Good morning, thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the first quarter 2023 results and the company's business outlook. Speaking today are the company's Executive Chairman and Co-founder, Robert Ortenzio, and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. 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, growth opportunities, and other statements that refer to Select Medical's plans, expectations, strategies, intentions, and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change.
At this time, I would now turn the conference call over to Mr. Robert Ortenzio.
Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the first quarter of 2023. As I've done in past calls, I'll first provide some overall commentary on the quarter and then provide some detail on each of our four operating divisions. I'll then turn it over to Marty Jackson, and he'll provide further detail on the progress we have made on our labor costs for the Critical Illness Recovery Hospital division, and also discuss some other financial metrics. First, I'd like to say, by almost any standard, we had a very good first quarter, and I'd like to commend and thank all of our colleagues who encountered and overcame many challenges over the past three years while continuing to provide high level of quality care and a great patient experience within our facilities.
Last call, we noted encouraging signs heading into 2023. We continue to be encouraged with all four of our operating divisions exceeding prior year EBITDA this past quarter. Overall revenue grew 4% and adjusted EBITDA by 31% compared to prior year Q1. The impact of the restatement of the Medicare sequestration was a $9.7 million headwind when comparing Q1 to prior year same quarter. For the quarter, total company adjusted EBITDA was $214.1 million compared to $163.8 million in the prior year. Our consolidated adjusted EBITDA margin was 12.9% for Q1, compared to 10.2% in the prior year.
Our Critical Illness Recovery Hospital division experienced the most significant increase in performance compared to prior year, with a 114% increase in adjusted EBITDA, along with a 13% reduction in their salary, wage, and benefit to revenue ratio. The Critical Illness Recovery Hospital division's SWB to revenue ratio was 56.3%, which was within our target range of 55-57, along with an $87 million reduction in agency expense compared to the same quarter prior year. In addition to the labor improvements, Critical Illness has had a lot of activity on the development front with three openings this past quarter. In January, we opened a distinct part unit in our Springfield, Missouri hospital. In February, we opened a 31-bed satellite in our current Toledo, Ohio hospital.
March was also a busy month with the opening of another rehab distinct part unit in our Pensacola, Florida Critical Illness Recovery Hospital, as well as a new 50-bed hospital with a joint venture partner in Jackson, Tennessee. There are 2 hospitals with JV partners expected to open in Q2 that are located in Tucson, Arizona and Alexandria, Virginia. We've also signed an agreement to acquire a 60-bed hospital in Richmond, Virginia, which is expected to close in June. As previously mentioned, we have an agreement to open a Critical Illness Recovery Hospital with a distinct part unit in Chicago with our joint venture partner, Rush University System for Health, in 2024. We're very excited about the tremendous improvement in the Critical Illness division and optimistic about the remainder of the year. On alternative inpatient rehab.
The inpatient rehab hospital division continued their strong performance, exceeding prior year revenue, occupancy, and adjusted EBITDA. In March, we acquired Reunion Rehabilitation Hospital in Dublin, Ohio with our joint venture partner, OhioHealth. This hospital has 40 private rooms and has been renamed OhioHealth Rehabilitation Hospital. We also entered into a joint venture partnership with CHS, under which Select will purchase a majority interest in a 36-bed inpatient rehab hospital currently owned by CHS in Fort Wayne, Indiana. This transaction is expected to close after the second quarter this year. As previously noted, we have partnered with AtlantiCare to build a new inpatient rehab hospital in Southern New Jersey.
Contingent upon regulatory approval, the hospital will be called the Bacharach Institute for Rehabilitation and is slated to open either in 2024 or 2025. The development pipeline for our inpatient rehab division remains strong, and we anticipate continued strong performance throughout this year. Concentra continued their exceptional performance, exceeding prior year revenue, EBITDA, and patient volume. This quarter, Concentra completed 2 transactions and continued to build its pipeline of future acquisition and de novo projects. The acquisition of Lehigh Valley Health Network's occupational health business was a fold-in of their 5 locations into Concentra's recently opened 2 practices in Allentown and Bethlehem, Pennsylvania, which solidifies our position in this new market. Concentra also acquired the Connecticut occupational health business of PhysicianOne, a fold-in of the business from their 16 Connecticut locations into Concentra's statewide footprint.
