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

Hello, and welcome to the Annual Meeting of the Stockholders of Select Medical Holdings Corporation. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's 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 webcast, and we are pleased that you could join us today. Your interest in the company is very much appreciated. I will serve as Chairman of the meeting. Before we proceed with the meeting itself, however, I would like to introduce you to David Chernow, who is 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, Senator William H. Frist, Dr. Parvinderjit S. Khanuja, Rocco Ortenzio, Thomas A. Scully, Marilyn B. Tavenner and Daniel J. Thomas. I would also like to introduce you to the senior management of the company who, in addition to David Chernow, Michael Tarvin and me are participating today. Rocco Ortenzio, Vice Chairman and Co-Founder; Martin Jackson, Executive Vice President and Chief Financial Officer; Mike Malatesta, Senior Vice President of Finance; Chris Weigl, Senior Vice President, Controller and Chief Accounting Officer; and Tom Mullin, Executive Vice President, Hospital Operations. Will the meeting please come to order? I'd now like to introduce you to Michael Tarvin.

Good morning. I would like to introduce you to Jeffrey Adeli of PricewaterhouseCoopers LLP, the company's independent public accountant. In addition, with us today is Drew Waford of Computershare, Inc., who will serve as the Inspector of Election for this meeting. I'd like to start by discussing our agenda for today's meeting. First, our President and Chief Executive Officer, David Chernow, will make a few brief remarks. We will then vote on 4 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 from 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 on 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 on 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 her his 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 to you again, Mr. David Chernow.

Thanks, Mike. The ability to adapt and innovate for the future requires strategic leadership, focus and execution across our 4 lines of business and nearly 60 brands. To that end, The Concentra division had another strong year in 2022, recording annual adjusted EBITDA of $334.3 million and a 19.4% adjusted EBITDA margin. The division continued to play a crucial role in keeping America's workforce healthy by serving over 200,000 employer customers, including Fortune 500 companies, municipalities and small- and medium-sized businesses. The leadership team's focus on developing and enhancing internal and external technology solutions also help to serve these customers more efficiently and improve patient satisfaction. The Inpatient Rehabilitation Hospital division also posted another strong year with adjusted EBITDA of $198 million, a 7.2% increase from prior year. Several rehabilitation hospitals once again received prestigious Best Rehab Hospital rankings from U.S. News & World Report, including Kessler Institute for Rehabilitation, which was #4, Baylor Scott & White Institute for Rehabilitation, which was #14, Emory Rehabilitation Hospital at #26 and OhioHealth Rehabilitation Hospital at 31. Additionally, 16 of our inpatient rehabilitation hospitals across the country made Newsweek's 2022 list of America's Best Physical Rehab Centers. After 3 years of navigating the COVID-19 global health crisis, the next mission-critical challenge was the industry's mass exodus of health care professionals, specifically nurses. This labor shortage resulted in a historically high rate of dependency on agency staffing across our critical illness recovery hospitals. While we prioritized and made steady progress in reducing these costs, it greatly impacted the overall financial performance of the division and company in 2022. The result was adjusted EBITDA of $111.3 million, a 58.5% decrease from the prior year. The company's Outpatient Rehabilitation division also faced a challenging year due to labor shortages and a 3% decrease in Medicare reimbursement. The Outpatient Rehabilitation division finished the year with adjusted EBITDA of $101.9 million, a 26.3% decrease from the prior year. Despite these obstacles, the division continued to define elevated standards of quality to support the launch of National Specialty Programs of Excellence in 2023. As the overall health care sector underwent further consolidation in 2022, Select Medical continued to expand its business lines, partnerships and national footprint, keeping its sights on future projects -- prospects, excuse me. On the joint venture front, a new partnership was formed with Ascension Saint Thomas for a 70-bed critical illness recovery hospital in Nashville, followed by a joint venture with the Nova Health to open a 35-bed critical illness recovery hospital in Northern Virginia in early 2023. The company's existing joint venture with Arizona-based Banner Health opened a third inpatient rehabilitation hospital in April and expansions under the OhioHealth and UPMC partnerships will add 75 new inpatient rehabilitation beds in Pennsylvania and Ohio in 2023. Plans are also underway to build a neuro transitional center, the first of its kind in the Central Ohio region as part of the OhioHealth joint venture. In May, wholly owned West Gables Rehabilitation Hospital added 30 beds to meet the growing post-acute needs of the greater Miami area. And in September, Select Medical entered an agreement to acquire 80 beds from New Jersey-based Bacharach Institute for rehabilitation with plans to build a new state-of-the-art inpatient rehabilitation hospital in 2024 under a new joint venture with AtlantiCare. The Concentra division expanded its footprint with 8 acquisitions and de novo transactions and added more than 20 new corporate on-site clinics throughout the year. In December, it also successfully transitioned 17 Select Medical WORKNET Clinics into the division. Today, The Concentra division has 540 outpatient occupational medicine centers and an additional 147 on-site locations in 42 states. The Outpatient Rehabilitation division saw a new clinic growth through 58 de novo transactions and 34 acquisitions, bringing its total clinic count to 1,928, further solidifying Select Medical as the largest physical therapy network in the country. Additionally, the division expanded its ReVital Cancer Rehabilitation Program now offered in 500 clinics across 22 states. After a 2-year hiatus due to the pandemic, the company hosted the Select Medical Way Conference in Scottsdale, Arizona, bringing together 500 leaders across the enterprise. Under a creating a culture of connectedness theme, the 2-day event focused on the recruitment, retention and development of the best talent in the industry. This was and continues to be a business-critical priority for Select Medical as the stability of our workforce directly impacts our ability to deliver an exceptional patient experience to the more than 99,000 patients we treat daily in our hospitals, clinics and centers across the United States. In closing, we extend our sincere gratitude to fellow shareholders and joint venture partners for their trust and support as we continue to adapt innovate and grow in 2023 and beyond.

