Select Medical Holdings Corp (SEM) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Select Medical Corporation first quarter 2003 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Donald . Sir, you may begin.

Good morning and thank you for joining us today for Select Medical Corporation's Investor Conference call to discuss recent corporate developments regarding yesterday's first quarter 2003 earnings announcement. By now you should have received the press release. If for some reason you have not received the press release or are unable to log onto the Web cast, please call me, Donald , of at 212-845-4274 and I will be happy to assist you.

This conference is being recorded. It will also be available through replay starting at 1 p.m. Eastern today and running until 1 p.m. Eastern on Tuesday, May the 6th. To access this replay, please dial 877-519-4471 within the U.S., or 973-341-3080 internationally. The pass code to listen to the replay will be 3868452,

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 an overview 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 call may contain forward-looking statements regarding future events or the future financial performance of the Company, including, without limitation, statements regarding operating results in calendar 2003, earnings per share in 2003, growth opportunities and other statements that refer to Select Medical's plans, prospects, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to Select Medical Corporation today and the Company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included in Select Medical's most recent Form 10-K or other public filings filed with the Securities and Exchange Commission.

At this time, I will turn the conference over to Robert Ortenzio. Please go ahead, Mr. Ortenzio.

Morning, everyone, and welcome to Select Medical's earnings call covering the results of the first quarter 2003. I'll provide some overall financial performance highlights for the quarter as well as take you through the operating performance of each of our divisions.

Once again, I am pleased to report that we have exceeded earnings expectations for another quarter with fully diluted earnings per share of 29 cents, six cents ahead of analysts' consensus. This represents a 38.1 percent increase over fully diluted earnings per share of 21 cents in the same quarter last year.

Our net revenue for the quarter increased 14.9 percent to $312.3 million compared to 271.9 million for the same quarter last year. Our earnings before interest, taxes, appreciation, amortization, minority interest, or EBITDA for the quarter increased 27.6 percent to $38.4 million compared to 30.1 million for the same quarter last year.

EBITDA is not a measure of financial performance under GAAP, however, it is commonly used by analysts investors in our industry. A reconciliation of net income to EBITDA is attached to our press release, which can be accessed on our Web site at www.selectmedicalcorp.com.

Income from operations increased 28.3 percent to $30.8 million for the quarter versus 24 million for the same quarter last year. We had another strong quarter for cash flow as our cash flow from operations was $24.4 million for the quarter. In addition, we were able to reduce our days sales outstanding to 64 days compared to 73 days at the end of 2002.

Next I'll take you through some of the key performance measures for each of our operation divisions, starting with our specialty hospitals.

Our hospital net revenue increased 23.2 percent for the quarter to $183.4 million compared to 148.8 million in the same quarter last year. For hospitals open prior to January 1, 2002, which I'll refer to throughout as same store, net revenues increased 17.3 percent to $174.6 million compared to 148.8 million in the first quarter last year. This increase was primarily driven by higher occupancy and rate in these same story hospitals.

The remaining eight point eight million dollars increased revenue resulted from internal development that commenced operations after January 1, 2002.

Our hospital EBITDA increased 62.7 percent for the quarter to $25.5 million compared to 15.7 million in the same quarter last year. Same store hospital EBITDA increased 63 percent to $26.7 million compared to 16.4 million in the first quarter last year.

Overall EBITDA start up losses incurred in the first quarter for hospitals developed in late 2002 or in their pre-opening period were two million dollars.

Same store EBITDA margins improved to 15.3 percent for the quarter versus 11 percent in the same quarter last year.

Overall occupancy in our hospitals was 71 percent for the quarter, down slightly from 72 percent in the same quarter last year. Same store occupancy rates, however, increased 400 basis points to 76 percent for the quarter.

Our hospital, patient mix for the quarter, which is based on the number patient days, was 78 percent Medicare, 22 percent non-Medicare, versus 77 percent Medicare and 23 percent non-Medicare in the same quarter last year.

Our hospital revenue per patient day or rate improved 11.4 percent to $1,106 per day compared to $993 per day in the same quarter last year.

Our hospital payer mix, based on the latest 12 months ended March 2003 was 65 percent Medicare, two percent Medicaid, one percent workers' comp, and the 32 percent balance from commercial insurance and managed care. Hospital patient base increased 10.6 percent for the quarter to 165,818 days compared to 149,869 days in the first quarter last year. Same-store hospital patient base increased 5.7 percent to 158,389 days for the quarter.

We opened no new hospitals this past quarter and expect to open eight to ten new hospitals this year. We did elect to close one hospital this month, which will be reflected in next quarter's reporting.

