Select Medical Holdings Corp (SEM) 2002 Q2 法說會逐字稿

Good morning. My name is [Kenny] and I will be your conference facilitator today. At this time, I would like to welcome every one to the Select Medical Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question press star and the number 2 on your telephone keypad. Thank you, Mr. Murphy, he may begin the conference.

Good morning, and thank you for joining us today for Select Medical Corporation investor conference call to discuss recent corporate developments relative to yesterday's second quarter 2002 earnings announcement. By now you should have received the press release. If for some reasons you have not received the press release or unable to log on to the web cast, please call me or Donald Murphy to present your [indiscernible] at 212-845-4274 and I will be happy to assist you. This conference call is being recorded, and also will be available through replay starting at 1 pm Eastern today and running until 1 p.m on Tuesday, August 6. To access these replay please dial 800-642-1687 with [indiscernible] or 706-645-9291 internationally. The [indiscernible] code to listen to the replay will be 473-3690.

Speaking today we have the company's President and CEO Robert Ortenzio, and the Company's Senior Vice President and Chief Financial Officer, Martin Jackson. Management will give you over review of the quarter highlights, and then open the call for questions and answers. Before we get started we would like to remind you that this conference may contain forward-looking statements regarding future events on the future financial performance of the company including, without limitations, statements regarding operating results in calendar 2002, earning per share in 2002, growth opportunities and other statement that were referred to Select Medical clients, prospects, expectations, strategies, and assumptions and beliefs. These forward-looking statements are based on the information available to Select Medical Corporation today, and the company assumes no obligations or up date the statements as circumstances change. Additional information, please see the cautionary statements included in Select Medical most recent Form 10-Q or other public filings filed with the Securities and Exchange Commission. At this time I would turn the conference call over to Robert Ortenzio. Please go ahead Mr. Ortenzio.

Good morning every one and welcome to Select Medical earnings call covering the results of second quarter ended June 30th, 2002. As we go into past, I will start by providing some overall financial performance highlights, and then take you through performances in each of our operating divisions.

We are pleased to report strong earning performance for another quarter. We began exceeding analyst expectations with diluted earning per share for the quarter of 25 cents versus consensus estimates of 22 cents. This represent 56.3 percent increase over fully diluted earnings of 16 cents for the same quarter last year. Our net revenue for the quarter increased 19.7 percent to $280.3 million compared to 234.2 million for the same quarter last year. Our earnings before interest and taxes, depreciation, amortization and minority interest or EBITDA for the quarter increased 19.3 percent to $34.2 million compared to 28.7 million for the same quarter of last year. Income from operations increased 34.7 percent to $28 million for the quarter versus 20.8 million in the same quarter last year. Our cash flow operations were $16.3 million for the quarter and $50.5 million for the six months ended June 30. Next I will take you through some of the key performance measures for each of our operating divisions starting with our specialty hospitals. Our hospital net revenue increased to 27.8 percent for the quarter to $152.1 million compared to 119 million in the same quarter last year. For hospitals opened prior to January 1, 2001 which all refer [throughout as same store]. Net revenues increased to 15.2 percent to $135.7 million compared to a 117.8 million in the same quarter last year. This increase was primarily driven by both higher occupancy and rate in these hospitals. Our hospital EBITDA increased 27.2 percent for the quarter to $17.3 million compared to $13.6 million in the same quarter last year. [indiscernible] hospital EBITDA increased 19.3 percent to $18.3 million compared to $15.3 million in the same quarter last year. [indiscernible] EBITDA margins improved to 13.5 percent for the second quarter versus 13 percent in the same quarter of last year. Occupancies in our hospitals were 73 percent for the quarter up to 66 percent in the same quarter last year. [indiscernible] occupancy rates was 76 percent for the quarter up from 68% for the same quarter last year. Our hospital non-Medicare patient [next] which is based on a number of patient [days] decreased by a 100 basis points in the second quarter to 24 compared to 25 for the same quarter last year. Same [indiscernible] non-Medicare patient next remain constant compared to the same quarter last year at 24%. Our hospital net revenue for patient day or rate improved 4.2 percent to $987 per day compared to $937 per day in the same quarter last year. Our hospital [indiscernible] based on the latest 12-months ended June 2002 was 61 percent Medicare, 2 percent [Medicaid], 1 percent workers comp and the balance of 36 percent from commercial insurance to manage care. Hospital patient days increased 22.6 percent for the quarter to 153,942 days compared to 125,587 days in the second quarter last year. [indiscernible] patient days increased to 11.1 percent to 137,911 days per quarter versus 124, 161 days in the same quarter last year. We opened two new hospitals in the second quarter and two additional hospitals in the month of July. We continued to project a total of 8-10 new openings this year.

