Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the first quarter 2013 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 operational 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 will turn the conference call over to Robert Ortenzio.

Thank you, operator. Good morning, everyone, and thanks for joining us for Select Medical's First Quarter Earnings Conference Call. For our prepared remarks, I'll provide some overall highlights for the company and our operating divisions and then ask Martin Jackson, our Chief Financial Officer, to provide some additional financial details before opening the call up for questions. Our reported earnings per fully diluted share were $0.24 in the first quarter, compared to $0.29 in the same quarter last year. Our earnings per share in the first quarter of this year included a nonrecurring loss on early retirement of debt. Excluding this loss and its related tax effect, the adjusted net income per share was $0.25 for the quarter. Net revenue for the first quarter was $750 million, compared to $744 million in the same quarter last year. During the quarter, we generated approximately 74% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals, and 26% from our outpatient rehabilitation segment, which includes both our outpatient clinics and our contract services. Net revenue on our specialty hospitals for the first quarter increased slightly to $557.8 million, compared to $553 million in the same quarter last year. This growth resulted primarily from the increase in revenues that are generated from contracted labor services provided to our Baylor joint venture. Specialty hospital net revenues per patient day increased 1.2% to $1,543 in the first quarter, compared to $1,525 per patient day in the same quarter last year. This increase resulted primarily from an increase in our average non-Medicare net revenue per patient day. Our patient days declined slightly to just over 339,000 in the first quarter, compared to 343,000 days in the same quarter last year. And our occupancy was flat at 73%.…

Thanks, Bob. Good morning, everyone. For the first quarter, our operating expenses, which include our cost of services, general and administrative costs and bad debt expense, increased 2.4% to $651.6 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were 86.9%, compared to 85.5% in the same quarter last year. Cost of services increased 2.2% to $624.9 million for the first quarter compared to the same quarter last year. As a percent of net revenue, cost of services was 83.3% for the first quarter. This compares to 82.2% in the same quarter last year. The primary reason for the 110 basis point increase in our cost of services was inflationary labor cost increases in our specialty hospitals, which we were not able to offset with revenue growth. G&A expense was $17.4 million in the first quarter, which, as a percentage of net revenue, was 2.3%. This compares to $14.2 million or 1.9% of revenue in the same quarter last year. Our G&A expense during the first quarter of last year were favorably impacted by a gain on the sale of a building. Excluding the gain, G&A would have been 2.3% of revenue for the same quarter last year. Bad debt, as a percent of net revenue, was 1.3% for the first quarter. This compares to 1.4% for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $100.1 million for the first quarter, and adjusted EBITDA margins were 13.3%. This compares to adjusted EBITDA of $109.1 million or 14.7% adjusted EBITDA margins in the same quarter last year. The primary reason for the decline in adjusted EBITDA in margins were due to the increase in the specialty hospital labor costs and the increase in G&A, as I…

[Operator Instructions] Our first question comes from A.J. Rice from UBS.

First off, maybe just a follow-up on your comments on the IPPS rule. I know that doesn't -- that sort of phases in over time, like you said, based on your cost reporting period. Is there any way to quantify any impact that you're reflecting in the guidance for this year, if there is any, and then long term, in 2015 and beyond when it's up and running, what the aggregate impact would be?

A.J., there is. I want to point out that these are estimates because the -- because of the calculations that are used and they're constantly changing, I mean, we really kind of focus on the first year and then we try to give an estimate for '14 and '15. But in 2013, we think it will be less than $1 million.

Okay. And long term?

Yes, I mean, longer term, if you take a look at 2014, when you take a look at all of our hospitals and some mitigation strategies and some of the operation cost expenses that we can reduce, we're probably in that $5 million to $10 million for 2014.