Regarding PPS, we transitioned 23 of our hospitals to the new prospective payment system during this past quarter and now have 36 hospitals operating under the new system. For 35 of those hospitals, we have elected to accelerate national rate. We continue to expect to accelerate over 95 percent of our hospitals to the new rational rates as they transition to PPS. While the implementation of PPS is revenue neutral to the industry, our low-cost operating model coupled with the high acuity of our patient population causes us to continue to be optimistic about our prospects under PPS.

Moving over to our outpatient rehabilitation division, our outpatient rehab net revenue increased 4.9 percent for the quarter to $125.6 million compared to 119.7 million in the same quarter last year. Of our outpatient rehab revenues for the quarter, $86.5 million was from our U.S. outpatient rehab clinics, 4.1 million from our managed clinics, and $35 million from our Canadian subsidiary and our other outpatient services.

Our outpatient rehab EBITDA decreased 7.3 percent for the quarter to $19.5 million compared to $21 million in the same quarter last year. EBITDA margins declined as well year-over-year to 15.5 percent for the quarter compared to 17.6 percent in the same quarter last year. The EBITDA decline was primarily the result of three factors. We experienced the adverse effect of weather in several of our markets in January and February.

Our benefits expense in our NovaCare operation continued to run at levels higher than those experienced prior to April 2002. In addition, we now have ownership of a group of clinics that were previously managed whose margins are well below those experienced throughout the rest of our operations, which has created a decline in our overall outpatient margins.

Visits in our U.S.-based outpatient rehab clinics increased 1.8 percent for the quarter to over 981,000 visits compared to 964,000 visits in the same quarter last year. Net revenue per visit in these clinics increased to $88 compared to $86 dollars in the same quarter last year. Excluding the effects of the previously managed clinic visits, overall visits would have declined 4.3 percent versus the same quarter last year. Again, the majority of this decline can be attributed to the weather issues in January and February in several of our markets.

During the first quarter, our outpatient rehab division opened six new clinics, acquired five new clinics and 28 previously managed clinics and closed or consolidated 10 existing clinics. At the end of the quarter, we had 739 clinics operating in 32 states, the District of Columbia, and seven Canadian provinces, compared to 720 clinics at the end of the first quarter last year. We continue to expect to open 30 or 40 internally developed clinics this year.

I'll now turn it over to Marty Jackson, our CFO, to cover the financial highlights in greater detail.

Thanks, Bob.

Once again we are pleased to report solid financial results for another quarter. Operating expenses, which include our cost of service, general and administrative costs and bad debt expense, increased 13.3 percent to $274 million in the first quarter, compared to 241.9 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter decreased 120 basis points to 87.7 percent, compared to 88.9 percent for the same quarter last year. Of our operating expenses, rent expense was 22.2 million, compared to 20.6 million in the same quarter last year. Cost of services as a percentage of net revenue contributed to the decrease in operating expenses as it dropped 70 basis points to 80.8 percent for the first quarter, compared to 81.5 percent for the same quarter last year.

G&A as a percentage of net revenue also decreased by 60 basis points to three percent for the first quarter, compared to 3.6 percent for the same quarter last year. And as--bad debt as a percent of net revenue increased slightly, by 10 basis points, to 3.9 percent for the first quarter, compared to 3.8 percent for the same quarter last year. While total EBITDA increased 27.6 percent for the quarter, EBITDA margins improved 120 basis points for the quarter to 12.3 percent. This compares to 11.1 percent in the same quarter last year. The improvement was driven by significant margin expansion in our inpatient operations, offset by margin contraction in our outpatient rehabilitation business.

Overall hospital EBITDA margins increased 340 basis points for the quarter to 13.9 percent, while same store margins improved 430 basis points to 15.3 percent for the first quarter. Outpatient rehab EBITDA margins, however, decreased 210 basis points to 15.5 percent for the first quarter. As Bob mentioned, the decline in outpatient margins was primarily the result of volume declines related to weather, incremental benefit expense in our operations, and the consolidation of a group of clinics previously under a management arrangement and those clinic's low margins compared to the rest of our operations.

Depreciation and amortization increased 24.7 percent to 7.5 million for the first quarter, compared to six million for the same quarter last year. This increase was primarily related to increased depreciation on fixed asset additions related to new hospital development and expansion. Net interest expense decreased by $500 thousand to 6.2 million for the first quarter, compared to 6.7 million for the same quarter last year. This decline in interest expense is a result of lower debt levels outstanding during the quarter, as well as reduced overall interest rates compared to the same quarter last year. The effective interest rate on our credit facility debt during the quarter was 7.4 percent, compared to 7.6 percent for the first quarter last year. Our interest rate matures--or did mature on March 31st and the effective interest rate on our credit facility debt as of April 1st is 4.95 percent.