Thank you, David. This meeting has been called pursuant to the notice dated March 3, 2023 that was made available to all stockholders of record as of the close of business on March 1, 2023. Proxies were solicited on behalf of the Board of Directors of the company for this meeting. Drew Waford 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 proposals as set forth in the company's proxy statement and the other questions that will be voted upon by ballot, if any. Mr. Waford has already delivered to me his 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. The Board of Directors set March 1, 2023 as the record date. Computershare, Inc., the transfer agent for the company, reports that there were shares of 127,176,279 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 notice 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 3, 2023, as evidenced by an affidavit of mailing provided by Computershare, Inc. A copy of these materials will be made at a permanent part of the company's corporate records. More than half of the shares outstanding as of 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 124,320,528 shares of Select Medical Holdings Corporation common stock are represented at today's meeting, which constitutes 97.75% of the total shares outstanding on the record date. Therefore, I certify that a quorum has been achieved.

Thanks, Drew. Will the Secretary present the notice of meeting and the proxy statement.

By clicking a tab entitled Meeting Materials, you can have access and review copies of the notice of annual meeting, proxy statement, proxy card and the company's annual report on Form 10-K. 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 mailing of Computershare Inc. and the certificate with respect to the stockholder list, will be filed with the minutes of the meeting.

Thank you, Mike. I now declare the meeting duly convened, properly organized and confident to transact business.

The first order of business on our agenda for a stockholder vote is the election of 4 Class 2 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 1, 2023 is entitled to 1 vote for each share of common stock held. As of March 1, 2023, there were 127,176,279 shares of Select Medical Holdings Corporation common stock outstanding. The 4 nominees for Class 2 Directors are Bryan C. Cressey, Parvinderjit S. Khanuja, Robert A. Ortenzio and Daniel J. Thomas. 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. The third order of business on our agenda is to hold a nonbinding advisory vote on the frequency of the advisory vote on the compensation of the company's named executive officers. The fourth and final order of business on our agenda for a stockholder vote is the 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, 2023.

Thank you, Mike. We will now attempt to answer questions posed 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 in 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.

Thank you, Bob. There are no questions in the queue. Back to you.

Thank you, Brian. The online voting will now be closed. Based on the review of the votes cast, will the inspector of election please submit his report on the results of the balloting.

Having conducted the election and vote at the Annual Meeting of Stockholders of Select Medical Holdings Corporation held on April 27, 2023, I hereby certify that each of the 4 nominees for Class 2 Director received a majority of the votes of the common stock cast for election as a Director. The stockholders have approved the compensation of the company's named executive officers. The stockholders have approved the 1-year frequency for holding advisory votes on the compensation of the company's named executive officers as recommended by the company's Board of Directors. And the stockholders have ratified the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2023. The report of election prepared by Computershare Inc. evidences that all nominees for Class 2 Director were elected by an affirmative vote of 86.92% or more of the shares voted. The compensation of the company's named executive officers was approved by an affirmative vote of the holders of 107,662,511 shares or 87.68% of the shares voted. 14,902,617 shares were voted against approval and 225,842 shares abstained. The 1-year frequency for holding advisory votes on the compensation of the company's named executive officers was approved by an affirmative vote of the holders of 116,335,529 shares or 94.75% of the shares voted. 5,135,199 shares were voted for a 2-year frequency. 1,306,327 shares were voted for a 3-year frequency, and 1,529,558 shares abstained. The appointment of PricewaterhouseCoopers LLP was ratified by an affirmative vote of the holders of 123,337,745 shares or 99.21% of the shares voted. 760,759 shares were voted against ratification and 222,024 shares abstained.

Thank you, Drew. Based on the report of the inspector of elections, I therefore, declare that, one, the nominees have been duly elected as Class 2 Directors of the company. Number two, the stockholders have approved the compensation of the company's named executive officers. Three, the stockholders have approved the 1-year frequency for holding advisory votes on the compensation of the company's named executive officers. And four, the stockholders have ratified the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2023. The inspector of election will execute a certificate as to the results of the balloting and the certificate will be filed in the minute books of the company along with the minutes of this meeting. There being no further business to come before the meeting, I hereby adjourn the meeting. Thank you, everyone, for your participation.

This concludes the meeting. You may now disconnect.