Good morning, and thank you for joining us today for Select Medical Holdings Corporation earnings conference call to discuss the fourth quarter and full year 2012 results and the company's business outlook. Speaking today are the company's CEO, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter highlights 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'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 turn the conference call over to Robert Ortenzio. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us for Select Medical's Fourth Quarter and Full Year's Earnings Conference Call for 2012. For our prepared remarks, I'll provide some overall highlights for the company and our operating divisions, and then ask Martin Jackson, our Executive Vice President and Chief Financial Officer, to provide some additional financial details before opening the call up for questions. Our reported earnings per fully diluted were $0.28 in the fourth quarter compared to $0.25 in the same quarter last year and $1.05 for the full year compared to $0.71 for the prior year. In both 2011 and 2012, the company's reported earnings included nonrecurring loss on early retirement of debt. Excluding these losses and their related tax effects in both periods, adjusted net income per share was $1.07 for 2012 compared to $0.84 for the prior year. Net revenue for the fourth quarter increased 3.2% to $741.1 million compared to $718.4 million in the same quarter last year. Net revenue for the full year increased 5.2% to $2.95 billion compared to last year. During the year, we generated approximately 75% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals; and 25% from our outpatient rehab segment, which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the fourth quarter increased 4.1% to $556 million compared to $534.2 million in the same quarter last year. This growth resulted primarily from increases in our net revenue per patient day and revenues generated from the Baylor joint venture. Specialty hospital net revenue per patient day increased 3.2% to $1,542 in the fourth quarter compared to $1,494 per patient day in the same quarter last year. We experienced increases in both…

Thanks, Bob. For the fourth quarter, our operating expenses, which include our cost of service, general and administrative costs and bad debt expense, increased 2.9% to $644 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were down slightly at 86.9% compared to 87.1% in the same quarter last year. For the year, our operating expenses increased 5.2% to $2.5 billion. This compares to $2.4 billion last year. As a percentage of our net revenue, operating expenses were 86.4% both this year and last year. Cost of services increased 3.4% to $620.3 million for the fourth quarter compared to the same quarter last year. As a percentage of net revenue, cost of services was 83.7% for the fourth quarter compared to 83.5% in the same quarter last year. For the full year, cost of services increased 5.8% to $2.44 billion. As a percent of net revenue, cost of services was 82.9% for the full year compared to 82.3% last year. The increase in cost of services as a percentage of net revenue resulted primarily from increases in the relative labor costs in both our specialty hospital and our outpatient rehabilitation segments. These increases were associated with the increase in relative costs associated with providing labor services under the Baylor JV services agreement in both segments and increased relative labor costs in our outpatient clinics as a result of the effects of Hurricane Sandy, where we continue to incur labor costs in the affected clinics without corresponding patient revenues. G&A expense was $16.3 million in the fourth quarter, which as a percent of net revenue was 2.2% compared to $14.7 million or 2% of revenue for the same quarter last year. For the full year, G&A expense was $56.2 million,…

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

First of all, maybe a quick comment on the bad debt. Obviously, getting a 60-basis-point improvement on that line item, it's a bit fluctuated between 1% and 2% is a nice margin swing. Do you think the level you're at now is sustainable or is that a little bit of an anomaly?

No, A.J., we're pretty comfortable now. I know we have talked about bad debt being in the 1.8% range. I'd say the range now is closer to 1.5% or maybe even a little bit less than that. The operators have done a great job collecting a lot of the older receivables, and we're more comfortable with that 1.5% range.

Okay. You mentioned exiting some contracts in contract therapy. Is that -- can you give us some flavor for how many contracts we're talking about on this portion of the book? And is that contracts that became unprofitable because of the recent reimbursement changes or is that something that's been a trouble spot for a while?

A.J., we dropped about 10 contracts in the quarter, and they were just contracts that we continue to have very, very little margin in, and it didn't make any sense to continue.

Okay. On the guidance, does the guidance include any benefit from either the refinancing or ongoing buybacks?

They do not.

Okay. And then final question for me. We're at the end of the -- obviously, the moratorium's expired. You could conceivably start building on new LTACs. Are we assuming that there are any new additions this year? And also, maybe just comment on acquisitions and joint ventures and what the pipeline looks like there.