Moving over to our outpatient rehabilitation division, our outpatient rehab net revenue increased 11.3 percent for the quarter to $124.6 million compared to $112 million in the same quarter last year. Our outpatient rehab revenues to the quarter $85.5 million came from our US outpatient rehab clinics, $6.9 million from our [manage] clinics and 32.2 million from our Canadian [subsidiary] and our other outpatient services. Our outpatient rehab EBITDA increased 11.8 percent for the quarter to $23.1 million compared to 20.6 million in the same quarter last year. EBITDA margins expanded as well year over year to 18.5 percent for the second quarter compared to 18.4 percent in the same quarter last year. [Visits] in our US based outpatient rehab clinics increased 3 percent for the quarter to over 995,000 visits compared to over 966,000 visits in the same quarter last year. Net revenue per visit in these clinics increased to $86 compared to $81 in the same quarter last year. [Though in] second quarter our outpatient rehab division opened 18 new own clinics and one new managed clinics, acquired six clinics and [calls] are consolidated five existing clinics. At the end of the quarter, we have a total of 740 clinics operating in 32 states the District of Columbia and seven Canadian provinces. This compares to 671 Operating Clinics at the end of the second quarter last year. With 32 new developed clinic openings through June we have reached the [low end] of our goal of 30 to 40 [indiscernible] developed clinics this year. We are comfortable that we will be able to reach the upper end of that target during the remainder of 2002. I will now turn it over to Martin Jackson, our Chief Financial Officer to cover our financial highlights in greater detail as well as provide you with some guidance for the upcoming quarter.