Concentra has a strong pipeline of development opportunities, including 4 signed leases for de novo locations and several additional acquisitions and de novo opportunities that are under consideration. I'll now turn to outpatient. As expected, our outpatient rehabilitation division's performance improved, surpassing prior year's revenue, adjusted EBITDA, and patient volume. The division has 37 executed leases for de novo clinics, which are scheduled to open throughout 2023. There are also many additional opportunities that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our Critical Illness Recovery Hospital division experienced a 1% decrease in net revenue compared to prior year, primarily due to decreases of less than 1% in both volume and rate. Even though we experienced a slight decrease in volume, we did see an increase in our occupancy from 71% to 72%.
Our case mix index decreased from prior year, which was 1.35 down to 1.28, did increase from prior sequential quarter. Nursing agency rates decreased 42%, nursing agency utilization decreased 53% when compared to prior year Q1. Nursing agency rates decreased 10%, while nursing agency utilization remained consistent compared to Q4 2022. Orientation hours increased 11% compared to prior year Q1, decreased 17% compared to Q4 2022. Nursing sign-on incentive bonus dollars decreased 29% from prior year Q1 and 11% from prior sequential quarter. Our adjusted EBITDA margin was 12.9% for the quarter, compared to 6% in the prior year Q1. Our positive reductions in labor contributed to the improvement in our EBITDA margin.
Finally, in April, the long-term acute care proposed rule for fiscal 2024 was posted by CMS. If adopted, we would see an increase in the federal base rate of 3.3% and an increase in the high-cost outlier threshold. We expect the rule to be finalized in August after the required comment period. Our inpatient rehabilitation hospital division experienced a 5% increase in net revenue, with patient volumes increasing 4% and our rate per patient day by 1%. Our occupancy was 86% compared to 84% prior year. The adjusted EBITDA margin for the inpatient rehab was 20.4% for Q1 compared to 19.2% in the prior year. CMS also posted their proposed inpatient rule in April for fiscal 2024.
If adopted, we would see an increase of 3.3% in the federal base rate. We also expect this rule to be finalized in August after the required comment period. Concentra. Concentra experienced an increase of 8% in net revenue, driven by a 3% increase in volume and a 7% increase in rate. The increase in rate is attributable to a 3% increase in our workers' comp net revenue per visit, along with a decrease in our employer services mix, which has a lower level of reimbursement than work comp. Concentra's adjusted EBITDA margin was 20.5% for the quarter, compared to 21.5% in the same quarter prior year. Turning to our outpatient rehab division.
This division experienced an increase of 9% in net revenue, with patient volumes increasing by 14%, offset by a slight decrease in rate from $102 net revenue per visit to $101 net revenue per visit compared to same quarter prior year. The increase in volume compared to prior year was spread amongst multiple markets and was primarily attributable to improved patient access and clinical productivity. The decline in rate was primarily due to a decline in Medicare reimbursement, along with the full implementation of sequestration when compared to prior year.
The outpatient division's EBITDA improved by $3.6 million compared to prior year, while their EBITDA margin was 10.2% this quarter versus 9.8% same quarter prior year. Earnings per fully diluted share was $0.56 for the quarter, compared to $0.37 per share in the same quarter prior year. In regards to our allocation deployment of capital, our board of directors declared a cash dividend of $0.125 payable on May 31st to stockholders of record as of the close of business on May 18th, 2023. This past quarter, we did not repurchase shares under our board authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks.
At this point, I'll turn it over to Martin Jackson, who'll give you some additional financial details before we open the call up for questions.