Tax expense was 9.3 million in the first quarter, representing an effective tax rate of 39.2 percent. Net income increased 42 percent for the first quarter to 14.5 million, compared to 10.2 million in the same quarter last year.

And as Bob mentioned, EPS increased 38.1 percent to 29 cents for a fully diluted share for the quarter versus 21 cents in the same quarter last year.

We ended the quarter with 227.9 million of debt outstanding in total leverage or total debt to trailing 12 months EBITDA of one point seven times. This represents a reduction of 32.3 million in debt for the quarter as we used some of our cash flow to reduce our outstanding credit facility debt on March 31. This compares favorably to our leveraged at year-end 2002 of two times and two point four times at the end of the first quarter last year.

Debt to total capitalization was down to 43 percent at the end of the quarter compared to 48 percent at year-end and 53 percent at the end of the first quarter last year.

Again, we had a solid quarter of cash flow from operation, with operating activities generating 24.4 million of cash for the quarter. Contributing to the quarter's solid cash flow, was days sale outstanding reduction to 64 days compared to 73 days at the end of 2002 and 74 days at the end of the first quarter last year.

Offsetting this source of cash was a significant reduction in our due to third party liability and the payment of over $16 million in cash taxes during the quarter.

Investing activities used eight point one million of cash in the first quarter including seven million for purchases of capital equipment and $700 thousand for acquisition related payments.

Financing activities used 33.9 million of cash in the first quarter, which included 32.3 million in debt reduction payments, and three million dollar reduction in our bank overdrafts offset by proceeds from stock issuance of one and a half million dollars for the quarter.

We ended the quarter with $38 and half million of cash on the balance sheet. As we noted in our press release, the financial objectives we provided investors of October 29 for the remaining quarters of 2003 remain unchanged. With the positive performance to expectations in the first quarter, we now expect fully diluted EPS in the 115 to dollar 18 range.

With that, I'd like to turn it back over to Bob for some final summary comments.

Thank, Marty. Let me just say that overall we're very pleased with the results of the first quarter. While we had some margin compression, our out patient operations, which we discussed, we posted some improvement sequentially versus the first quarter, fourth quarter of last year in the outpatient business segment.

Also our same store hospitals continued to experience margin expansion, which as I mentioned we attribute in part to EPS systems.

So we're reiterating our previously provided financial objectives for the remaining quarters of '30 and the remaining is allotted for your questions. So at this point we'd like to open the call up to questions.

Thank you, sir. The floor is now open for questions. If you do have a question, please press numbers one followed by four on your touch-tone phone. To remove yourself from the queue, please dial the pound sign. We do ask that while you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, ladies and gentlemen, that is one followed by four. Please hold while we poll for questions.

Thank you. Our first question is coming from of Merrill Lynch.

Hi. Good morning, everyone. It's actually filling in Just a quick question on the ownership of the new clinics that were previously managed, do you see that as an opportunity for margin expansion and do you have any timeframe on that if you do?

Well we certainly see it as an - as an opportunity for margin expansion. Those clinics that were previously managed are in a good market segment. They're in an area where we have critical mass. And we have a very solid management team in place there, and, yes, I do expect to see margin expansion.

OK, great. Thanks a lot.

Thank you. Our next question is coming of Wachovia Securities.

Good morning. Congratulations on a great quarter.

Thank you.

One housekeeping item - I was wondering if you could tell me what the licensed beds were and admissions were for the quarter.

Sure. Hold on one second.

Julie, the licensed beds were and admissions were 5,958.

OK. And then secondly, we've seen some great margin expansion with the implementation of PPS. Do you have a sense of where this might go in the future once you have all of your hospitals on board?

Now, we've actually not given out any guidance either - to anyone on that point. You know, we continue to phase our hospitals in as they come up on their cost-reporting year, and we expect to have all the hospitals in by the end of Q3 of this year. I think that you can certainly expect to see some margin expansion from here, given the number of hospitals that have now transitioned and the positive experience that we've seen to date with the transitioning of our hospitals. I think, again, that's dependent upon the cost of our - the lower cost of our model and the higher acuity of our patients.

OK, great. Thank you.

Thank you. Our next question is coming from of CIBC World Markets.

Hi. Thanks. Just one quick housekeeping question that I may have missed - do you have average length of stay in the hospitals for the quarter?

Yes, Charlie, it's 29 days.

OK. And just some commentary on the - on the outpatient business - there was a quick little jump in profitability from the fourth quarter, and I'm just curious how you classify the chances of that business back to the - to the EBITDA contribution margin that we saw, you know, last year - couple of years ago and, you know, what kind of timeframe you might target further improvement there.

