Concentra Group Holdings Parent, Inc. (CON) Earnings Call Transcript & Summary

Hello, everyone. Thanks so much for joining. My name is Joanna Gajuk, health care analyst at Bank of America. And it's my pleasure now to host this session with Concentra. Very interesting company. And we have the entire group here. So we have Matt, President and CFO; Tanner Newton, who's the SVP of Strategy and Finance; and Bill Chapman is here, too. So perfect. Sorry, we don't have your name there. And I guess we'll go right into Q&A, unless...

Great. No, go right into it.

Yes. But I was also actually thinking that since this company is very unique, like the payer is like a unique one. And the business itself kind of is different than most of the companies people are kind of talking at the conference. So maybe we should start there just like high level, just -- so in case someone is not familiar with the business. And also, what are the biggest drivers and how you're thinking about the long-term kind of growth algo for this entity?

Yes, sure. So, thanks for attending. Appreciate the time. So Concentra is the largest provider of occupational medicine in the country. We are the largest by a good ways. We've been a business that's been around for 45 years, $2.3 billion roughly in revenue, $450 million in EBITDA, 20% EBITDA margin, strong cash flow profile. It's a very unique industry. We have 1,000 locations across the country. About 630 of them are occupational medicine centers in 43, 44 states. About 400-plus of the locations are on-sites. So we have an Occupational Medicine business segment. We have an On-site segment. We have a Telemedicine segment. And basically, we are treating 1 out of every 4 initial injuries that occurs in the workforce in the U.S. today. We have facilities that are about 7,500 square feet of doctors, therapists, specialty care. We see work comp visit volume, so injuries, rechecks, physical therapy, things like that. We also see employer services visits. So if you have a drug screen or a physical for a preemployment or an annual exam needed for your job, there's a very good chance you go to Concentra. I think one of the most unique things about our business is the reimbursement, as you mentioned, Joanna. Work comp reimbursement is set up with each individual state has their own fee schedule. The state acts as the referee and they set the reimbursement levels, but they are not the payer. So there is no government reimbursement in our model, which is a big differentiator versus a lot of the other companies that you'll be talking to. We also -- with our Employer Services segment, we set the prices and the employer pays us directly. So it's a very unique model. A lot of the fee schedules have built-in inflationary adjusters. So they're going up roughly 3% on average per year on a combined total portfolio basis. The other interesting fact with our business is we have direct relationships with employer, which I've heard other people that have been in the health care industry for a long time describe that as the Holy Grail in health care. So no government reimbursement risk, direct employer relationships, very stable business model and the largest player in our space by far. So hopefully, that's a good setup for our discussion.

This is perfect. And unlike most of the companies, the quarter actually was better and then you raised your guidance. So this was actually a pretty good indication in terms of how unique is this business because there already talk about is there's reimbursement pressure, payer pressure, all sorts of pressure points in health care. So this was great. But maybe just yes, to level set, can you walk us through the main drivers of the upside in the quarter and for the year? And I guess you also closed a couple of acquisitions. So maybe help us understand you're changing guidance, what's driving that?

Yes. So I'll set up the long-term algorithm for us, and then I'll come back to talk about the quarter and then maybe you guys can talk about some of the deals we did. Our revenue algorithm is mid- to high-single-digit revenue growth. That's made up of low-single-digit visit growth, and we will talk more about that; 3% rate growth, which I mentioned earlier; and then low single digits from our core inorganic de novos and M&A that we've been doing for 45-plus years. So it all adds up to mid to high single-digit revenue growth. When we do something larger like we did last year with Nova acquisition and the Pivot acquisition, we bump up into higher than the mid- to high-single-digit revenue growth. For example, Q1, we grew revenue 14%. Excluding the acquisitions, it was 6.3%. So back to the quarter, we had a very strong quarter, probably our best quarter since we've been a public company, about 2 years. It will be 2 years this July. Our work comp visit numbers were 6.2% visit growth in the quarter, excluding our acquisition. Our Employer Services numbers were in the low-single-digit range, and then we had very close to the 3% work comp or overall rate gains. So we had a great quarter from a top line perspective. The teams managed the cost very nicely. Our cost of services came down. Our G&A percentage is going up as we finalize our separation from Select. But the combination of the revenue growth, the cost management at the center level and other business level more than offset the slight tweak-up in G&A, and we expanded our margins about 70 basis points year-over-year. So overall, great quarter. And the driver is really a few things, and you guys jump in if I leave anything out. Total employment continues to rise. The blue-collar segment where most of the patients that walk in our centers every day are blue-collar workers, that continues to grow. So it's a very different trend than what you're seeing in white-collar. We noted a net positive, we estimate, from weather in the first quarter but that's really an estimate and it's hard to tell how much of that had an impact. Just like a lot of the other providers, we had centers closed, we lost visits. We lost revenue when those centers were closed due to weather. But in our business, slips and falls do lead to more visits. So we did estimate or ballpark that it would be a net positive for the quarter. But at the end of the day, we had much higher customer retention. We saw visit growth across all of our regions, pretty consistent work comp visit growth, even in the Pacific region, for example, which had no weather impact. So I think a lot of what we've been working on from a technology standpoint, from a customer experience standpoint is really clicking, and we had a really nice quarter as a result of all that. So would you guys add?