A.J., in the current year -- this is Bob. In the current year, I wouldn't look for the company to start construction on new LTACs. I mean, I think our first focus is to expand bed capacity in those LTACs that over the years have enjoyed very high or virtually full occupancies. So that's really our priority, we get our best return on investment on that and our best pull-through. And we'll wait for a bit more certainty in the regulatory and legislative environment before we would embark upon a lot of -- a new allocation of capital to the construction of new LTACs. In terms of the other segment of our business, we do see potential, more growth in the rehab segment -- rehab part of our business mainly through our model of joint venturing. And so while we can't move those as quickly because they're obviously dependent on future partners, that's still our focus.

And your next call comes from the line of Frank Morgan with RBC Capital Markets.

In your guidance, what would be the implied cash flow from ops outlook for 2013? And then how much CapEx do you think you'll put out in 2013?

Frank, the CapEx -- our expectation on CapEx is probably somewhere in the neighborhood of $70 million to $80 million.

Okay. And then on the cash flow from ops, is it safe to grow it at some level off the annual number for '13 -- sorry, the annual number for '12? Is there anything unique we should be thinking about in terms of the cash flow from operations in '13?

Yes, I actually think it's going to be a little bit less than 2012 coming from operations.

Okay. And it's just -- any particular reason?

Yes, it really is a function of the AR. If you take a look at the AR that we experienced in 2012, it was a significant improvement. And consequently, I think that's 45 days, and we don't anticipate it going down much further than that. As a matter of fact, it may bounce back a little bit.

Okay. Well, I get that kind of ties in with your -- this improvement in bad debt you saw this year, so -- and just kind of a technical question, just making sure the $20 million hit from sequestration, that is a 9-month number, right? The impact of the 2% cut to your specialty hospital business, that's what it would be for the period of the sequestration -- not an annualized number, but for the amount that would be in effect for '13?

Yes, Frank, the $20 million is a ballpark number, and it really is an annualized number. I think one of the -- it's really a function as to how sequestration is applied. Historically, the way sequestration has been -- or any hit has been applied is against the base rate. If applied against the base rate, then the cost base business, being the short sale are in the high-cost outlier, would not be impacted. So I know when a lot of the -- when a lot of you and your peers take a look, and if they take a look at the total Medicare dollars, it's actually Medicare dollars that are only associated with DRG payments as opposed to that which is associated with the short-stay outliers and the high-cost outliers. And I think across the industry, the cost base reimbursement, typically, is in the 25% to 30% range of the total Medicare dollars.

Okay. So you take that out then do the 2% to the...

That's correct.

Balance of it. Okay. And any guidance you would -- might be willing to share with us on some of the below-the-line items? I mean, with all this refi activity going on in terms of maybe like interest expense or anything unique and any of these other lines, the JV equity income lines or some of these other below the line?

Yes, I think as far as the financing was concerned, I think on an annualized basis, it's probably the ballpark is $7 million. But again, that's an annualized number.

Okay. All right. And then one last one. Case mix in the quarter on the specialty side, case mix growth in quarter?

Case mix was about 1.17%, I believe.

And your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

I wanted to get a sense of what you guys thought -- when you think about long term, what the growth of your business is going to be as you think about 2015 and 2016, I guess, because the 2013 guidance basically has adjusted EBITDA roughly flat and EBIT down -- sorry, EPS down slightly in 2013, even though you're not assuming a sequestration happens. So I know there's a few more rate cuts in 2013, and there are going to be in '14 and '15, but you're still going to have market basket adjustments in the phase-in of the budget neutrality adjustment. Do you expect 2014 and 2015 to be similar EBITDA-type growth years for the company? Or is there a reason to think that you'll kind of accelerate off of this base?

