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

Good morning, and thank you for joining us today for the Concentra Group Holdings Parent, Inc. earnings conference call to discuss the third quarter 2026 results. Speaking today are the company's Executive Chairman, Keith Newton; the company's President and Chief Executive Officer, Matt DiCanio; and the company's Executive Vice President and Chief Financial Officer, Tanner Newton. Management will give you an overview 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 Concentra's current plans, expectations, strategies, intentions and beliefs. You are hereby cautioned that these forward-looking statements may be affected by the important factors, among others, set forth in Concentra's earnings release and the reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those discussed in the forward-looking statements. These forward-looking statements are based on the information available to management of Concentra today, and the company assumes no obligation to update these statements as circumstances change. Additionally, during today's call, we may reference measures such as adjusted EBITDA, adjusted EBITDA margin and free cash flow, which are non-GAAP financial measures. The definitions of adjusted EBITDA, adjusted EBITDA margin and free cash flow and the tables reconciling those metrics to the corresponding GAAP measures are provided in the earnings release. At this time, I'll turn the conference over to Mr. Keith Newton, Mr. Matt DiCanio, and Mr. Tanner Newton.

Thank you, and good morning. This is our first earnings call following our leadership transition, and I'd like to begin by congratulating Matt on his assumption of the Chief Executive Officer role and Tanner on his assumption of the Chief Financial Officer role effective as of November 1. These appointments reflect a thoughtful succession process and the strength of the leadership team we have built over many years. Concentra enters in this next chapter from a position of considerable strength. We have a differentiated market position, a proven strategy, strong operational execution and a talented, very experienced team serving our patients, employer customers and partners every day. I am confident that Matt, Tanner and the broader leadership team are exceptionally well-positioned to build on the momentum we've established and continue to create long term value for our stakeholders. While my role has changed, my commitment to Concentra remains the same. As Executive Chairman, I'll continue to partner very closely with Matt, the Board, and the leadership team to support our strategic priorities and ensure a seamless and successful transition. I'm very excited about the opportunities ahead and the future of the company. With that, I'll turn the call over to Matt.

Thank you, Keith, and good morning. I appreciate your leadership and look forward to continuing our partnership in your role as Executive Chairman. I also want to welcome Tanner to his first earnings call as Chief Financial Officer. We had a great third quarter with strong visit volume, higher revenue per visit and disciplined cost management driving significant earnings growth. Let's jump into some of the highlights. Total revenue increased 8.6% year-over-year to $622.1 million. Net income was $67.8 million, up 36% from a year ago, and adjusted EBITDA was $140.2 million, up 17.9% from a year ago. Tanner will walk through the financial details, but I want to spend a few minutes on what we saw across the business and where we are focused. Total Occupational Health Center patient visits increased 4.9% to an average of more than 58,000 visits per day in the third quarter. Our Workers' Compensation visits per day increased 4.2% and Employer Services visits per day increased 5.8% relative to prior year. We believe this performance reflects a combination of favorable labor market conditions in many of the blue-collar sectors we serve and continued market share gains. Growth was broad-based across all 6 of our regions and most end markets. Recent activity in our Employer Services business remains particularly encouraging with strong increases in hiring-related services such as drug screens and physicals across transportation and logistics, manufacturing, construction-oriented customers and other industries as well. The activity we are seeing among customers in these sectors continues to indicate healthy workforce demand. We believe our ongoing investments in sales execution, account management and technology continue to strengthen our competitive position and support market share gains. Customer retention remains at multiyear highs. while year-to-date new business activity is tracking ahead of 2025 levels. Turning to our Occupational Health Center rate. Revenue per visit increased 3.3% year-over-year in the third quarter. This growth was driven by a 3.5% increase in Workers' Compensation and a 4.0% increase in Employer Services revenue per visit. Employer Services revenue per visit was slightly elevated this quarter, in part due to a shift in the mix with services comprising a larger percentage of higher revenue per visit physicals relative to drug screens. During the third quarter, we acquired 4 medical centers in Minnesota. We also opened 3 de novo centers in Kansas City, Missouri, Boise, Idaho, and Daytona Beach, Florida, with the latter 2 representing new markets for Concentra. Following quarter-end, we opened 2 additional centers near Pensacola, Florida, and Washington, D.C. We expect to open one more center before the end of this year. In total, completed acquisitions and de novo development are expected to add 15 new centers during 2026. We are currently anticipating low double-digit de novo openings in 2027. Our M&A pipeline remains strong with multiple bolt-on transactions progressing well. We see attractive opportunities to continue expanding the business through both acquisitions and de novo development, and we will remain disciplined in evaluating returns and executing on those opportunities. Within the onsite business, fundamentals remain strong, supported by employers' continued focus on managing their rising health care costs, a growing sales pipeline, and strong operational execution as we capture the benefits of the Pivot integration. I'll now turn the call over to Tanner, to review our financial results in more detail.