Thanks Bob. Bob mentioned we are very pleased to report another quarter of strong financial results. Our sixth straight quarters of public company [indiscernible] expectations. Operating expenses increased 19.7 percent and 246.1 million in the second quarter compared to 205.5 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter remained consistent 87.8 percent compared to the same quarter last year. Our operating expenses include cost of services, general and administrative costs and bad debts. Cost of services as a percentage of net revenue was the primary reason for the increase in operating expenses as it rose 80 basis points to 89.4 percent for the second quarter compared to 80.6 percent for the same quarter last year. Cost of services which primarily looks like our labor costs have increased on a relative basis versus last year. The increase is primarily due to our start of hospitals, which typically experience higher relative cost during the start of phase. G&A as a percentage of net revenue decreased 40 basis points to 3.3 percent for the second quarter compare to 3.7 percent to the same quarter last year. G&A expense for the quarter increased 9 percent to 9.3 million verses 8.6 million in the same quarter last year. Bad debt expense increased 3.3 percent to 8.6 million this quarter compared to 8.3 million in the same quarter last year. As a percentage of net revenue bad debt decreased 40 basis points to 3.1 percent for the second quarter compared to 3.5 percent for the same quarter last year. Our bad debt percentage year to date is 3.4 percent while total EBITDA increased 19.3 percent for the quarter, EBITDA margins remain constant at 12.2 percent compared to the same quarter last year. Overall hospital EBITDA margins remain constant at 11.4 percent for the quarter compared to the same quarter last year. However, sales to our margins improved 50 basis points to 13.5 percent for the second quarter. EBITDA start of our office in our newly developed hospitals denote in the pre-opening phase amounted to 1.8 million in the second quarter. Outpatient [indiscernible] EBITDA margins also have increased to 18.5 percent for the quarter of 10 basis points versus the same quarter last year. Depreciation and amortization declined 21.4 percent to 6.2 million for the quarter compared to 7.9 million for the same quarter last year. The decline resulted primarily from the amortization reduction from the adoption of [phase] 141, 142 was decreased amortization expense by approximately 2.3 million for the quarter when compared to the second quarter last year. This reduction was offset by increase in depreciation on fixed asset additions related to new development. Net interest expense decreased by 0.8 million to 6.7 million for the quarter compared to 7.5 million for the same quarter last year the decline in interest expense is a result of same result of lower debt levels outstanding during the quarter as well as reduced overall interest rates compare to the same quarter last year. The effective interest rate on our credit facility debt as of June 30 of 2002 was 7.5 percent compared to 8.4 percent at the end of the June quarter last year. Tax expense was 8.2 million for the second quarter representing an effective tax rate of 39.3 percent. Net income increased 65.8 percent to 12.6 million for the quarter compared to 7.6 million before extraordinary items in the same quarter last year and as above mentioned the EPS increased 56.3 percent to 25 cents for fully delivered share for the quarter versus 16 cents in the same quarter last year. The end of the quarter was 272.99 [indiscernible] outstanding and total leverage were total debt EBITDA up 2.3 times. This represents a reduction of 15.5 million in debt since year-end and improvement in leverage from 2.6 times. Debt returning capitalization was down to 51 percent at the end of the second quarter compared to 59 percent at the end of the second quarter last year and 55 percent at the end of 2001. We generated 16.3 million of cash flows from operations this past quarter. We did experience a slight increase and they felt outstanding for the quarter. They felt outstanding with increase two days to 76 days at the end of the second quarter compared to 74 days at the end of the first quarter. This increase resulted from a significant government payment that was not received until July 5th, which represents two days in overall DSO. Investing activity was 12.3 million of cash in the quarter including 9 million for the purchase of capital and 3.3 million of acquisition related payments. [indiscernible] till date investment activities have used 21.8 million including 17.9 million in capital purchases. Financing activity used $2000 of cash in the quarter. This included 5.2 million in debt reduction payments also at [indiscernible] of stock issuance of 2.9 million and 3 million in additional bank overdrafts during the quarter. We had 28.8 million of cash in the balance sheet at the end of the second quarter, up from 25 million at the end of last quarter, and up from 10.7 million at the end of 2001. We are providing this following guidance for the third quarter in the full year of 2002. For the third quarter, we expect the revenues to be in the 255 and 265 million range compared to net revenue of about 239 million for the same quarter prior year. EBITDA, we expect to range from $28-30 million compared to EBITDA of just about $26 million in the same quarter prior year, and we expect EPS in a range of 17-18 cents on a fully diluted basis compared to 13 cents fully diluted EPS in the same quarter prior year. We have increased our expectations to the year to reflect the solid year-to-date performance with revenue for 2002 now expected to be in the $1.07 to 1.08 billion range, we expect EBITDA in the $127-129 million range and our EPS expectation on a fully diluted basis are now in the 86 to 89 set range. They felt that outstanding expectations remain unchanged with the target of 68 days by the yearend 2002. As above mentioned we expect to open 46 additional hospitals by yearend as well as to continue to open new outpatient rehab clinics. We are increasing our expectation on capital expenditures for 2002 and are now expecting CapEx in the $30-32 million range. The increase in our expectations regarding CapEx is related to some additional opportunities to expand hospital beds and several of our markets and additional outpatient rehab clinic development outputs. We will continue to use our cash flow to take advantage of opportunities for development when those opportunities arise. We [indiscernible] with the financial and operational performances we experienced this past quarter and the fact that we once again were able to exceed [indiscernible] earnings expectations. The reminder of our time is allotted for your questions. We would like to open up the call at this time.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The next question comes from [Joel Way] of [Jacobian Security].

[indiscernible] and secondly the [indiscernible] if we use and limited uptick on [age old]?

Yes [possibly]. We were cut out therefore that we couldn't get [indiscernible].

Okay. I wanted to ask you two questions.

Yes, proceed.

First, we hope you give us some specific data on admissions through the outpatient and our bed capacity and then secondly [indiscernible] I will give you some little bit of timing on PPS to the [indiscernible].