I'd just add on the leg of the growth algorithm that includes de novos and core M&A, which is really called semi-organic growth because we're able to do de novos and these core bolt-on M&A deals so accretively. I think our average entry basis over 75 de novos and deals over the last 10 years is sub-3x. We really accelerated de novo activity over the last year. I think we'll -- we've guided to 8 to 10 this year, probably pushing closer to 10. By the time it's all said and done, have a large pipeline geared up for next year to likely get to double digits again. And then from a bolt-on M&A standpoint, we did the California deal in January where we acquired 3 net centers. We've got a robust pipeline there where we're actively looking at a number of deals. Expect to have further updates on that in the near future. And so as we kind of think about the long run, between double-digit de novos and the bolt-on deals, you could see us adding, call it, 15 to 20 centers a year just through that strategy. Never mind the larger opportunities out there that Matt talked about, including the de novo type deals.

Yes. And I'll just add that there's a lot of white space for us to continue to grow via de novo and through the bolt-on M&A. There's hundreds of these mom-and-pop clinics out there that do what we do, but not quite to our level. So we're able to get those at really attractive economics, and then we'll grow the top line. There are certainly economies of scale when they join the Concentra organization, so they make a lot of sense for us. And one thing I also wanted to add back to the work comp environment because it is state by state, there's very complex and different rules and regulations from one state to the next. So it's actually one aspect of our industry that makes it really difficult for our competition to expand beyond state line. So the next largest player in the space, which is a fraction of our size, are in 2 or 3 states. And we've been seeing some of our competition have to leave the state like that Reliant deal from January in California.

Right, exactly. But on the workers' comp because really that number stood out. Like you mentioned, the growth was 6% in Q1, right? And workers' comp organic volumes grew maybe 3% last year for the whole year. So clearly, this number stood out. But even the 3% it's pretty good, considering, like you mentioned, employment growth, maybe not bad. So is that a sustainable number? Because it sounds like there must have been something on the comp side or something else just kind of filling that number.

So it was our softest comp of the year. And I think we noted that in our call last week or the week before. But besides the comp versus Q1 of 2025, as I mentioned, our customer retention stats are up at all-time highs since we've been measuring that particular statistic. And our new sales approach is working. So our -- pretty much every KPI that we track is at an all-time high right now. So we do think that the comp was helpful. 6%, we're not projecting 6% for the remainder of the year. As you mentioned, the last 3 quarters of last year, we were in that 3%, 3.5%, 4% range. So that's kind of how we're thinking about it on a go-forward basis.

And so as you think about the growth within workers' comp, you've got the market that's growing, right? As Matt talked about, blue-collar is up relative to the broader market. And you've heard -- if you hear the kind of the headline layoffs, that's really concentrated within the knowledge worker base, which is not our bread and butter. And so you're seeing as employment goes up, injuries go up. Another dynamic within our industry and within the workforce in general is that there's more comorbidities and the workforce is aging. So when people are getting hurt, it's oftentimes more severe, which means more recheck, more PT. So that also has been a tailwind to visits over time. We've seen that over a number of years. And then -- so you got the market going up and then you've got just the retention metrics, which are driving increases in market share in the markets that we're already in. And then, of course, our de novo and bolt-on strategy, which is kind of the third leg there.

And talking about the workers' comp dynamics and how states differ and such. So the latest was around New York. So I'm going to ask you again, it sounds like it could be something like -- be like a new state for you guys. And I guess once you know what it is and you feel like, okay, this is the time to make a move, but how quickly you can expand in that market?

