTAC will continue to be a growth segment for us. But with our platform, we can be a little bit more judicious on our capital and find opportunities where we can grow in the LTAC space without a lot of capital and then continue to allocate that primarily right now because of the opportunities on the inpatient rehab side.
Justin Bowers: Just quick one on the IRF rates, I think in the 2Q call, you talked about 2% for the federal funds base rate, and then the final rule said basically like 3% market basket net of productivity. Can you just square those two for us, at least on the Medicare side? Is the right way to think about sort of like, the base rates is 3%.
Martin Jackson: Justin, this is Marty. We think it is in that 3% range.
Operator: Our next question will be coming from Bill Sutherland of The Benchmark Company.
William Sutherland: I had one question on LTAC. Noticing one fewer hospital listed as of the last quarter, was there a removal or something from the portfolio?
Robert Ortenzio: Hold on just for a second, Bill. I think we saw a reduction from a year ago.
William Sutherland: Maybe I was wrong, I thought you were at 107. Okay, maybe I was wrong, the second quarter isn't – it was already at 106?
Robert Ortenzio: Yeah, we're looking right now. Yeah, you're right. We did close one in Ohio.
William Sutherland: Just underperforming?
Robert Ortenzio: Yeah, it was a consolidation, Bill.
William Sutherland: Marty, while I've got you, what are you thinking about as far as additional progress you can make on SWB as a percent of revenue? Is there more wood to chop?
Martin Jackson: Yeah, we think that there is, Bill. The numbers that we provide for, our targets are really annual. We think we'll probably end this year in that 57% range. As you know, we started off very well in the first quarter in that 54%, 55% range. And so, next year, we think we can see that come down. And there's really two points that are going to drive that. One is the commercial contracts. We continue to have some success on the negotiation of our commercial contracts. If we can obtain what we've done in the past year, be in that mid-range single digit increases, that will certainly help that number come down. The second one is volume increases. Volume increases has a big impact on the ability to drive that number down. And the hope is that, given the CMS mandate, that Medicare Advantage, follow traditional Medicare patient criteria, that we'll see improvements in the pre-authorization admission approval rates of Medicare Advantage. So if that occurs, that SW&B as a percentage of revenue will continue to drop.
William Sutherland: Looking at outpatient rehab and the progress you're making steadily here, kind of what are the keys for the next sort of step up? I know that it's a business that you've run in the mid-teens margin area in the past. I'm not sure what's on the planner for progress forward from here.
Robert Ortenzio: Bill, one of the major movers for us is our clinical efficiency. Clinical efficiency being the number of patients a therapist can see in a day. And we've really kind of focused over the past year in using technology to help us do that. We've got a very significant release that's occurring at the end of the year, and we think that that will be a game changer. That will be a big help for us. So we anticipate we'll see some nice improvement in the margins come next year.
William Sutherland: Is that an internally developed system or…? I'm just curious.
Robert Ortenzio: Yes. Yes, it was.
Operator: Our next question comes from Joanna Gajuk of Bank of America (NYSE:BAC).
Christian Malachy Porter: This is Christian Porter on for Joanna. Our question was about outpatient rehab. So margins came in much better than our estimate and we just wanted to know if you could talk about your efforts to improve efficiency. One of your peers saw higher contract labor costs in Q2. And we were wondering if you were seeing any of that and just trends around volume, staffing, and pricing.
Martin Jackson: There's a couple of questions that you put there. I think what we saw was, the first one I'll focus on is really taking a look at supplemental staffing, the agency staffing. We've seen that decline sequentially, and so that certainly helped the margin. I think we talked with the prior caller, with Bill, on what we're doing on the technology side through our systems to help enhance our clinical efficiency. So, both of those, we think will – one has helped in just recently, we think the technology will certainly help in the future.
Operator: And I would now like to turn the call back to management for closing remarks.
Robert Ortenzio: Thank you, operator. No closing remarks. We appreciate everybody that was on, your questions, and your condolences for Rocco. So thank you. We look forward to updating you next quarter.
Operator: And this concludes today's conference. Thank you for your participation. You may now disconnect.
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