Only address the second question first which is the timing for PPS. As most people who follow our company know, in March [indiscernible] with propose regs to move the [indiscernible] payment -- make the payment to a PPS. The common period ensured which common period is now complete. We have not gotten specific guidance from CMX that when they think that it will be finalized, but our expectation is that CMX will come out perhaps with final regs as during September 1 and look to make the legs [indiscernible] with for the investment at January 1. So again that is what my estimation without specific guidance from CMX.

Here we liked your first question in admissions Q2O2 is 5019 admission compared to 4224 admission in Q3 number 1. It retain our bed capacity. Next we are currently at 2383 beds.

Thank you very much.

Okay.

Your next question is from [A.K. Wides] of [Merrill Lynch].

Double thanks Mary. First of all on -- you give recent comments on lab which you [indiscernible] in terms of house bellows availability and willingness to consider packs. And is there any impact on pending PPS on people saying let me wait and see how it plays out or is that not that really a factor [indiscernible] factors that is [indiscernible] at this point.

Okay. Let me get it Bob two questions. There is one have received a change based on the occupancy acute care hospitals were funding up and getting stronger over the past two years. [indiscernible] well we have seen in our development efforts more often then not today is that acute hospitals are moving other services out the hospitals relocating them in order to make room for the outpack services. As supposed to going into MP range of [indiscernible] as we made them traditionally a couple of years ago was more than [indiscernible]. So practicing for that trend is with us and probably we will continue. It is really not changed much on our opportunities as we continue to see strong opportunities into our [indiscernible] market since continue to be great popular on our pipeline and the guidance we have given to open 8 to 10 hospitals here.

Your second question I think was -

Related to PPS, whether it will have an impact?

No I don't think so because the PPS for the [indiscernible] did not directly or directly affect what it be acute care or [indiscernible] hospitals. We had not yet seen that as a factor in our development because as you mentioned because the acute care hospitals under regulation our factors that prohibited from earning the service. Though the relationship with company like [Cerlacto] on the hospital side is really one of [indiscernible] then are impacted by our reinvestment.

Any change in your revenue as not [indiscernible] that you have would get impacted by any PPS change anything like that?

No nothing.

Okay. Any thoughts on the acquisition front rather there have been number of private companies to dabble around of both of the business [indiscernible] and obviously with the capital market they are to make me optimist you see I have taken acquisition that you look out over next year or it also almost once.

Let me take that

of both --with both of our [segments] on the hospital side I think it fair to say that we will get a look at anything that comes out as you know the [indiscernible] industry is not a large one so the number of potential companies out there for acquisition is much more limited than is stated in outpatient side [indiscernible] hospital business. So, I -- we are not projecting in any of our numbers completing our dealing in the acquisitions and we feel comfortable in making all of our targets without making acquisition from the hospital side. But, having said that if opportunity presents themselves, we would certainly take a look. We have been able to -- the [indiscernible] numbers we have been able to get what we believe such as a period we [indiscernible] invested capital on our new development opportunities. It does make it difficult to stack up acquisitions against those particular with the momentum that we have. On the Outpatient side, if you have a little bit of a different model because it is so fragmented and because there is opportunity to do small and midsize acquisitions. We continue to take a look at outpatient acquisitions from time-to-time and we have had again similar to the hospitals that met with pretty good success in the development of new outpatient locations and I have really seen superior returns on our capital. So, once again, we will be -- we will look at acquisitions on the outpatient side. But, I would suspect that we will be pretty careful at making good acquisitions but in terms of their --not only the geographic location but also [what] price. [We are being price] sensitive.

Your next question is from [Walter Brankson] of [Regimen Capital].

Just have question on your guidance with the September quarter. Well, your guidance represents a year-over-year pick up on a sequential basis the revenues in any [indiscernible] numbers of both significantly lower. Can you address that is seasonality issue?

Sure Walter. It is important to remember that the business --both business [indiscernible] in has seasonality but in addition to that we will result in two new hospitals at the end of Q2 in June, July in the timings of the new hospital [developments] this year has caused us to take a conservative and cautious approach to the coming quarter as well as full year expectations.

Okay, so what about on the clinic side. Is the clinic business seasonal?

It's really, yeah, I mean if you take a look at the third quarter and all other outpatient [indiscernible] did the same type of thing. In addition to what happened [indiscernible] and to patients going on vacation during July and August.

