Select Medical Holdings Corp (SEM) 2007 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS)

I'd like to now turn the call over to Select Medical, you may begin.

Good morning and thank you for joining us today for Select Medical Corporations earnings conference call to discuss the first quarter and full year 2007 earnings. Speaking today are the company's CEO, Robert Ortenzio, and the company's Executive 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.

Before we get started, we would like to remind you this conference call may contain forward-looking statements regarding future events or the future financial performance of the company including without limitations 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 information available to management of Select Medical Corporation today and the company assumes no obligation to update these statements as circumstances change. For additional information you should review Select Medical 's 2007 audited financial statements and managements discussion and analysis available in the company's website at www.selectmedicalcorp.com. At this time, I'll turn the conference over to Robert Ortenzio.

Good morning, everyone. Let me start by providing some overall financial performance highlights for our fourth quarter and full year 2007 and then take you through operating performance for each of our business segments. Net revenue for the quarter increased 16.2% to $518 million compared to 445.7 million for the same quarter last year. Adjusted EBITDA for the quarter declined 19.4% to $57.9 million compared to 71.8 million for the same quarter last year. Adjusted EBITDA margins were 11.2% for the quarter compared to 16.1% for the same quarter last year. For the full year, net revenue increased 7.6% to $1.99 billion and adjusted EBITDA declined 17.3% to 254.9 million compared to the prior year. Adjusted EBITDA margins were 12.8% for 2007 compared to 16.7% in 2006. The revenue increases in both the quarter and year-to-date periods result primarily from the acquisition of outpatient rehabilitation division at HealthSouth.

For operating divisions, I'll start with our specialty hospitals which at December 31 consisted of 83 long-term acute care hospitals and four rehabilitation hospitals. Reference to same-store hospitals refers to the hospitals that were open or acquired as of January 1, 2006, and were operated throughout both periods by the company. Overall, specialty hospital net revenues increased 7.3% for the quarter to $352.9 million compared to 328.8 million in the same quarter last year. For our same-store specialty hospitals, net revenues increased 9.2% to $335.6 million compared to 307.4 million in the same quarter last year. For the year, overall specialty hospital net revenues increased six-tenths of a percent to $1.4 billion and same-store specialty hospital net revenues increased 2.6% to $1.3 billion. Overall specialty hospital adjusted EBITDA declined 25% for the quarter to $48.8 million compared to 65.1 million in the same quarter last year. Same-store adjusted EBITDA declined 17.6% to 54.1 million compared to 65.7 million in the same quarter last year. Adjusted EBITDA margins for the segment declined to 13.8% for the quarter compared to 19.8 in the quarter last year. Same-store adjusted EBITDA margins were 16.1% for the quarter compared to 21.4 in the same quarter last year.

For the year, adjusted EBITDA declined 23.3% to $217.2 million and adjusted EBITDA margins were 15.7% compared to 20.5% for the prior year. Same-store adjusted EBITDA declined 16.8% to 230.7 million and same-store adjusted EBITDA margins were 17.7% compared to 21.8% in the prior year. The reductions in adjusted EBITDA and margins for hospitals are a direct result of the reimbursement changes that have occurred in the (inaudible) industry over the past several years. Our outpatient rehabilitation segment at December 31 operated a total of 999 outpatient clinics throughout the U.S. compared to 544 clinics operated at the end of last year. Net revenue in our outpatient rehab segment increased 41.8% for the quarter to $165.1 million compared to 116.4 million in the same quarter last year, a net revenue for the year increased 28.3% to $603.4 million compared to 470.3 million for the prior year.

Visit volumes increased 61% for the quarter compared to the same quarter last year and increased 35.7% for the year compared to last year. The increases in both our net revenue and visit volumes were primarily the result of the acquisition of the outpatient rehabilitation division of HealthSouth. Rate in our outpatient clinics, which we measure by our net revenue per visit, increased to $101 for the quarter up from $98 in the same quarter last year. For the full year, net revenue per visit increased $100 compared to $94 last year. Our outpatient rehab adjusted EBITDA declined 4.6% for the quarter to $15.2 million compared to 15.9 million for the same quarter last year. Adjusted EBITDA margin declined to 9.2% for the quarter compared to 13.7 for the same quarter last year. For the year, outpatient adjusted EBITDA increased 16.4% to 75 million compared to 64 million last year, and adjusted EBITDA margins declined to 12.5% compared to 13.8% last year. The decline in adjusted EBITDA margin is primarily the result of the lower EBITDA margins currently being produced by the clinics acquired from HealthSouth. At this point I'll turn it over to Marty Jackson, our Chief Financial Officer, to cover some additional financial highlights.