Yes. So we mentioned New York maybe a couple of quarters ago because for the first time in a long time, there's a push to increase the fee schedule in the state of New York. And it's really coming from the top down from the governor's desk, from what we can tell. We've engaged the lobbyists. They put out some updates that will potentially go into effect at some point soon. They haven't explained when that will be. We're in the middle of a public comment period. We've commented on the rates. And the big thing, the E&M rates, evaluation and management codes, that is pretty much initial injury or a recheck or specialty visit, those rates are proposed to increase pretty significantly, which we like and which was much needed. Their physical therapy reimbursement was left unchanged. And obviously, that's a big part of our overall model and what happens within the 4 walls of our center. So what we pushed for publicly was for those rates to be adjusted as well. We've done all of our analysis. We can enter the state in a major way. We've looked at acquisitions. We've mapped that out. We've mapped out de novos. So we can make a move pretty quickly. Obviously, it takes time to build some centers and to get some deals done. I think what we're going to do right now is just continue to monitor the situation. We expect to hear soon if there's any additional changes. We might dip our toe in the water and do some centers here or there if it makes sense right now. But we have so many opportunities, as Tanner mentioned, across the country. We've got probably 50 different sites that we're looking at that will narrow that list down to the 10 or so this year, the 10 to 15 next year. And those margins in the other states are going to be higher than they would be in the state of New York. So we called it out a couple of quarters ago because it's the largest state that we're not in. And it could be a really nice growth driver for us in the future, but some things need to happen to make that come true.

And there was also an update -- a favorable update in Florida, right? There was something this year in California. Anything else to call out in terms of some outsized opportunity or something that you already know is going to happen for sure this year or next year?

There's nothing the size of a Florida or a California out there right now. We had a nice update that came into effect April 1 in Tennessee, which we should see some good benefit from there. There should be a nice -- Florida, we should see a nice update going into next year again. Again, not nearly to the level that it was before, but just the way the mechanism works, there's a catch-up. And so that should be. And then there's a couple of states that are laggards on the bottom end that we're monitoring actively. Louisiana is one where we've got some centers there, but it's not -- we're not -- we don't have a big presence, but there's been some chatter about they could potentially do something. So we're monitoring that pretty closely. And then, of course, there's the Alabamas and the Massachusetts of the world that -- where we haven't necessarily heard anything as far as folks marshaling resources to do something there, but there's obviously a high concentration of injury volume that if there was something to come to fruition, we can make a big dent there.

And on Employer Services, you mentioned you negotiate directly with those entities? Any pushback or kind of how easy or how hard it is and things are changing or kind of stable?

Yes. No, we haven't had pushback. Typically, what we do with our Employer Services portfolio is we'll bump up those prices, call it, 3% on average in line with inflation every year with our cost of providing the services. And obviously, we'll give our sales force and our operational team some leeway. But that's pretty much what we do across the board on every different type of service within Employer Services. And we look at what market pricing is and things like that just to make sure we stay in line.

Are you getting any pushback? Or it's just kind of like, okay, they just understand like the costs going up and...?

Yes. I mean I think everyone sees the cost of providing goods and services increasing right now. And so what we try to do is make sure we stay in line with what everyone else is reading about and experience in their business or personal life.

And coming back to your growth in your workers' comp business, so it sounds like you're growing faster than the market itself. So the question -- obvious question is like who are you taking market share from? And I guess how much room there is...?

So we do -- that's a great point. We do estimate that we're taking market share. It's hard to precisely calculate. But obviously, with 6% growth and you look at all the other stats out there, it's pretty clear that we are taking market share. Our competitors are urgent cares, family medicine offices, health systems, emergency departments. So all those groups that I just mentioned, do not focus on occupational medicine. They're not investing their cash flow, their capital and technologies, workflow improvements, things like that. So this is what we do day in day out, and we're reinvesting to have the best-in-class outcomes, the best-in-class workflows to make it really easy to do business with us.

Right. Exactly. And I want to touch on that because I guess you guys spend a lot of time talking about how you differentiate from your competitors and the technology stack you have. And I guess now it's very still topical around the use of AI and these new tools. So maybe kind of flesh it out for us a little bit, like how much more there is opportunity and kind of any metrics you can provide in terms of returns on these investments?