Yes, we think that we're going to continue to see improvement there. And as we mentioned in our prepared remarks, much of the margin compression was due to the really unseasonable winter that we had particularly in January and February. And even in March, we did see the indications of the return to greater profitability on a comparative basis.

So, we remain optimistic on that side of our business. We think we are in some great markets, and we have a good management team in place, and we expect to see continued improvement sequentially in the outpatient business.

OK, thanks a lot.

Thank you. Our next question is coming from of J.P. Morgan.

Good morning. Thank you. Terrific numbers, and particularly so since obviously guidance and analyst expectations had not really included the weather issue. So my focus really is also on the outpatient side. Can you give us a sense of sort of the monthly progression or - in visits including April if you have any sort of early read?

, what we can tell you is that on a month-to-month basis, January and February down, March came back to where our expectations were.

So it was at least positive on same-store or flat?

It was flat on same store.

Flat, OK. And also, anything you can give us on the economics of the acquisition? I'm wondering if these formerly managed clinics were loss making and is it even diluting the EBITDA contribution because of that.

No, the EBITDA margins on the managed clinics, I believe was in the eight percent range. I think if you take a look at that on an overall basis, it probably represented about a 40 to 50 basis point reduction of the overall EBITDA margins.

Oh, very good. That's helpful. Thank you.

Yes.

Once again, to ask a question, please dial the numbers 1, followed by 4, on your touchtone phone at this time.

Our next question is coming from Michael of ING.

Hi. How you doing, guys? Good job. Take me through that again; the--when did you convert the 28 clinics to ownership instead of just managing them?

That was 1-1.

1-1, OK. And you think that hurt--that hurt overall EBITDA margins by 40 basis points?

That's correct.

OK. Does that mean you took them--you took all the revenues in as revenues. What did you do previously on them?

Previously--yes, it was a management fee, Michael.

So you took a management fee.

That's correct.

OK, great. Now I actually think your outpatient volumes were great given the environment. I'm also concerned about the effect of the economy because you have rising co-pays everywhere. I mean are you--can you quantify any economic fallout from--in terms of the impact on your outpatient business?

Are you...

It's hard to quantify the effective co-pays on the business. I think we--the best that we would have would be anecdotal information. So, you know we don't really see that as being a factor that we could point to at this point.

But you did say, Marty, that same center admits were flat in March? Is that right? Because that's actually pretty good, I think.

We were saying that the...

I meant in the month of March, not the quarter.

... were flat in the month of March.

OK. Are you seeing sort of similar trends, though, thus far this month?

We really can't speak to that right now, Michael.

OK. Hey, could you just--you said you did close one of your in the--subsequent to the end of the quarter. Is that right?

That's correct.

That's right.

Yes. What was the thinking there?

This was a hospital that we had gotten through one of our acquisitions back in 1998 and it had come to the end of its lease and given the profitability and the market of that hospital, we just believed it was really in the Company's overall best interest just not to renew the lease and close that hospital.

I see. And one final one, if you could. The eight to 10 hospitals, are we going to get the bulk of those in the fourth quarter in all likelihood?

No, I wouldn't say the bulk in the fourth quarter, no. I mean we will be obviously more backend loaded, but I expect to see a number of the hospitals opened by mid year.

Oh, great. Thanks a lot.

Thank you. Our next question is coming from Jason of Bear Stearns.

Hi, guys. Just two questions. One, could you give us a little more color on, I guess the two other expense line items, G&A and bad debt expense? It looked like you had some nice improvement in G&A sequentially. And then bad debt expenses, both as a percentage of the top line, bad debt expense was up sequentially as a percentage.

Yes, Jason, let me address the bad debt first. As we've said all along, we have a methodology that we use for calculating bad debt that's based on the aging receivables. And in essence all we've done is utilize that to come up to that three point nine percent.

So I mean you'll see - you'll see the swing in bad debt, you know, a couple of basis points here, a couple of basis points there depending on what the methodology shows.

OK. Should we see, I mean it seems to be more in line quarter-over-quarter. Is there some seasonality issue to that or not really?

No, there really isn't.

OK, and then from a G&A perspective?

Yes. The G&A decline is really a portion of that is driven by the movement of the in-patient costs captured in prior years to division from corporate. It basically is following the revenue.

So if you take a look at the way that we have reported - if you take a look at the third line on our revenue?

Yes.

Other revenue that was basically revenue associated with reimbursement on corporate home office expenses. Now with the implementation of PPS, we are moving those costs out to the hospitals. So you're going to see - you're going to continue to see a decline in the third that third revenue line we have?