Thanks, Bob. Our operating expenses which include our cost of service, general, and administrative costs, and bad debt expense increased 23% to $461 million in the quarter compared to 374.9 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter increased 490 basis points to 89% compared to 84.1% in the same quarter last year. For the year, operating expenses increased 12.5% to $1.74 billion compared to $1.55 billion last year. As a percentage of our net operating revenue, operating expenses increased 380 basis points to 87.4% for the year. Cost of services as a percent of net revenue increased 340 basis points to 85.3% for the quarter compared to 81.9% in the same quarter last year. For the year, cost of services as a percent of net revenue increased 310 basis points to 83.3% compared to 80.2% last year.

G & A as a percent of net revenue decreased by 90 basis points to 1.3% for the quarter compared to 2.2% in the same quarter last year. For the year, G & A as a percent of net revenue was 2.2% compared to 2.4% last year. Bad debt expense, as a percent of net revenue, was 2.4% for the quarter. For the year, bad debt as a percent of net revenue was 1.9% compared to 1% last year. As Bob mentioned, total adjusted EBITDA was 254.9 million for the year and adjusted EBITDA margins declined 390 basis points to 12.8% compared to 16.7% last year. Depreciation and amortization increased 30.2% to 15.3 million for the quarter compared to 11.7 million in the same quarter last year. For the full year, depreciation and amortization expense increased 22.8% to 57.3 million compared to 46.7 million last year. Net interest expense was 27.6 million for the quarter and does not include an additional $8.8 million in interest expense at the holding company. For the year, net interest expense was $103.4 million which does not include an additional 34.7 million in interest expense at the holding company.

We ended the year with $1.45 billion of debt outstanding at total leverage of 5.7 times, 5.3 times pro forma for the HealthSouth outpatient acquisition compared to four times leverage at the end of last year. We ended the year with $4.5 million of cash on the balance sheet. Total debt to total capitalization was 70% at the end of the year. Operating activities provided $118.8 million of cash for the year compared to 260.2 million last year. Day sales outstanding, or DSO, increased to 48 days compared to 41 days at the end of last year and 47 days at the end of last quarter. Operating cash flows in 2007 were negatively affected by a decline in operating earnings, increases in interest expense and increases in our accounts receivable balance.

Investing activity used $382.7 million of cash for the year. Of this amount, we used $237 million for the acquisition of HealthSouth and other related payments and $166.1 million for purchases of property and capital equipment. These amounts were offset by $16 million in proceeds from the sale of business units and properties and $4.3 million from restricted cash. Financing activities provided 186.8 million of cash for the year, including 213.5 million in net borrowings under our senior credit facilities, the majority of which was used to finance the acquisition of HealthSouth outpatient division, and proceeds from bank overdrafts contributing 8.9 million of cash. These amounts were offset by 32.8 million in dividends to the holding company, 1.3 million in principal payments on other debt and 1.7 million in distributions to minority partners.

One other item I wanted to note is that both Select Medical and Select Medical Holdings filed a Form 15 with the Securities and Exchange Commission to be register select 7-5/8 senior subordinated notes and holdings senior floating rate notes. Consequently, we will no longer be subject to the reporting requirements of the SEC. We will continue to provide financial statements, MD&A and certain other required information to our bond holders through a direct mailing. We will also continue to produce earnings releases, post our financial statements and MD&A on our website, www.selectmedicalcorp.com under the Investor Relations section, and we will continue to have our quarterly earnings calls. With that I'll turn it back over to Bob for some final comments before we open it up for questions.

Thanks, Marty. I'll just make one point on the hospital transition and development fronts. During the fourth quarter we closed or sold four [LPACs] all of which were hospitals within hospitals. We mentioned on our last conference call we had several facilities in development. As you're probably aware, the Medicare and Medicaid SCHIP Extension Act was signed in late December and included a moratorium on new [LPAC] development among other things, but it did grandfather some facilities that had reached certain construction or spending milestones, which we had had several. During the first quarter of 2008 we opened five additional [LPAC] hospitals, four of which are freestanding and one was a hospital within a hospital. At this point, we'll open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). [Mike Serangeli], your line is open.

Hi, thanks, good morning, guys. I wanted to take a look at the specialty hospital margins if I could in the quarter. You had some nice volume growth. You got some nice revenue per day growth, but margins were down about 600 basis points year-over-year in the quarter. If I look at, if I try to get behind that I look at cost per day, cost per day was up by about 10.5% and that caps an increasing trend throughout the year, it was less than 1% in the first quarter and then kind of went to 2%, 6% in the third quarter and then, as I said, 10.5 this quarter, so that seems to be the driver. Can you guys just give us color as to what's behind that and if that's kind of the normalized cost level for you?

Sure, Michael, let me answer that question. I would not assume that that is a normal level. Let me break down that 10.5-10.6% you're talking about. If you go back and take a look at Q4 of [Technical difficulties, audio ends abruptly]