Yes. So with respect to some of our sales efforts, we've rolled out some technologies that -- one of the most important things for us in our business, given our breadth of customers at over 200,000 is identifying and maintaining relationships with the key decision-maker at any one of those companies. And so across that many companies, there's obviously a lot of turnover. So recently rolled out some new technologies to help us identify those key decision-makers when there is turnover, which has been, I think, pretty impactful so far. We've also automated some of our outreach and our account management functions. We've got a team of north of 200 sales folks and account managers to touch base with 200,000-plus in customers. So to the extent that we can automate some of that function to increase touch points, that's been helpful. And so we've seen benefit there. On the AI front, we've developed some internal machine learning algorithms that have helped us with predictive analytics around potential missed visits. So basically, a number of variables feed into a model that then spit out whether the likelihood of a potential patient who's scheduled for a visit missing said visit. So we can get out in front of that, call the patient, make sure they come in. So that's been impactful. And then also on the AI front, doing some things around rev cycle management that's been really interesting and we think could have an opportunity to make a big dent for us, particularly around chart audits and things like that. So deploying technology across a myriad of different fronts, looking at AI technologies, in particular, across a number of different fronts, including ambient listening and other areas within the back office, front office, et cetera, which we expect to be able to talk more about that over the next, call it, 12 to 18 months.

And the only thing I would add, our approach to AI in general is to have a culture across the entire organization where we have centralized approaches, but we also have some decentralized approaches where every department and every part of our organization should be bringing forward ideas that they can utilize in their department. And it might be a vended solution where we're buying something from somebody who's implementing AI that makes us more efficient, helps us grow our top line or reduce our cost or we could do something organically like we have a couple of the examples Tanner mentioned, we've built out those things organically. So the opportunities are -- at this point, are limitless. And we think they're going to help potentially grow our top line, but also reduce costs over a long period of time, but also make our existing resources a lot more efficient.

And I was also thinking you quoted the study that you did talking about like 25% lower workers' comp claim costs, 65 fewer days claim duration. So can you talk about like how you're able to achieve these results? Like what exactly -- I mean, maybe you don't want to share the secret sauce, but high level sort of how you're able to execute consistently across such a large portfolio on these metrics to kind of come up with that?

No, that's a great question. I should have weaved that into my opening remarks, too, because it's -- that is our value prop. We save employers 25% on their work comp injury costs, and it's a sizable number for almost every employer out there. And our model -- we've talked about this publicly. It's in all our available data. Our model is built on early intervention and return-to-work model. So we have doctors and clinical staff that are working hand-in-hand with therapists. So if there's a referral needed to therapy, we'll walk the patient over the same day and the doctor will talk with the therapist. If there's a need for specialty care, which is a portion of our visits, or injuries need a specialist, we'll bring specialists into the 4 walls of the center, and they'll be able to interact with the therapist and the doctor. So the whole point is to get people back to work. They might have restrictions, but to get them back moving quickly, like we always say like an industrial athlete. When you see somebody get hurt on the football field, you get them in the tent, you start them moving quickly, get them back to what they do. And that's our whole approach. That, combined with technologies and workflows to get information flowing quickly. And that's why we've been able to have that stat where we've measured over 500,000 closed claims versus non-Concentra facilities and we're 25% lower. Case duration is lower. And what we're doing is reducing the back end of the cost -- the case duration where there's a lot of administrative, a lot of legal costs. We get the employee back to work as quickly as possible.

And maybe -- I still have a couple. On-site, is relatively small, but I guess it's growing quite rapidly. So we should talk about that business still, right, in terms of like what's driving that business and how big this could be, say, in 5 years or 10 years?

Sure, sure. Bill, do you want to take that one?

Yes, absolutely. We're very excited about the on-site space. We've had that operation for decades. But just in the last few years, we feel like it's really taken off. And something we were excited to do was invest in that business further with the acquisition of Pivot Onsite Innovations last year, which really brought in the infrastructure and the team for us to be able to have a nice base for that business to grow organically and inorganically in the future, we think, as well. But the industry as a whole with employers seeing double-digit increases in their medical benefits costs for their workforce is what's really driving employers to want to be more proactive in reining those costs, more proactive medical care. So that's why there's a significant rise in the number of on-site health clinics out there. And we estimate around a $15 billion to $20 billion serviceable addressable market, highly under-vended. And we are right around second, third, fourth largest player in that space right now. So our legacy business there is focused on occupational health. We also launched advanced primary care about 18 or so months ago specific to our on-site health clinics. We now feel like we have really great solutions in both sides of the house for employers to be one-stop shop as they need on-site services and a lot of cross-selling as well, potential between our existing customers that want to go to our centers, need an on-site, want to utilize our telemedicine and tele rehab platform. So we feel like it's a great leg of the stool that will continue to grow fast organically in the future.