Kevin, this is Bob. The out-years could be the same if the company doesn't make any strong moves to accelerate growth. Our history has been that we're fairly -- we try to be opportunistic and look for good value in acquisitions and when we deploy capital to grow. So there's obviously a lot of things that we could do. The judgment is, is whether we think it's prudent to do so. So what you saw last year was a fairly large dividend. You've seen stock buybacks. And so I think what you can take from that is that we're not comfortable with any other opportunities that are out there such that our capital has been used to look to reward shareholders in other ways. I think this current year is an important year. If we get some more visibility on what the environment's going to look like in 2014 and beyond, we can obviously make some bolder moves, if I can use that term. But failing that, we won't go out and deploy capital either to build new hospitals or to make acquisitions if we think in hindsight that they can look like bad moves for shareholders. So we're hanging around, and we're keeping an eye on things, and we're still the type of company that can move quickly. And so there are opportunities out there to make acquisitions, but the question is, is at the price, and given where the macro environment is right now for the post-acute services, is that the right move? So we'll be watching it. And so I'm not really prepared to give any guidance for 2014 or 2015 or beyond.

Okay, I think that's very helpful. I guess -- so you're saying is obviously, as a company, you've had all the history of buying things accretively and buying back stock or giving dividends. So that's just all a function of kind of where you are on the rate visibility side of things, and you figure that as rates become more stable, you may flip back from share repurchase and special dividends back towards acquisitions. Or it's easier to do that, I guess, to get more rate visibility.

Absolutely. And it's not just rate. I mean, you look at things -- I mean, the industry has been working for a couple years to get patient facility criteria passed but hasn't happened yet. But that, I think, would certainly give the industry a little bit more stability and visibility on the LTAC side. We have a strategy on the rehab side. That outpatient has been a stable, highly non-Medicare business, which we like very much. So we'll be watching what's going on in all the segments and the development of ACOs and what's happening with bundling and what's happening on the regulatory front and whether sequestration happens or doesn't happen, and make moves accordingly.

Okay. And then just one last kind of quick question. The equity earnings in the quarter, you mentioned it was down because of losses in some start-up companies where you own a minority interest. I guess what kind of start-up companies are you investing in?

I think we have that in the -- we have a list of those companies in our file, the 8-K, but we have an investment in NaviHealth, which is a Welsh, Carson company which is focused on post-acute payment and risk-taking. We have investment in a physician -- a rehab-based physician practice management company. We have an investment in a inpatient hospital within a hospital psychiatric company. And we have an investment in a rural hospital health hospital management service in joint venture with the Mayo Clinic. And we have an investment in alarm -- alert technology company that we're using in our hospitals. So those are 5 hospital -- 5 investments that we have right now.

And then one that just kind of jumped out at me on that list is the NaviHealth. Is that something that you guys are really looking at doing as far as taking risks from a post-acute care perspective?

Well, we're not doing it right now. But to our involvement in that company, which is, I think, doing some unique things, that is really where we're monitoring it and participating in it, and from a board level, to really get a better understanding so that when we have to move in that area, we'll have, hopefully, a level of sophistication that we won't have to learn on the job, if you will.

And your next question comes from the line of Gary Lieberman with Wells Fargo.

This is Ryan Halsted on for Gary. I guess my first question was going back to the environment in D.C. It seemed like at the beginning of the year, there may have been some negative rhetoric coming up, and I guess I know you gave, I guess, some brief update on the legislation. I was just curious if you are hearing, I guess, sort of some negative rhetoric in D.C. and kind of any general comments on the outlook -- on the regulatory outlook there.

Yes, I mean, I guess -- I don't know that I can give great insight there. If you follow this industry historically, there's always been noise, particularly around the LTAC, and this -- the LTAC industry. And in this kind of day and age, with a lot of bundling demonstrations, accountable care organizations, there really -- nothing really surprises me. I don't think that -- I think the one thing that is consistent, whether you look at the Congress or look at CMS or look at MedPAC, I think that they all continue to say for the right type of patient, the LTAC hospital makes both clinical and economic sense for the Medicare program. So that's why, above everything else, our primary public policy goal remains adoption of LTAC patient facility criteria. But yes, from time to time, you do get that. But at a lot of other segments get it as well, including home health, and there has been a lot of others. So I think as a small industry, we certainly get our share, and that's why we have a public policy initiative.