The other thing, A.J., I want to point out is the -- in -- the rules, as you know, is proposed. That's one of the reasons why we often hesitate to make a lot of comment on proposed rules because they can change between the proposed and through the common [ph] period to the final rule. So if you assume that the final rules put into play the 25 Percent Rule as it's proposed, stays, then Marty is giving you some comments with some guidance on that. You'll also know in that proposed rule that CMS telegraphed that they're looking at revisiting patient facility criteria maybe in a year from now. That was in the narrative. So you could also speculate that if patient facility criteria was in the proposed rule a year from now and that became effective in the final rule, whether the 25 Percent Rule would be a permanent part of that or whether criteria would eliminate the need for the 25 Percent Rule, which was pretty much what CMS telegraphed last year at this time in their proposed rule where they said they were looking at policies that would make the 25 Percent Rule not necessary. So I just point that out to suggest that there are a fair number of moving parts here, and a lot of this is estimates and a lot of it is speculation of what the regulation will be.

That actually leads to my second question. I was going to ask you about the fact that last year, they did seem to couple the 2 together, the criteria and the 25 Percent Rule. And this year, they seem to decouple them. I mean, do you read anything into that? And then second, I know you guys in the industry have legislative efforts underway. Any update on the status of those to get the criteria bills through the Congress?

Well, to your first point, I mean, I think it is factually correct at last year's proposed rule, they seem to couple other policy initiatives with the elimination of the 25 Percent Rule. And in this proposed rule, they seem to decouple those. I don't know that, that represents a -- 2 separate policy lines. I mean -- and again, this is speculation. But it could be that their policy recommendations for further criteria were not ready for prime time or not ready to be proposed, but they just wanted to go ahead and let the 25 Percent Rule, which was already baked and already pretty much articulated going back as far as 2004, to just go ahead and let that go into effect. But I suspect that there was going to be a lot of comments on that by providers and others during the comment period of the proposed rule. So we may not have heard the end of that.

All right. And then the congressional initiatives, anything new to report there?

No, I don't have much new. As I think most people in the call know that follow the company, the industry has been pushing for patient facility criteria. It did show up in a Roberts-Nelson bill. There has been a lot of work done by the American Hospital Association. And the only way for me to characterize is, that work is ongoing. And speaking for Select, we continue to work with Washington to try to push along patient facility criteria. That is, we think, the best place for the industry to go. CMS now seems to be back in the fray. They had suggested a couple of years ago that they didn't think patient facility criteria was something that they were going to work on and it was really kind of left to the Congress. But now that CMS is reengaged in this, I mean, I think that, that might be a positive, but both -- and I think now, I think the way to look at it is probably both initiatives, both from CMS and on the Hill, both initiatives are ongoing. So for us, we want to kind of be participatory in both debates.

Okay. And then your -- the prepared comments, you guys mentioned that there was some contract terminations in your contract services business. Was that something you initiated? Or maybe give us a little more background on those.

Yes, A.J., that's really just a -- it's just a common occurrence in that business, where you're constantly reevaluating the contracts and seeing how profitable they are. In this particular case, those are contracts that we terminated because of their -- the lack of profitability.

Okay. I just was wondering because it seemed like you called those out and highlighted them. And then I'll just ask the last question on capital priorities. You mentioned the dividend. You've done this refinancing. I don't know if there is additional thoughts on further refinancings, but can you just comment on capital priorities for your cash flow at this point?

Yes. I mean, I think, I'll make the first comment. I'll let Marty add some comments. A.J., if you look at the company in the recent past, I think it's a good indication of what we would do in the future. I mean, we've made acquisitions. We've bought back stock. We've bought back -- we've bought back bonds at certain points in time, and we've paid dividends. And what we try to look at is try to be opportunistic. I think the board -- the recent dividend shows the board's confidence in the cash flow of the company. And I think you can also assume that it reflects management's not highly confident that this is a good time to be making a lot of large acquisitions with our capital. And we are in a period of regulatory uncertainty. The 25 Percent was -- Rule was something -- if it's in the final rule, it's something we didn't anticipate. So we'll have -- we'll let that sort out through the industry, as well as CMS' work and congress' work on patient facility criteria. So I don't think we think a lot -- see a lot of opportunities for -- in the M&A area that we've seen in the past. And so we think that the -- a small dividend as a percentage of our overall free cash flow is probably a good thing to look at right now.

Our next question comes from the line of Gary Lieberman from Wells Fargo.