Yes. And just to add some stats, I mean, we grew 20%, excluding the acquisition, in Q1. We're at about $150 million in run rate revenue. The margin profile of that business is growing nicely. And so we're going to continue investing in it organically. We'll probably look at some acquisitions as well because we were very successful with our Pivot integration. And it's really becoming a lot more meaningful second leg of the stool for Concentra. So it's something to track on a go-forward basis.

So is that 20% the way we should think about the organic growth there? Or there was also something a little bit unusual?

I'd say that's similar to the work comp visit growth numbers in Q1. I mean the last few quarters before this were definitely double digit. And so that's really the expectation for that business segment right now is double digit, but 20% plus was a very strong quarter for us.

So this double digit, sorry, is driven by adding services because you mentioned the primary care?

It's mostly winning new sites. And there is some additional services that we're adding to our existing sites. But as Bill mentioned, it's a large market. Some vended, some not vended. There's a lot of RFPs out there. There's a lot of direct sales. But we're seeing a very significant trend with employers looking to bring their health care services on-site, whether it's primary care, advanced primary care, occupational medicine or a combination of those. And we think we're extremely well positioned in both those channels.

Yes. And just an important characteristics of that business segment, long-term contracts, there's really no seasonality relative to kind of our core business, if you will. There are -- the fee model is cost plus. So basically, the cost that we have to staff a doctor plus a margin on that, which is, again, really attractive from that standpoint. And then -- I lost my train of thought.

One more thing that there's no CapEx associated with that.

No CapEx, yes.

Because you essentially come in and use the space.

Yes, it's employer's location. So it's really their facility.

Right. And talking about capital intensity or lack of it, you should talk about free cash flow because that was another highlight of the quarter and in the year, you raised it. And I guess now free cash flow is going to grow like 7% or something like year-over-year. I know CapEx is really stable kind of over a long period of time, right? So kind of help us understand what you're going to do with all this free cash flow?

Yes. So I think that's another really great part of the business model that we've built over a long period of time. We're going to have well north of $200 million in free cash flow this year. We had a strong start to the year. Typically, Q1 is our slowest period of time because of the timing of outflows and also coming off of our lowest visit quarter in Q4, but it really picks up steam from here. And so we use the cash flow to delever. We use it for growth. We have a $70 million to $80 million CapEx budget, which covers renovations, relocations, maintenance, IT, de novos, things like that. We have a dividend as well. So I think the beauty of our business is we have enough cash flow to spread across all the different strategies we have. We've publicly said that we are targeting sub-3x by the end of this year, which is right around the corner. And we're going to maintain the dividend as we just announced with our last earnings call. And we're going to continue to do the M&A that we've outlined. So we can do a lot of different strategies and really just take the opportunities that exist and present themselves and what's in the best interest of a shareholder return.

And I guess you also have share repurchase program as well.

Yes, yes, yes.

So would you be able to like prioritize for us? Like what's kind of the #1.

Yes. So the way I think we think about capital allocation right now is we have a priority 1A and 1B, which is delever being 1A and growth being 1B. And so never sacrificing other strategies for growth when they manifest and there's opportunistic opportunities out there for us, because as Matt said, because of the robustness of the cash flow, we're able to do more than that right now, which includes share repurchases. We bought $15 million worth of shares in Q1. And I think towards the end of the year, as we get down below 3x and ultimately land in, call it, the 2.7-ish times on a run rate basis, that will open up the door for us to do, again, continue to do growth, but increase return to shareholder strategies, including more share repurchases, including potentially enhancing the dividend. So all things that we're going to be thinking about over the coming 6 months.

Just one thing worth tying together real quick, too. I think Tanner mentioned this earlier, but we can continue to do the bolt-on M&A and de novos at such attractive rates that those are leverage-accretive. So a great baseline for growth while we hit our leverage goals.

It's a great way to end. Thank you so much, everyone. Thanks.

Thank you.