Okay, that's helpful. And I guess going back to some of those initiatives you have investments in, I saw the announcement about the Mayo JV. I guess I was just curious what you were sort of looking at with that venture and what you may hope to learn from that.

Well, this is the providing of services similar to that, that we currently provide, not exactly at the same level, in more rural settings because as you find that, that is important, and it's something that -- Mayo had developed some really outstanding clinical protocols in some operational areas, and they teamed up and partnered with us to move that across a larger geographic area.

Okay. And I guess my last question. So you've talked about potentially expanding bed capacity. Any sort of specifics you can offer there? What kind of capacity availability do you think exists and how aggressively you could potentially build in 2013 on some of that?

We haven't really put out any specific guidance on the amount of beds, what we're looking at, because many of our hospitals are a hospital within a hospital. Obviously, having -- negotiating to be able to get more space is always an issue even if we have demand profile. And then in some of our locations, we do have some construction that we'd want to do to add on to those hospitals. And we're going through kind of the regulatory and the real estate processes to do that. So I'm not comfortable at this point really giving a bed number and a financial impact. But we do have a number of hospitals that enjoy fairly high occupancies.

Okay. How about as far as a runway, I guess, on the regulatory or approval side of that, that you just mentioned?

Well, I think it varies, depending on what state you're in. For example, we have some that we're going to be wanting to do in the state of Florida, for example, and so you may have anywhere from 30 to 90 days to get local real estate approvals. And then in some of our markets where we have hospitals within hospitals, we really have to work with our host hospitals to free up space and then get in and do any renovations that are necessary. And sometimes, that can be anywhere from 30 days to 120 days. So it's a mixed bag.

And your next question comes from the line of Miles Highsmith with RBC.

Bob, just a follow-on from the earlier question. I'm just curious, following some of the commentary out of MedPAC in December, if there's been any specific initiative on your part to educate them just in terms of the value of LTACs? Or do you guys sort of have bigger fish to fry and maybe that comes later?

Well, yes, I want to always be respectful of the stuff that's coming out of MedPAC. And I was -- notwithstanding some of the negative that seem to come out of there, I was still gratified to see the number of physicians and others who serve as MedPAC commissioners added positive comments about the role of LTACs in their local communities. And it is important for us to continue to engage with them and work with them. At the end of the day, the Congress engaged on MedPAC matters as far back as 2007. And CMS, obviously, has a very big role. And we're looking really toward the April proposed rule that comes out. So we always have to try to make judgments on where we put our resources. So all are important and some more than others. So yes, we'll continue to engage policymakers or advisers to policymakers wherever we can. So I think we have a pretty good story to say. And there isn't all negative. There is a fair amount of positive. And again, it comes back to this, for the right type of patient, the LTAC hospitals make really great clinical and economic sense for the program and for patients. And we fit, I think, very solidly, although not in a large area, in the continuum of care. The big debate that is going on right now is this whole coordination of care. I mean, all these bundled payments and these accountable care organizations is really about where patients should be treated and how they should move through, through the post-acute. And that's a debate that's just going to -- I think that's just going to continue because the reality is that there is a lack of coordination during what they consider this episode of care in the post-acute. And that's, I think, what everybody is trying to wrap their arms around, and you see us doing it through our joint ventures, you see it through the demonstration projects. And it is a theme and a thread that's running through some of the comments that's coming through MedPAC and others, which is how do you deal with this lack of coordination through this episode of care in the post-acute? So we're trying to engage all levels on that. And this is not an issue that's going to be resolved soon. And I don't think anybody that is involved in this area or is thoughtful, think that this is something that's going to happen this quarter or even this year. It's going to be very much in the out-years.

Okay. And Marty, just a quarterly question on the restrictive pay capacity. I guess with the income you generated this quarter, is it right to think you got several hundred million following the dividend that was done in Q4?

Miles, you're always very good with that. Yes, that's appropriate.

And just a follow-up. Is that governed by your credit agreement? And the reason I ask is, if the bonds go away, will that number still apply?

Yes, it will still apply.

And there are no further questions at this time. I would now like to turn the call back to management for closing remarks.

No closing remarks. I appreciate your attendance and your interest in the company, and we look forward to updating you next quarter.