Yahoo Finance Select Medical Holdings Corporation (NYSE:SEM) Q4 2023 Earnings Call Transcript
Select Medical Holdings Corporation (NYSE:SEM) Q4 2023 Earnings Call Transcript February 23, 2024
Select Medical Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter 2023 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 call over to Mr. Robert Ortenzio.
Robert Ortenzio: Thanks, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3, 2024, we announced that our Board of Directors has approved a plan to pursue the separation of Select Medical's wholly-owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be affected in a tax-free manner to Select Medical and its stockholders and to be completed in 2024.
We expect in the very near future to receive a private letter ruling from the U.S. Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the separation is still subject to customary conditions, including favorable market conditions, completion of necessary financing transactions and final approval by the Select Medical Board of Directors. I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year. We experienced double-digit adjusted EBITDA growth over prior year in every quarter of this year. In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions again exceeding prior year revenue and EBITDA.
For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year. Our consolidated adjusted EBITDA margin was 10.9% for Q4, compared to 9.4% in the prior year. Our critical illness recovery hospital division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin along with a 4% reduction in their salary, wages and benefits to revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continued progress with labor. Critical illness incurred $3.6 million of startup losses related to new hospitals in this quarter compared to $3.1 million in the same quarter prior year. The opening of the critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University System for Health remains on target for Q2 of this year.
As we mentioned last quarter, we also have hospital expansions underway which are expected to be completed in 2025, including in our Orlando market which will also include a 48-bed rehab distinct part unit. On the inpatient rehab development front, we're excited to announce that we signed an agreement with CoxHealth System to construct a new freestanding 63-bed inpatient rehab hospital in Ozark, Missouri in which we will have a majority interest. This hospital is projected to open early-2026. As previously noted, we have agreements with the University of Florida Health Shands to open a 48-bed hospital in Jacksonville, Florida, in Q3 of 2024 and with the Cleveland Clinic to open a fourth inpatient rehab hospital, which is a 32-bed hospital scheduled to open in the first half of 2025.
In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab in partnership with AtlantiCare. We anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024. Overall, I am pleased with the development results and pipeline for our Specialty Hospital divisions. In 2023, we developed or acquired and put in operation 128 inpatient rehab beds and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025. Concentra continued their strong performance exceeding prior year revenue, EBITDA and patient volumes.
As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland and the opening of three de novos in Norfolk, Virginia; Columbus, Ohio and Fort Myers, Florida. We have five signed leases for de novo slated open in 2024 and two signed leases for de novo expected to be open in Q1 2025. There is a strong pipeline of acquisitions, including one currently under a letter of intent and other de novos that we continue to evaluate. This quarter, our outpatient rehab division generated a 41% increase in adjusted EBITDA and an 11% increase in visits per day. The division added seven clinics this quarter via de novos, which offset the closure of 12 underperforming clinics and the fold-in of eight clinics into existing operations as their leases expired.
The pipeline for future growth remains strong with 19 executed leases for de novo clinics, of which 10 are scheduled to open in the first half of 2024. There are also many additional opportunities for acquisitions and de novo development that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our critical illness recovery hospital division experienced increases of 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from same quarter last year, an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We've experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed prior year.
Our adjusted EBITDA margin was 10.1% for the quarter compared to 7.9% in the prior year Q4. The reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salary, wages and benefit to revenue ratio. Both nursing agency rates and utilization decreased 24% when compared to prior year Q4. Orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q3 of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter. Our inpatient rehab hospital division experienced 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7% and our rate per patient day increased 3%. Our occupancy of 85% was consistent with prior year.
The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year of 23.6%. Concentra experienced an increase of 6% in net revenue, driven primarily by rate. Our workers comp volume increased 6% but was offset primarily by a decrease in employer-based visits which are reimbursed at lower rates that resulted in an overall visit increase of 1%. Concentra's adjusted EBITDA margin increased to 15.5% for the quarter compared to 15% for the same quarter prior year. Outpatient rehab division experienced an increase of 6% in net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $102 net revenue per visit to $100. Organizational activities focusing on improving clinical productivity via patient access contributed to additional volume where the decline in rate was due to a decline in the outpatient Medicare fee schedule, payer mix, and variable discounts.
The outpatient division adjusted EBITDA increased by 40.9% compared to prior year with a 33% increase in EBITDA margin to 7.5% from 5.7%. Earnings per fully diluted share were $0.36 in the fourth quarter compared to $0.22 per share in the same quarter prior year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. Adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effects. In regards to our allocation deployment of capital, our Board of Directors declared a cash dividend of $0.125 payable on March 13, 2024, to stockholders of record as of the close of business on March 1, 2024. This past quarter, we did not repurchase shares under our Board authorized share repurchase program and we will continue to evaluate stock repurchases, reduction of debt, and development opportunities.
This concludes my remarks and I'll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call up for questions.
A - Martin Jackson: Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 prior year, down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed. Our year-to-date basis with regards to SW&B as a percentage of revenue decreased from 63.4% in '22 down to 57.2% in '23. Thus far in 2024, our SW&B as a percentage to revenue has continued to trend favorably and we expect to finish at or below 55% in Q1. This past quarter we had a sequential reduction from Q3 to Q4 in our RN agency costs with a decrease in both utilization and agency rates.
The reductions realized were 17% in RN agency costs, a drop in RN utilization from 15% to 14%, and a decrease in agency rate from $78 to $70. RN agency utilization decreased throughout the quarter from 14.4% in October, 13.8% in November and 13% in December. Nursing sign-on and incentive bonuses dollars also decreased by 5% and we had a 26% decrease in orientation hours. Moving on to our financials. In Q4, equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter prior year. Net income attributable to non-controlling interest was $15.5 million compared to $10.2 million in the same quarter prior year. Interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter prior year.
The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of '22. At the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $280 million in revolving loans, $1.2 billion in our 6.25 senior notes, and $68.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.54 times. As of December 31, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans is capped at 1% SOFR+ 300 basis points through September 30, 2024.
For the fourth quarter, operating activities provided us with $179.4 million in cash flows. Our day sales outstanding, or DSO, was 52 days as of December 31, 2023, this compared to 55 days at December 31, 2022, and 52 days at September 30, 2023. Investing activities used $69.6 million of cash in the fourth quarter. This includes $60.6 million in purchases of property, equipment and other assets and $9 million in acquisition and investment activity. Financing activities used $103.3 million of cash in the fourth quarter. This was primarily due to $60 million in net payments on a revolving line of credit, $16 million in dividends on our common stock, $13.4 million in net payments on other debt, which included $5.3 million of term loan payments and $12.5 million in net payments and distributions to non-controlling interests.
As stated previously, we did not purchase any shares under our Board-authorized repurchase program this quarter. Last quarter, the Board approved a two-year extension of the share repurchase program, which now remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion to $7.1 billion. Adjusted EBITDA is expected to be in the range of $830 million to $880 million. And finally, our expected range for earnings per fully diluted common share is $1.88 to $2.18. We expect capital expenditures to be in the range of $225 million to $275 million for 2024. 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: Thank you. [Operator Instructions] Our first question comes from the line of Justin Bowers from Deutsche Bank.
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