Thanks, Bob, and good morning, everyone. Consistent with the prior two quarters, I would like to provide some additional details with the significant progress we've made regarding labor costs within the Critical Illness Recovery Hospital division. This past quarter, we had a sequential reduction from Q4 to Q1 in our total RN agency costs and our RN agency rate, while our utilization of agency remained the same. The reductions we realized were 12% in agency cost, moving to $27.2 million in Q4 to $23.8 million in Q1, and 10% in our agency rate, moving from $92 in Q4 to $83 in Q1. Our utilization of agency remains at 18%.
We experienced a reduction in our agency rate as the quarter progressed from January to March of 11%, moving from $89 in January to $79 in March. While we slightly fluctuated within the quarter in both RN agency costs and our utilization numbers. This quarter, we had another decline in orientation hours compared sequentially to Q4 of 2022 of 17%. Other areas where we saw improvement compared to the sequential quarter were reductions of 11% in nursing sign-on and incentive bonus dollars, and 2% in hospital administration salaries, wages, and benefits. Overall, our salaries, wages, and benefits to net revenue ratio improved 6% compared to the fourth quarter. Fourth quarter, we ran at 59.8%, and as you know, we were down this quarter down to 56.3%.
This is within the target range that we had previously communicated. Moving on to our financials. In Q1, equity and earnings of unconsolidated subsidiaries were $8.6 million. This compares to $5.4 million in the same quarter prior-year. The increase in earnings was the result of increased earnings in a few of our unconsolidated joint ventures. Net income attributable to non-controlling interest was $14.5 million. This compares to $6.8 million in the same quarter prior-year. The increase is primarily due to improved performance of our consolidated joint ventures. Interest expense was $48.6 million in the first quarter. This compares to $35.5 million in the same quarter last year.
The increase in interest expense was primarily attributable to an increase in the one-month LIBOR rate compared to Q1 of 2022, as well as borrowings made under our revolving credit facility. The interest rate on $2 billion of our term loans is capped at 1% LIBOR plus 250 basis points through September 30, 2024, which provides us with a level of protection and predictability moving forward in the current interest rate environment. At the end of the quarter, we had $3.9 billion of debt outstanding and $83.7 million of cash on the balance sheet.
Our debt balance at the end of the quarter included $2.1 billion in term loans, $460 million in revolving loans, $1.2 billion in the 6.25% Senior Notes, and $90.5 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 5.57 times. As of March 31st, we had $134 million of availability on our revolving loans. For the first quarter, operating activities provided $51.4 million in cash flow. Our days sales outstanding, or DSO, was 54 days at the end of March of 2023. This compares to 53 days March of 2022 and 55 days at the end of December 2022. Investing activities used $69.1 million of cash in the first quarter.
This includes $58.9 million purchases of property and equipment and $10.2 million in acquisition and investment activity. Financing activities provided $3.4 million of cash for the fourth quarter. We had $15 million in net borrowings on our revolving line of credit and $10.3 million in net borrowing on other debt. These borrowings were offset by dividends on our common stock, $15.9 million, and $5.2 million in net payments and distributions to non-controlling interests. As stated previously, we did not purchase any shares under our board authorized repurchase program this quarter, but have the capacity to purchase an additional $400 million worth of shares.
This program remains in effect until December 31st of 2023, unless further extended or earlier terminated by the board. We issued our business outlook for 2023, with expected revenues to be in the range of $6.5 billion-$6.7 billion, expected EBITDA in the range of $780 million-$820 million, and earnings per share to be in the range of $1.75-$1.99. Capital expenditures are expected to be in the range of $190 million-$210 million for 2023. Operator, this concludes our prepared remarks. At this time, please open up to all of our questions.
To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Justin Bowers from Deutsche Bank. Your line is open.
Hi, good morning, everyone, and congratulations on the quarter and reinstating the guide. Marty, can you talk us through the progress you made in LTAC and labor? It still sounds like there's some training costs in the segment, and maybe you can help us think through sort of how the labor plays out through the rest of the year. Then just more broadly, any seasonality that we should take into account with the guide back in place.