Yes.

And then that's going to be applied to the hospitals themselves.

OK.

OK?

But those costs are included now in the DRP payment we get at the hospital level.

Yes.

By either reimbursed by Medicare through a home office cost report.

OK. So we'll see that showing up in your operating expenses.

That's correct.

So G&A, we should expect as a percentage of the top line, given that we'll be more in that three percent range than kind of I guess three and a half to ...

That's correct. That's correct.

OK. Got you.

Last question is just you did pay down a nice chunk of debt here in the quarter. You still have a decent amount of cash on hand. Should we expect any additional, I guess, payments ahead of schedule going forward?

That is - that is an option that we have. We will either pay down debt or we'll take advantage of some opportunities that we see in the marketplace in the form of acquisitions, or additional development.

Yes. From an acquisition standpoint what is, I guess, more appealing is it more on the or the outpatient rehab side?

I think you could - I think it would probably expect to see more on the inpatient side. Although that could also include some outpatient as well, so I would say first in-patient and second outpatient.

Got you. OK. Thanks very much.

Thank you. Our next question is coming from of Alpine Capital.

Hi. Could you tell me what your amount due to third parties were on your current liabilities for the quarter?

Yes. It was nine million, 377 thousand.

OK. And in terms of cash flows in the quarter, did you make net payments? Was it a negative cash flow for the quarter?

Yes, it was.

OK. Do you have that amount handy?

It was, yes, basically debt repayments of was it 30 million, five 62.

I'm sorry. I'm just talking about operating cash flows to the third parties.

Oh.

To Medicare.

It was $16,799,000.

Great. And is that - I know - I know that that's just squaring up the - you know, the revenues that you - that you charged to Medicare. Are the turns in that - in that line item fairly steady over the course of the year or does it get sort of lumpy?

It's lumpy.

OK. So there's no way to look at that in terms of an average turns for each quarter?

No, there really is not. It's not a linear function.

OK. But is it - is it safe to say that it turns more than once a quarter? I mean you're squaring up with Medicare on a monthly basis or how does that work?

Yes, for the most part, it should be depleted. But remember, that is really an adjustment under a - under a - on the inpatient side, we were reimbursed by a cost report.

Right.

That is basically a settlement of that cost report. With the implementation of PPS, that should actually go down and should continue to go down.

OK, so those sorts of cash flows should pretty much disappear as you convert all the way over.

That's correct.

OK, great. Thanks a lot.

Once again, to ask a question, please dial the numbers one, followed by four on your touch-tone phone at this time. Our next question is a follow-up coming from of J.P. Morgan.

Yes, thank you. Given the de-leveraging that I see going on this year, it just is very topical again to be asking you, I think, about acquisition pipeline and actually any thoughts - conversations on stock repurchase. Thank you.

We have really not considered stock repurchases currently. In terms of acquisition pipeline, we are always in the process of assessing and looking at acquisitions in our two business lines, either rehabilitation or the long-term acute side of the business. So I expect that we'll continue to assess and study acquisitions in those two business lines. And I don't think that you would look to see for any planned stock repurchases, and if we would, we'd obviously have to put an announcement out on that.

Sure, OK. But any prospect of a significant acquisition over the next, you know, foreseeable three - six months?

Well, I really can't comment on what a - what an acquisition would be. I think it's fair to say that we do get a look at just about everything that's out there in our two core businesses because of our dominant market position in both the and in the rehab. So we'll continue to look at opportunities and see if they fit with us strategically and financially.

OK. Thanks for taking the questions.

Sure.

Thank you. Our next question is coming from of Morgan Stanley.

Congrats on the quarter.

Thank you.

One quick follow-up - I was writing furiously and I missed it. Could you go over the payor mix information again on the ?

This is on the inpatient side?

Yes.

Based on patient days, it was 78 percent Medicare - 22 percent non-Medicare. And that's versus 77 percent Medicare and 23 percent non-Medicare in the same quarter last year.

OK, and did you give the revenue breakdown right after that?

Yes, the revenue per patient day improved 11.4 percent to $1,106 per day compared to 993 same quarter last year.

No, I meant did you give a mix - I think - did you give a last-twelve-months mix?

Yes, we did. And that was 65 percent Medicare, two percent Medicaid, one percent work comp, and 32 percent from commercial and managed care.

Terrific. Thank you for that.

Sure.

Thank you. Our next question is coming from of Capital Management.

Mr. disconnected his line. Gentlemen, there are no further questions. I'll turn the floor back over to you for any closing comments.

Thank you very much for your time and we'll look forward to updating you further after--in the second quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.