Select Medical Holdings Corporation (SEM) Earnings Call Transcript & Summary

Good morning, and welcome to the Annual Meeting of Stockholders for Select Medical Holdings Corporation. Please note that today's meeting is being recorded. [Operator Instructions] It's now my pleasure to turn the meeting over to Mr. Robert Ortenzio, the company's Executive Chairman and Co-Founder. Mr. Ortenzio, the floor is yours.

Thank you, operator. Welcome, everyone. Today's virtual-only meeting is a live video webcast. We're pleased that you could join us today. Your interest in the company is very much appreciated. I will serve as Chairman of this meeting. Before we proceed with the meeting itself, however, I'd like to introduce you to Mr. David Chernow, who's President and Chief Executive Officer of Select Medical Holdings Corporation; and to Michael Tarvin, Executive Vice President, General Counsel and Secretary of the company. Mr. Tarvin will act as Secretary of this meeting. I would now like to introduce you to the directors of the company who, in addition to me, are participating today. Russell L. Carson; Bryan C. Cressey; Katherine R. Davisson; James S. Ely; center, William H. Frist; Rocco Ortenzio; Thomas A. Scully; Marilyn B. Tevenner; and Daniel J. Thomas. I would also like to introduce you to the senior manager of the company who, in addition to David Chernow, Michael Tarvin and me, are participating today. Rocco Ortenzio, Vice Chairman and Co-Founder; Marty Jackson, Executive Vice President and Chief Financial Officer; and Scott Romberger, our Senior Vice President and Chief Accounting Officer. Will the meeting please come to order? I would now like to introduce you again to Mr. Michael Tarvin.

Good morning. I would like to introduce you to [ Jeffrey Adele ] of PricewaterhouseCoopers LLP, the company's independent public accountant. In addition, with us today is Monique Hughes of Computershare, Inc., who will serve as the Inspector of Election for this meeting. I'd like to start by discussing our agenda for this meeting. First, our President and Chief Executive Officer, David Chernow, will make a few brief remarks. We will then vote on 3 proposals today, which will be followed by a question-and-answer session in which stockholders may ask questions. Stockholders who have entered the 16-digit control number for their proxy cards in the designated field on the web portal may submit their questions online at any time prior to the question-and-answer session by clicking the dialogue icon in the upper-right corner of the meeting center screen. The polls are open. If you have not voted or wish to change your vote, you may do so now by clicking the link provided online. Any stockholder who has sent in proxies or who has already voted via the Internet or telephone and does not want to change his/her vote need not take any further action. The polls will close once the question-and-answer session is finished. I'd now like to introduce you again to Mr. David Chernow.