Thank you.

Okay.

Next question is from [Guaic Solomon] of SIC Capital. Mr. Solomon, your line is now open sir.

Now, I am sorry, [indiscernible]. My question was just answered thank you. Hello

Yes, yes, got it

Thank you.

Great, thanks.

At this time, I would like to give everyone an additional minute of [indiscernible] star and the number 1 on your telephone keypads to ask a question. Your next question is from [Charles Weng] of CIBC World Market.

May be I had to go and press it again. I have two questions. Actually, I would also like to follow-up on the last question that was asked. [Marty], can you talk about any assumptions you have in the coming quarter about start up last that you have said it about 1.8 million in the second quarter on the hospitals?

I experience later on in the company's [adequacy] to announce the third quarter.

Okay, [indiscernible] I want to have $2 million.

Yeah, better under.

Okay, the secondly [Bob] you mentioned a number of [capacity] or addition projects, can you give some kind of primaries and what kind of you know what kind of magnitude in new beds you might be adding and the timing there of?

Well, it is really varies. When you look at the 67 hospitals that we have around the country and the -- as I mentioned in my [compared] remarks the increase in occupancy that we have seen or you can appreciate that we have number of hospitals that are enduring very [indiscernible] so we are in the process of negotiating with many of our host hospitals for additional bed in a locations so that I wouldn't characterize that as any large kind of incremental additions at any one or two hospitals that really goes across the board.

So, [upcoming] with that the something in the order of may be an additional one or two beds on a per hospital basis if you worked it out over the next 18 months or so, something in that range?

No, I don't think you could characterize at revenue -you would look may be at some percent of our hospitals, may be 20 or 25 percent of our hospitals that are in various stages of negotiation to add as many as 10 to 12 or 13 more beds at that location.

Okay, that's great. And just [indiscernible], you know, this year has shown a lot of activity and start of hospitals in your business [Ken Rich] Healthcare has started to show activity as well. Looks like there is a fairly robust amount of demand for both your and their business. And I am just wondering if you could add a little color about how you see the competitive landscape or in fact, if Ken Rich's presence in the market actually enhancing the recognition that you guys are out there?

I don't think the enhancement of the recognition is really a factor because, you know, we had been at -- we have a number of development professionals throughout in the markets over the last couple of years. So, I think [all] this ability is pretty good. I think -- I agree with your comment that there is a significant opportunity out there and in fact, Ken Rich is probably the only other company that is relatively active on the development front. Having said that, we don't really go head-to-head with them very often with the host hospitals that we may be negotiating with. So I think that would suggest [indiscernible] that the market is really relatively strong for our service.

That sounds great. Thanks a lot.

Thank you Charles.

Your next question is from [John Patrick Losch] Wachovia Securities.

Good morning. You had indicated in your hospital report [indiscernible] are considered to increase to 76 percent from 68 percent. You [indiscernible] little bit on what's driving that increase and also where you think you substantially taken are considerate to? In terms of third part of the question what type of flexibility do you think the parent hospitals typically have a few needs if bought some extra space to expand as a bed or whatever the cast might be?

On your first question, what I attribute the increased occupancy are: one, you are becoming more familiar with your educational activities in the local markets. Also remember that each of the last two years we have opened 10 new hospitals, so you have a number of hospitals that are worthwhile, we may characterize them as in the matured category I will call truly not matured so the occupancies are going up as a result of the national [indiscernible] process of this hospital that have been opened in last two years and an increase in our awareness and reputation and referral patterns in the local market. In terms of the flexibility of hospitals to give us additional beds as you can probably appreciate --, that's why we are over the map in some locations we struggle for space and in others there may be opportunities to expand. Generally speaking, if you look at our trend, acute care hospitals are enjoying higher occupancy and that's good news for us from the standpoint that they are seeing more patients and more robust in the local markets. But also it does make it more difficult to us to expand although we've been having pretty good success. I am sorry, you asked the question what do we think maximum occupancies. That often depends on the configuration of our hospital whether we have the number of beds and the number of private and semi-private rooms that we think we have opportunities to go up from the 76 percent if you look at the overall occupancies we have now. Now we have some hospitals that enjoy high 80 percent occupancies.