Thank you, Matt, and good morning. I'm pleased to join you in my new role and look forward to continuing to work with our leadership team and the investment community. I'll begin with our consolidated results, then review operating segment performance, expenses, cash flow, and the balance sheet. Total company revenue was $622.1 million in Q3 2026, compared to $572.8 million in Q3 of the prior year, representing 8.6% growth year-over-year. We saw a slight acceleration in year-over-year organic revenue growth compared to Q2, which grew at 8%. Net income attributable to the company in Q3 2026, was $65.9 million or $0.52 per share compared to $48.3 million and $0.38 per share, respectively, in Q3 2025. Adjusted net income attributable to the company in Q3 2026, was $66.1 million and adjusted earnings per share was $0.52 compared with $49.9 million and $0.39 per share, respectively, in Q3 2025, reflecting growth of 33.3% in adjusted earnings per share year-over-year. Adjusted EBITDA increased 17.9% to $140.2 million and adjusted EBITDA margin expanded 170 basis points to 22.5%. Sequentially, relative to Q2, margin was affected by 1 additional expense day in Q3 compared with the second quarter. More broadly, the year-over-year improvement reflects strong volume and rate growth, disciplined execution and operating efficiencies across the business. Next, breaking down revenue by segment. Total Occupational Health Center revenue increased 8.3% year-over-year to $569.7 million. Workers' Compensation revenue increased 7.9% to $370.5 million, while Employer Services revenue increased 10% to $190.5 million. Onsite revenue increased 10% year-over-year to $38.4 million. Organic growth moderated versus Q2 as Pivot entered the organic calculation following the acquisition anniversary with Pivot's relatively modest year-over-year growth diluting stronger growth in the core business. Finally, other businesses, which include telemedicine, pharmacy operations, and other occupational health-related services generated revenue of $14.1 million, an increase of 18.4% year-over-year. Moving on to expenses. Cost of services was $426.7 million or 68.6% of revenue in Q3 2026, an improvement from 70.8% of revenue for the same quarter of the prior year. The drivers were consistent with the first half of the year with strong flow-through from visit and rate growth, together with favorable staffing efficiencies across our centers. Our total general and administrative expenses were $60.9 million or 9.8% of revenue in Q3 2026, compared to 9.2% of revenue in the same quarter of the prior year. Excluding items that are added back for the purposes of calculating adjusted EBITDA, including equity compensation expense, onetime select separation costs and M&A transaction costs, G&A expense was $56.4 million for the quarter or 9.1% of revenue compared to 8.5% of revenue in the same quarter of the prior year. Turning to cash flow. In Q3, we generated $51.9 million of operating cash flow compared to $60.6 million in the third quarter of 2025. The year-over-year decrease was driven primarily by working capital timing and higher cash tax payments following the roll-off of certain tax benefits associated with the OBBBA that we received in the prior year period. Excluding these factors, the underlying cash-generating capacity of the business remains strong and consistent with our expectations. Investing activities used a net $25.9 million of cash in the third quarter, which includes both acquisition capital related to our Minnesota deal that closed in the quarter and net inflows from the sale of a previously owned building. Free cash flow or cash flow from operations less cash flow used in investing activity, excluding business combinations, totaled $32.2 million, a decrease from prior year third quarter free cash flow of $40.2 million. The year-over-year decrease was primarily due to the aforementioned lower cash flow from operations in Q3 2026. Finally, financing activities used $98.2 million of cash during the quarter. We repurchased 1 million shares for $34.65 million and returned an additional $8 million to shareholders through dividends. At September 30, 2026, approximately $19 million remained under the Board's original $100 million repurchase authorization. Subsequent to quarter-end, the Board authorized a new $250 million share repurchase program with no expiration date. The authorization provides additional flexibility to return capital while continuing to invest in organic growth, acquisitions and de novos and debt reduction. The Board also declared a quarterly cash dividend of $0.0625 per share payable on or about December 4, 2026, to shareholders of record as of November 19, 2026. During the quarter, we repaid $52.4 million on our Term Loan B, comprised of both mandatory amortization and a $50 million discretionary prepayment. We ended the quarter with a total debt balance of $1.52 billion and a cash balance of $85.8 million. Our net leverage ratio per our credit agreement at the end of September was 2.90x. We were also pleased to receive a ratings upgrade from S&P Global in August with our corporate rating improving from BB minus to BB. In mid-October, Moody's also revised its outlook from stable to positive. Now I'll turn it back over to Matt, to close this out with some comments on separation activity as well as our updated guidance.