Good morning. As a company, we faced incredibly challenging times in 2020 as the COVID-19 pandemic took hold in the communities we serve. Yet, we are stronger than ever as our colleagues across all divisions came together to meet the challenge of serving our patients in the health care environment that seems to be changing daily. There were many unknowns, but we learned, collaborated, adapted and innovated daily. We rose to the occasion, caring for more than 6,000 recovering COVID-19 patients who came through our hospital doors. After that, the thousands of non-COVID-19 patients treated daily across our post-acute care network this year amid the pandemic. Through it all, we strengthened our relationships with our joint venture partners, host hospitals and referral sources nationwide. New relationships were also established with acute care hospitals as we answer their calls for help, decompressing the ICUs in hard hit areas. These achievements were underscored by strong financial performance. Despite the pandemic and its disruption, revenue grew 1.4% year-over-year to more than $5.5 billion and adjusted EBITDA grew 12.6% year-over-year to $800.6 million. Our specialty hospitals responded to the extraordinary challenges of the pandemic in each local market by reinforcing short-stay hospitals that needed to discharge historically high numbers of patients still requiring acute care services. Our hospitals are persevered, often by setting up special COVID-19 care units. The critical illness recovery hospitals division had a strong financial performance with an adjusted EBITDA increase of 34.4% or $342.4 million for the year. Our inpatient rehabilitation hospital had their strongest financial performance in the history of the company with an adjusted EBITDA increase of 12.8% or $153.2 million for the year. The company's outpatient line of business was negatively impacted by the pandemic's lockdowns across much of the company -- country. The division posted adjusted EBITDA of $79.2 million, a 47.9% decrease year-over-year. However, the outpatient division was resilient. And by the fourth quarter, the division's revenue was restored to 94.7% of the level achieved in the same period in 2019. Concentra was also negatively impacted by the pandemic slow lockdowns. Concentra recorded adjusted EBITDA of $252.9 million, an 8.5% decrease year-over-year. Concentra focused on restoring its business. And by the fourth quarter, its revenue exceeded the level achieved in the same period in 2019. During 2020, Select Medical acquired an additional 30% interest in Concentra and now owns about 78% of Concentra. The following are additional 2020 highlights that define operational and clinical excellence across the organization. From a leadership perspective, the company conducted 116 virtual COVID-19 huddles from March through December 2020, bringing together senior operational and clinical leaders across the organization to identify and address obstacles, shared clinical developments and shape new protocols and procedures. In December, the American College of Chest Physicians published long-term acute care hospitals extend ICU capacity for COVID-19 response and recovery, an article chronicling Select Medical's response to the national health crisis, clearly defining the critical role of long-term acute care hospitals in the COVID-19 care continuum. Kessler Institute for Rehabilitation was again named one of the best rehabilitation hospitals in the country by U.S. News and World Report. Cleveland Clinic Rehabilitation Hospitals Avon, Beachwood and Edwin Shaw as well as UF, University of Florida health Rehabilitation Hospital, were recognized as the best rehabilitation centers in Ohio and Florida, respectively, by Newsweek magazine. From a growth perspective, despite the pandemic, the company continued to execute its growth strategy. In September, Select Medical formed a new joint venture with Rush, a top academic health system that will include critical illness recovery, inpatient rehabilitation and outpatient rehabilitation services. Two new rehabilitation hospitals were opened in Arizona in September and October as part of our Banner Health joint venture partnership. Additionally, 7 in outpatient clinics were acquired further expanding the company's national network. Concentra completed several center acquisitions and refocused its core businesses with the divestiture of its community-based outpatient clinics. From an innovation perspective, we responded to COVID-19 by accelerating innovation in 2020. We increased the company's telehealth capabilities and usage to ensure that patients maintained access to best-in-class outpatient and occupational medicine care in their time of need, particularly those impacted by compromised immune systems or restricted by stay-at-home orders. Concentra successfully developed COVID-19 testing in its centers and on-site for certain customers. The pandemic also spurred new outpatient clinical advancements, such as the recovery and reconditioning program, developed in partnership with leading physicians, physiatrists and infectious disease specialists. The program helps those continuing to recover from COVID-19 as well as others compromised by debilitating respiratory-related illnesses and conditions. From a culture standpoint, for the many hardships of 2020, our culture, the Select Medical way, has never been more formidable. Its guiding principles served as a beacon of inspiration and hope for our 50,000 person workforce amid many dark days. Additionally, One Select, our holistic approach regarding how we think partner and engage with each other across divisions and departments truly galvanized and unified our leaders across one mission, one team and one voice. Above all, however, we learned that when we face and embrace adversity, we will prevail better and stronger for it. As we enter 2021, we are hopeful for the country, grateful for one another and even more committed to providing exceptional care to the patients and families we serve. We thank you for your continued support.

This meeting has been called pursuant to the notice dated March 5, 2021, that was made available to all stockholders of record as of the close of business on March 3, 2021. Proxies were solicited on behalf of the Board of Directors of the company for this meeting. Monique Hughes of Computershare, Inc., has been appointed as Inspector of Election of this meeting and any adjournment or postponement thereof to conduct the vote with respect to the proposal set forth in the company's proxy statement and the other questions that will be voted upon by ballot, if any. Ms. Hughes has already delivered to me her oath of office. The bylaws of the company provide that each stockholder of record is entitled to one vote for each share of common stock held as of the record date. Board of Directors set March 3, 2021, as the record date. Computershare, Inc., the transfer agent for the company, reports that there were 134,838,706 shares of Select Medical Holdings Corporation common stock outstanding as of the close of business on the record date. The record of this meeting will reflect that the notices of annual meeting, the proxy statement, the proxy card and the company's annual report on Form 10-K were made available to all stockholders entitled to vote at this meeting beginning on March 5, 2021, as evidenced by the affidavit provided by Computershare, Inc. A copy of these materials will be made a permanent part of the company's corporate records. More than half of the shares outstanding as the record date must be represented at this meeting, either by stockholders participating online or by proxy to have a quorum as determined under the bylaws.

A total of 128,052,554 shares of Select Medical Holdings Corporation common stock are represented at today's meeting, which constitutes 94.97% of the total shares outstanding on the record date. Therefore, I certify that a quorum has been achieved.

Thank you. Will the secretary present notice of meeting and proxy statement and the shareholder list?

By clicking the tab entitled Meeting Materials, you can access and review copies of the notice of annual meeting, proxy statement, proxy card and the company's annual report on Form 10-K, together with the affidavit of Computershare, Inc. There are also true and complete lists of the holders of record of the shares of common stock, which are arranged in alphabetical order. The list contains the name, address and the number of shares of stock held by each stockholder of record at the close of business on the record date. The copies of the notice of meeting, proxy statement, proxy card and the company's annual report on Form 10-K, together with the original affidavit of Computershare, Inc. and the certificate with respect to the stockholder list, will be filed with the minutes of the meeting.