Sure, Justin. I think really the thing to point out here is that, you know, while we took a look at the SWNB as a percentage of revenue, we provided a little bit of guidance at the beginning of the year. We anticipated it would be in that 55-57% range. Obviously, we came in right in the mid-range there. We anticipate for the entire year it to be in that same range. Now there may be some fluctuations between the different quarters. I would anticipate quarter two, we'll probably be in that range, maybe a little bit higher in Q3 just because of seasonality. Q4, we should see it back to in that same range.
Got it. Then in terms of the development pipeline, and maybe this one for Bob, you guys have a lot of activity going on, and it sounds like the pipeline is building up in the outpatient as well. Is the plan still to do sort of organic and inorganic and what's the landscape look like in outpatient these days?
Well, you know, if you look at some of our competitors, you know, the outpatient looks a little choppy, I think, from the outside because some companies have struggled. I mean, we think the business is pretty stable, which is why you see us pushing the de novo projects. I wouldn't look for a lot of M&A in the outpatient unless it's really small and really compelling in terms of usually in markets where we already have a pretty good presence. I could see us doing some one-off or some small M&A activity. The de novo really seems to make sense for us right now as the margins and the staffing efficiency come back. We think there's a lot of runway and a lot of white space in the outpatient.
You know, the sequestration is a headwind on that as well as the Medicare reduction and the Medicare fee schedule for outpatient. I think that's putting some pressure throughout the industry. I think for us, it provides, you know, a bit of an opportunity, Justin. We feel pretty good. You know, Marty and I have been careful about the allocation of capital. At this point in the company's history, we do favor those growth opportunities that are lower on the capital side and outpatient, de novo outpatient certainly fits that criteria.
Appreciate it. I'll hop back in queue.
Thank you. One moment for our next question. Our next question comes from line of Kevin Fischbeck from Bank of America. Your line is open.
Hi, this is Nabil Gutierrez on for Kevin. Thanks for taking the question. Appreciate you saying that you expect SWB to be in the 55%-57% range for the year. Can you give us some color on what you're assuming for labor costs in each segment?
We haven't done that before. What we've done is we've provided it for the Critical Illness Recovery Hospital because of the significant variations. As you probably recall, I mean, historically, we've been in the SWNB as a percentage of revenue in that 52% range, and we saw that significantly increase during the pandemic growing. You know, at 1 quarter, I think we were up as high as 66%. Consequently, that's why we provided that information to make sure that all the investors had an understanding as to what that looked like. All the other business segments are relatively in that same. We haven't seen any significant variation in those entities. At this point in time, we're not providing that information.
Yeah, I wouldn't expect to see volatility in those other business segments, and we haven't in the near term.
Thanks. My follow-up is, what are the swing factors to the low and high end of your EBITDA guidance?
Well, you know, it's gonna be the usual drivers. It's going to be probably occupancies and volumes is really I think. As we've kind of approached, at least this quarter, the stability on the labor side, and we can, I think we have pretty good visibility on rate. It's really all gonna be volume.
Awesome. Thank you.
Thank you. One moment for our next question. Our next question will come from the line of Ben Hendrix from RBC Capital Markets. Your line is open.
Hey, thanks guys. With the kind of those productivity headwinds that you saw in outpatient in the fourth quarter unwinding, I was just wondering if you could just talk about the dynamics there and the levers that you can pull to keep productivity high in that segment.
Yeah, Ben, I think it's fair to say that Bob and I were very pleased with the improvement that we saw in the outpatient business. As we talked, it was really a function of clinical efficiency improvements. I'll tell you the other variable there was very strong growth on volume. You know, and we expect that to hopefully continue. What we've got to do is get just a little bit better. We think that there's still some upside on the clinical efficiency side. You know, and we expect to see that through the balance of the year.