Thanks, Tanner. As discussed last quarter, separation activities are substantially complete and will conclude with the expiration of the TSA with Select Medical at the end of this month. This marks the successful completion of a multiyear separation process. I'd like to recognize and thank both our Concentra team and the Select Medical team for their tremendous efforts and partnership throughout this entire process. Their work has been instrumental in achieving a smooth and successful transition, and we are pleased to have this milestone behind us. Now with respect to our updated guidance, we are raising our 2026 outlook as follows. We are increasing the low end of our revenue range by $35 million and the high end of our revenue range by $5 million, resulting in a revised range of $2.36 billion to $2.38 billion. We are increasing the low end of our adjusted EBITDA range by $20 million and the high end of our adjusted EBITDA range by $15 million, resulting in a revised range of $505 million to $510 million. Our free cash flow range of $220 million to $240 million and our capital expenditure range of $70 million to $80 million remains unchanged. The business continues to perform well, and we expect to close out the year on strong footing. As in prior years, we expect to provide formal 2027 guidance early next year when we have greater visibility into the economic and reimbursement environment. At this stage, we expect Employer Services rate growth to remain generally consistent with our long-term expectation of approximately 3%. It is too early to provide a definitive outlook for Workers' Compensation rates because most states have not yet announced changes to their fee schedules. Based on the information currently available, however, we have no reason to expect aggregate Workers' Compensation rate growth to differ materially from our long-term expectations. That concludes our prepared remarks. We thank everyone for the time today. We'll turn it back to the operator to open the call for questions.

[Operator Instructions] Your first question is coming from Ann Hynes from Mizuho.

So I just want to break down the strength just in the visits. So I know you give visits per day. What is the trend with visits per patient? What does that typically average? And is that growing per patient? Or are you seeing absolutely new patients?

Ann, it's Matt DiCanio. Thanks for the question. So we don't really break down our visits beyond what we disclosed publicly, but I'll add some comments on your question. We've talked about complexity of cases, severity, things like that, that have been trending higher over recent years. We saw a little bit of that in Q3, but Q3 visits were really driven primarily by stronger initial injury visit volumes, which is the start of the patient cycle within Concentra.

Okay. Great. I want to say congratulations to everyone before my questions on your new positions. And then when I head into 2027, can you remind us how much MA EBITDA contribution that was in 2026? And when we do our models, should we put kind of some unannounced M&A in our models? Or would you prefer just like organic models?

Yes. Ann, this is Tanner. I'd say the way we think about it is until we've got deals definitively done, we don't bake that into our internal projections. So I would expect our analyst community to follow along or follow in suit from that standpoint.

Your next question is coming from Justin Bowers from Deutsche Bank.

Matt, we've continued to get constructive feedback from your customers, and you talked about new business development trending very well this year as well. So longer term, how should we think about market share gains relative to the historical algo of volume plus price? And then part 2 would be, again, for Matt and/or Tanner. Any updates on New York and some of the developments there?

Yes, sure. I'll take the first one. Tanner, you can hit the second one on New York. As far as market share gains, similar to what we've said in prior quarters, our teams out there managing the centers and the visit volumes are doing a tremendous job. Retention is up across the board. Our KPIs are at or near all-time highs and anything we measure, whether it's turnaround times, patient satisfaction scores, things like that. So our job on a go-forward basis will be to continue that. And we've got some technology enhancements that we'll look to continue to roll out to help support the center colleagues so we can continue to drive that great experience. And as we continue to add dots on the map and do what we're doing at our existing centers, that is our goal to continue our market share gains across the board.

Yes. Justin, with respect to New York, there's not a substantive update at this time. We got through the public comment period. The regulator basically said, hey, take your comments, understand them, but we're going to stick with our existing proposal for now. We're not exactly sure when that's going to go into effect. They haven't provided guidance around that. We're still thinking sometime early 2027, hopefully. That being said, we do think that the level that they have increased the E&M codes within the state, have made it attractive enough for us to at least explore entry either via de novo or small bolt-on acquisitions. So we're going to be looking at that in pretty heavy detail.

Your next question is coming from Ben Rossi from JPMorgan.

I guess across segments, rates held up pretty steadily from 2Q despite the sequential step-up in volume growth. To what extent did rates reflect this underlying fee schedule and contract pricing versus some of the service line mix and market share gains? And then looking ahead to 2027, you mentioned consistency with rate trends in your 3% long-term guide. Are there any specific states to call out regarding fee schedule refreshes for next year?

Ben, thanks for the question. So from a rate standpoint, 3.5% Work Comp rate year-over-year in the quarter, 4% from Employer Services. We did call out there was some visit mix that drove the Employer Services rate slightly higher than our long-term average of 3%. So a little bit of visit mix. But from a Work Comp standpoint, most of that is just straight fee schedule gains year-over-year. As far as '27 rates, I think that was the second half of your question. We have -- we are about to find out a number of states. I think in the next 45 to 60 days, there's about 20 to 25 states that release their fee schedules for next year. So we'll have a lot more information. Most of those states release in December. Most are effective January 1. We have some pretty good insight, but obviously, would like to wait the next 30, 45 days and get the full data set.