I now declare this meeting duly convened, properly organized and competent to transact business.

The first order of business on our agenda for a stockholder vote is the election of 3 Class III directors to hold office, subject to the provisions of the bylaws, each for a 3-year term and until their successors have been duly elected and qualified. Each stockholder of record as of March 3, 2021, is entitled to 1 vote for each share of common stock held. As of March 3, 2021, there were 134,838,706 shares of Select Medical Holdings Corporation common stock outstanding. The 3 nominees for Class III Director are: James S. Ely III, Rocco A. Ortenzio and Thomas A. Scully. The second order of business on our agenda for a stockholder vote is to hold a nonbinding advisory vote on the compensation of the company's named executive officers. And the third and final order of business on our agenda for stockholder vote is a proposal to ratify the appointment of PricewaterhouseCoopers LLP certified public accountants as the company's independent registered public accounting firm for the year ending December 31, 2021.

We will now attempt to answer questions posted through the virtual meeting web portal by our stockholders. As mentioned earlier, stockholders who have entered the 16-digit control number from their proxy card on the designated field on the web portal may submit their questions through the portal by clicking on the dialogue icon in the upper-right corner of the meeting center screen. Brian Rusignuolo, the company's Executive Vice President and Chief Information Officer, will now provide the questions, if any, submitted by stockholders during the meeting.

There's one question from the United Brotherhood of Carpenters. Mr. Chairman, the Carpenter pension funds that have a collective ownership position of 240,600 shares of company's common stock, we believe that the executive compensation plan should drive the successful execution of the company's long-term strategic business plan and the company's executive compensation plan delivers cash to the named executive officers in the form of salary and the annual incentive awards. The long-term plan uses their only restricted stock units to provide executive long-term equity compensation. Could you or the Chair of the compensation Committee, speak to the rationale for not using complementary long-term instruments such as performance shares where the units with financial stocks, strategic performance metrics designed to incentivize the pursuant of long-term strategic goals?

Okay. This is Bob Ortenzio, and I'll respond to the question. Thank you. A couple of points that I would make with respect to the incentive comp plan. We currently, through the plan, have a number of portion of the compensation subject to the performance targets. I think the second point that I'd make is that our say-on-pay vote was very strong, and we were pleased that 95.76% of the shares voted. And a final point that I would make is ISS and other advisers of institutional investors have rated our comp plan as not being excessive and have voted as being appropriate. I think the final comment that I would make is that, with respect to the long-term incentives, I just want to point out that the restricted shares granted have a 3-year cliff vesting. So I think that there is a view on the part of the comp committee and others on the Board that having the incentive stock awards not vesting at all until a 3-year time frame is sufficient for management team to be mindful of long-term strategic goals of the company.

And there are no further questions. Thank you.

The online voting will now be closed. Based on the review of the votes cast, will the inspector of election please submit her report on the results of the ballots.

Having conducted the election and vote at the Annual Meeting of Stockholders of Select Medical Holdings Corporation held on April 29, 2021, I hereby certify that, one, each of the 3 nominees for Class III Director received a majority of the votes of the common stock cast for election as a director; two, the stockholders have approved the compensation of the company's named executive officers; and three, the stockholders have ratified the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2021. The report of election prepared by Computershare Inc. evidences that, one, all nominees for Class III director were elected by an affirmative vote of 89.5% or more of the shares voted. Two, the compensation of the company's named executive Officers was approved by an affirmative vote of the holders of 120,908,105 shares or 95.76% of the shares voted. 4,908,174 shares were voted against approval and 376,509 shares abstained. The appointment of PricewaterhouseCoopers LLP was ratified by an affirmative vote of the holders of 127,050,937 shares or 99.22% of the shares voted, and 975,353 shares were voted against ratification and 26,264 shares abstained.

Based on the report of the Inspector of Elections, I therefore declare that, one, the nominees have been duly elected as Class III directors of the company; two, the stockholders have approved the compensation of the company's named executive officers; and three, the stockholders have ratified the appointment of PricewaterhouseCoopers as the company's independent registered public accounting firm for the year ended December 31, 2021. The Inspector of Elections will execute a certificate as to the results of the balloting, and the certificate will be filed in the minute book of the company along with the minutes of this meeting. There be no further business to come before the meeting, I hereby adjourn the meeting. Thank all of you for your participation.

And that concludes today's conference call. Thank you all for participating. You may disconnect.