Okay, thank you very much.

Your next question is from [Anne Hinds] of [indiscernible].

[indiscernible] Is there any mix change in 6 percent increase and on the margin front, where do you see the margin growing and what would you do drive the map?

We didn't get your first question.

Oh, sorry, on the pricing front, is there mix change in 6 percent increase?

Mix change in 6 percent increase, we are not sure of your question, ma'am.

Is it just all price negotiations where are you in that process? And what's driving this 6 percent increase?

Is this on the --

Outpatient side.

On the outpatient side?

Yeah, [indiscernible] some outside [indiscernible] our negotiations are going on currently with the [indiscernible] at this time.

How far you do that I think on the last call you said you were 70 percent through negotiations.

We just we are constantly [indiscernible] going back to the [indiscernible] incremental increases in [indiscernible] if you take a look at the whole contract to the [indiscernible] probably, you know, 75 to 80 percent down the road with those.

Okay, another question how are labor [indiscernible] inpatient division?

We really see the challenges on the staffing side of the inpatient this is primarily in the nursing, but also I think if you keep up with literature, [they] are also seeing in pharmacists because each private hospitals have pharmacies so on the hospital side really the continue of challenge is on nursing. The way we look at are the ability to attract and retain nursing as well as by looking at our percent of temporary nurse labor compared to our total nursing [indiscernible] on rotation day basis and if we look at sequential from the first quarter and the second quarter we have actually seen some improvement I would say, only about [indiscernible] or so that it is up from a year ago, but it is stabilizing currently, [indiscernible] I think [indiscernible] is if you look at the nursing shortage [indiscernible] impacts through the use of the temporary labor we tended to see more in our newly opened hospitals that you would expect and our nursing temporary labor at all [indiscernible] hospitals is generally much less than it is on the recently open hospitals.

Okay, thank you.

Our next question is from David Carmen of JP Morgan.

Hello?

Yes David. Go ahead

Okay, great. First of all just, truly outstanding quarter, congratulations I never say that, but I wanted to ask you on the [indiscernible] side and other any locations that are not meeting management's expectations to control, [closure] candidates - and instead [indiscernible] why that might be the case.

Well, the answer that is always [yes] with 67 hospitals across the country. We are going to have some of the hospitals that are not meeting expectations and prospect of closure particularly because we do not have a lot of capital invested in these hospitals [indiscernible] we think an opportunity that we would look at we have an hospital that does not perform and we do not think has any prospects to perform. What would be the dynamics of why that would occur. You know one of the reasons is the recall that we made 37 of our distinct group of 67 hospitals that we have currently came to us through acquisition and since that period of time we have opened number of hospitals with new and I believe stronger criteria. So there may be some hospitals that came after '88 or otherwise that are not meeting our expectations because of the market [indiscernible] or because that we have other hospitals that [indiscernible] market. In our history we have closed one hospital that [indiscernible] an overlap market between hospitals that we have from both intended acquisition and as well as '88 so we are confident looking at that and really we would find hospitals that don't need and we don't think will need, we will receive orders as an opportunity to either relocate them or if we had to close.

Okay and with that naturally or typically only occur at that time when a lease would expire or whether would there will be a circumstance where you would actually close and you [indiscernible] lease pass through termination.

I would look at that on a case-by-case basis. Obviously, the preferred method will be to wait till the termination and our strategy has been to have five-year leases with multiple five-year extensions. So oftentimes even if we were call it off [indiscernible] or leave the hospital, which we had done it on once, move the hospitals [indiscernible] we have moved hospitals, before expiration of the lease. So if it's a five-year term and you are three years in them we have a great opportunity to relocate our hospital, we have moved the hospital and then negotiated out with the lessor the remaining term of the lease. So we will balance the opportunity to move close with the remaining liability on the lease. So that always would be a one-off process that we look at.

Okay great, that's all [indiscernible], thank you.

[indiscernible]

Ladies and gentleman we had reached the end of the allotted time for questions and answers. Mr. Ortenzio are there are any closing remark sir.

No, we want to thank you for joining us on the call.

This concludes today Select Medical Second Quarter Conference Call. You may now all disconnect.