This is Ryan Halsted on for Gary. I guess starting with the regulatory. You mentioned the ERF [ph] rule. I was curious if you had any thoughts on what was in the proposed rule, specifically the revisions to the codes?

We don't. That came out last night when the market closed as we were kind of getting ready for the conference call. And so we haven't spent a lot of time analyzing. So it wouldn't be fair for us to give any narrative on that at this point until we've had a chance to dig into it a little bit.

I mean, think the only comments we'd make there, Ryan, is that the rate looks relatively good.

Sure, okay. And then as far as your guidance for sequestration, it looks like you added more of a range now from where you originally anticipated the impact. Any thoughts on what you're seeing that might have changed?

Could you be more specific on your question, Ryan?

Well, just you're highlighting that sequestration could impact you by $20 million to $25 million. I believe in the past, you said just $20 million. Is there something additional that you think might be impacting you guys?

No. I think what we've done -- I think when we provided the $20 million number originally, there was no description from CMS as to the mechanics of how it was going to work. Now that CMS has come out with the mechanics and said, "No, it's not going to be applied against the base rate, but it's going to be applied against all of the Medicare revenue, less the deductibles and co-pays," we were able to fine-tune that.

Okay. And then -- so you've mentioned -- to A.J.'s question about potential offsetting cost initiatives, I was just curious if you guys had contemplated something more formal, considering a lot of your peers have sort of implemented the formal cost-cutting initiatives. Is that something you guys are looking into?

Yes, I mean, I would characterize it as something that we're looking at and we're always looking at. And as these -- the cuts become more visible and with the 25 Percent Rule, we'll take a step back and take a look at where we are. And we'll institute -- we'll formalize some of the things that we've been looking at. And the cost cutting is certainly something that we can initiate.

Okay. And then lastly, you indicated maybe a little bit of a slowdown on the M&A front. Does that include the inpatient rehab JVs or any sort of update on your pipeline there?

No, that doesn't include -- the JVs are less capital intensive and much longer lead time. And there's fewer of those and they're not as sizable. So we could do a couple of those per year that, on the capital side, really don't move the needle that much. Yes, the pipeline is good. We're in active negotiation with a number. And I'm feeling a little bit more confident than I have in the past that we'll probably get a couple this year.

Okay. And do you think the pace of those might change or pick up?

Well, I don't know. I don't want to say that the pace -- I'd certainly like to see the pace pick up because I've been disappointed about the pace or the absence of signed deals in the recent past. So yes, I would certainly like to see the pace pick up.

Our next question comes from the line of Walter Branson from Regiment Capital.

So I had a couple of things. So obviously, volume was weak in the first quarter. And this -- acute care hospitals have also been reporting weak volumes. But also, some of them have talked about a pickup in the second quarter so far. And I wondered if you had any comment about how volume trends are looking in the second quarter. And then my second question is, you've investing regularly in some of these start-ups, $10 million in the first quarter. I wondered if you could talk a little bit about what these start-ups are and what your expectations are as to what you'll achieve from them.

I'll take the first part of that. No, we really don't make comments on volume in the future quarters. It's just not our practice. I suspect maybe some companies do, but we really don't. And they can vary from month to month. I wouldn't want to give you a comment on volumes early in the quarter and find them falloff. So we really don't make comments on volume. In terms of our investments, I'll let Marty take a shot at that.

Yes. Walter, we have 5 investments, very small investments, minority interests in a lot of the companies that are basically start-up. And they're incurring costs. And in essence, what we're doing is just taking the hit associated with that.

I don't think we're looking at any material new investments in any of those companies at the current time. They're really capitalized. And what you see is the losses from our minority interest.

And do you have any expectation of actually showing profits from those in the next year or 2? Or is it more long term than that?

No, no. I -- we certainly expect to see profitability in the next year or 2.

We do, but they are -- those profits will not be material to us. I do think that these are more longer-term investments than to be characterized as strategic.

Having no further questions in queue, I would now like to turn the call back over to Robert Ortenzio for closing remarks.

We appreciate your participation in the conference call, and we look forward to updating you next quarter.