Just to follow up on Concentra, against the current economic backdrop. We just heard from Cigna, noting that there could be some, you know, economic impact on commercial membership through the year. I just wanted to get your comments on the persistency of Concentra's patient base, kind of versus any economic concerns for the balance of the year. Thanks.
Sure. You know, I think that we haven't had an earnings call in the last year where at some point I didn't say that a really bad economic environment would be a headwind for Concentra, and I have to repeat that. You know, what we found is that it's a little bit more nuanced than that. I mean, Concentra has such a big platform now across the entire United States, and they have such a mix of volume from different industries. This was never more apparent than during the pandemic when they still saw a lot of strong business from those industries that did well during the pandemic. You talk about, you know, the UPSes and the Amazons and the FedEx, those that were really busy, but yet saw others that were downturn.
Today, you look at the strength in the economy, in the hospitality sector and in transportation, and that drives it. Real estate and construction is hanging on. I guess what I would say is it all depends on, you know, what the economic downturn looks like. I can tell you that if, for example, in the extremes, if you see most of your job reductions and softness in the economy that's coming out of the tech sector, you know, that is not a headwind for Concentra as long as these other segments of the economy stay strong. You know, home construction, transportation, hospitality for now are good. It's been strong. We don't see any cracks in the strength that Concentra saw in the first quarter. We remain optimistic.
We have a, I think what we would consider a pretty good situation where staffing costs are coming down in our hospital division, but yet the economic activity throughout the economy is still driving Concentra's business. I feel pretty good about that right now.
Thank you.
One moment for our next question. Our next question will come to the line of A.J. Rice from Credit Suisse. Your line is open.
Hi, everybody. A couple quick questions here. I think you said you were down 12% on agency costs sequentially. I think the number is roughly about $23.8 million. Have you baked your guidance for the year now that you're going back out with EBITDA guidance? Are you assuming further improvement as the year progresses, or is that sort of $23.8, something in that neighborhood, sort of the run rate to anticipate?
Yeah, A.J., it is in the run rate that we anticipate. I mean, we, you know, if we take a look at the business historically, we've typically run somewhere in the neighborhood of a range of, at the high, $100 million, maybe a little bit north of that, to a low of $80 million.
Okay. Okay.
You know, it really kind of fits that 23.8 kind of fits right in that range.
Okay. Obviously, I think we all welcome the return to offering the EBITDA outlook. If I look at your first quarter margin trends by segment, I'm not asking for a specific margin target for each segment, but generally speaking, is that a good general ballpark to think about the rest of the year? Is there any segment that was particularly elevated or particularly depressed that still has likely to move to get to where you're now targeting for the full year? Is it pretty steady state from here on the margin by segment?
Yeah, AJ, there is, as you know, since you've been covering us for a long time, there is seasonality in the business. I think what you'll see is you'll see second quarter is probably relatively the same as the first quarter. Third quarter is typically, you know, in the outpatient, in particular, you'll probably see a little bit of a dip in the margin. In the fourth quarter, you typically see a dip in the Concentra margin. You know, I guess also in the third quarter, we'll see a little bit of a dip. We expect to see a little bit of a dip in Critical Illness Recovery hospitals.
I'm sorry, with that last one, what quarter was that for the Critical Illness?
That would be the third quarter.
Third. Right. Third quarter. Okay. Obviously recognizing the seasonality aspects of it, which are good, and thanks for pointing that out. We haven't had a normal seasonal year in a while. But you're saying that from your perspective, the margin trend that you showed across the businesses is sort of a normalized one. As you think about the rest of the year, you would factor in seasonality, but not that either there's a division that's particularly outperforming in a meaningful way or underperforming in a meaningful way that would change. Is that the right takeaway?
Yeah, we think so.
All right. Okay. Thanks so much.
All right, A.J.
One moment for our next question. Our next question will come from Bill Sutherland from The Benchmark Company. Your line is open.