This is Keith. I'd say the only thing to add to what Matt just said, specific more to Employer Services, the Work Comp is that pretty much in the finalization stages of sticking a stake in the ground on that, communicating it to the employers relative to our Jan 1 price increases that we typically do every year. As we've talked to you guys in the past, we will evaluate that typically October, November time frame, communicate to the employers what we're doing in a generic letter and put that into play on January 1 for everybody, and that has historically gone very well for us, and we anticipate that to do the same and be basically in line with what we've been seeing.

Great. I appreciate the added details there. Just as a follow-up, some of the initial contributions you described from things like onshoring and the data center build-out, you just refresh us on how these trends have shown across your footprint and maybe some of the specific indicators from either your customers or screening data that can help us get a feel for whether this is a sustained demand driver?

Yes. Ben, Tanner here. Yes, it's a great question. It's something that we're spending a lot of time trying to dive into our internal data on and parse out some -- derive some responses from. So what I would say there is with respect to data centers, it's a really small -- it's growing part of our business, but still a relatively small and immaterial part of the overall book of business. We're tracking all 300-plus projects across our sales team, both onsite and our core brick-and-mortar sales teams. I think there is going to be more opportunity going forward on the onsite, just given the nature of the construction projects there that are -- and the size of those construction projects that we're going to be tracking. But I wouldn't say that it's a huge contributor right now. On the overall reshoring trend, just given the data that we're seeing with respect to things like manufacturing and construction growth and particularly within the Employer Services book of business, which as we always talk about as kind of a leading indicator, we are optimistic and hopeful that, that is a sign of a growing reshoring trend. But again, I think we've talked about this in the past. It's still a little bit too early to definitively say that one way or the other.

Congrats again on the new roles to Matt & Tanner.

Your next question is coming from Ben Hendrix from RBC.

This is Michael Murray on for Ben. Just kind of building on the last question. Just wanted to hear your initial results on the election results or your initial thoughts on the election results and if that has changed your long-term perspective on the tailwinds from the data center build-outs and the manufacturing reshoring.

Yes. It's Matt. Michael, thanks for the question. Here's what I'd say, just to add on to Tanner's comments too about reshoring and the data center build-out. If you look at our results and what's driving the visit volumes, it is very broad-based. And we are very diversified across the country, across industries, across geographies, across employer sizes. And what we have been seeing is strength across pretty much every industry and every geography. So we don't really have a view on the election results and the potential impact on our business. We're continuing to monitor the day-to-day visit volumes. And it's not one industry that's driving what we're seeing right now. That's really my main point.

Okay. That's helpful. And then just a quick follow-up. It looks like adjusted G&A ratio was up a bit year-over-year even with the strong revenue growth. So is this the right run rate moving forward?

Yes. I would say in Q3, we had a few additional expenses that I would characterize as more onetime in nature. And so we had a slight uptick relative to Q2 G&A. I think the run rate is probably somewhere in between Q2 and Q3 G&A is how I would look at it on a go-forward basis.

Your next question is coming from Jack Slevin from Jefferies.

This is Brett on for Jack. Just wanted to touch on the margin progress you guys have made and kind of get a look into once you lap the separation costs moving forward into '27, how we should be thinking about the margin expansion and maybe the levers you can pull upon.

Yes. So we've had really strong margin expansion in 2026. I think that we feel pretty confident that we're going to be able to sustain that level of margin going forward. Staffing efficiencies in our centers have been great. We're getting -- starting to get more leverage off of our G&A as we start to run rate the separation costs. So I think that over a long period of time or a medium period of time, there's still opportunity for margin expansion, particularly as we continue to invest in centers and efficiencies within the centers. But would I expect to see the same level of margin expansion year-over-year that we saw in 2026 relative to 2025? Probably not. But I do think that we can sustain the current level of margin going forward.

Yes. I would just add to that. It's really a combination of strong rate, strong visits. We've done a nice job with cost control, and we've obviously been very active from a growth standpoint. So that's our strategy. We're going to continue that into 2027. And what you're seeing now with -- from a margin expansion standpoint is very much in line with how we've talked about the business for the last 2, 3 years since the IPO. As soon as we get through the separation costs, digest some of the M&A, we expected margin expansion, and that's pretty much exactly what we're seeing right now.

Great. That's super helpful. Maybe just for a quick follow-up on the capital allocation front. I know you have the new buyback authorization and obviously, with leverage coming down below 3x now. How should we be thinking about moving forward, capital allocation appetite for further M&A and de novo growth as well?