Hey, good morning. Bob, is there any color that would be helpful on the CMI change at critical illness?
Bill, what you're talking about is the drop in CMI?
Mm-hmm. Yep.
Yeah, I think that that's really just a function of the types of patients we were receiving.
Yeah, I don't think there's any meaningful takeaway on that. I mean, that is still a high case mix index in the industry, and it will, you know, vary a little bit, but, you know, based on the acuity to some of the patients that we'll get and, you know. No, I wouldn't take anything away from that. We report on it because it's continues to be strong and high for the industry. That change is I would not point to anything meaningful about that.
Okay. On the admissions growth, which was kind of flat, how should we think about that going forward?
You know, with regards to growth there, I think you can anticipate, you know, just on raw numbers because of some of the additional activity we're having on development, you can expect to see that rise a bit, Bill. You know, probably in that 2%-3% range is probably a good range.
Okay. On top of that, of course, the bits of additional beds coming in, could add a point or two, I suppose.
Yeah. I think that's right.
Okay. I'm curious, when you look at your plans, CapEx, focused on tech, are there any initiatives you guys are in any of the four groups that are particularly notable that could be impactful down the road? You know, there's a lot going on.
Well, when you.
Yeah.
Well-
When you say-
I'm sorry. I'm thinking about everything from just the more typical EHRs kinds of things to maybe some of the new frontier stuff in AI and so forth. Well, I think what we've really focused on in the past year or two is really adding automation to a number of our processes. You know, the use of bots in some of our more some of the areas where it's routine activity that's typically going on. We've seen a significant increase in utilization of those bots, and that's been very helpful. With regards to AI, you know, I think we don't really see a lot of-
We won't be out in front of that, the AI stuff. I mean, I think that most of the stuff that we'll focus on is for efficiencies and things that we can do that with the use of technology that will make, say, for example, each one of our hospitals more efficient and that we can recognize the benefit of that over 137 hospitals. That will be our focus is that more immediate return. In the area of AI, you know, we won't lead on that.
I didn't expect that'd be a top priority for you. It's another aspect to it, of course, is the virtualization, which I guess for you guys would just be an outpatient. In the past, you said that hasn't really had a meaningful impact, but I'm just wondering.
Bill, are you talking about telemedicine?
He's talking about-
Yeah. For instance, PT done virtually, in conjunction with a program for, in-clinic, rehab as well.
I think what our clinicians have found, I think our patients also, Bill, is that, you know, there was a usefulness to that during the pandemic when you had, you know, significant infectious types of activities going on. I think what we've seen is we've seen a substantial reduction in the utilization of that, and especially on outpatient, as it makes sense, is, you know, for PT, you need physical. A lot of it is physical manipulation. Continue.
Yeah, I would also say, Bill, you know, as the largest provider of PT, and I believe that we're the largest employer of physical therapists in the country, in fact, I'm quite sure of that. You know, we don't have our heads in the sand on this issue that's been out there. We're watching it very closely. There are some companies out there that have promoted this idea that perhaps PT could be provided virtually. I have to say that at this time, with, you know, a focus on it, we don't see it. I mean, I could give you lots of reasons why clinically, but, you know, we won't be surprised by what's going on out there. We track it very closely.
At this point in time, I can tell you that, we don't see the really strong viability of that except in limited, very limited circumstance. That's just our opinion as from our vantage point of.
Mm-hmm.
our position in this industry.
Yeah. No, I, as someone who's had PT fairly recently, it's, you know, these guys like Sword Health and Hinge Health, I'm surprised at the contracts they're getting. That's. It seems to be it should be more hands-on than not. You're right. That's it for my questions. Thanks, guys.
Great.
Thank you. With no further questions in the queue, I'll turn the call back over to Mr. Ortenzio for any closing comments.
Yeah, no closing comments. Thanks for joining us, and thanks for your questions. We'll look forward to updating you. If there's other questions, feel free to reach out to Marty.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.