Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter and Full Year 2013 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 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 will turn the conference call over to Robert Ortenzio. Please proceed, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's fourth quarter and full year earnings conference call for 2013. For our prepared remarks I'll provide some overall highlights for the company and our operating divisions and then ask our Chief Financial Officer, Marty Jackson to provide some additional financial details before we open the call up to questions. I want to first note the results for the fourth quarter and the full year reflect Medicare's payment changes that became effective on April 1, including a 2% reduction in Medicare payments that was implemented as part of the automatic reduction of federal spending mandated under the Budget Control Act of 2011, or better known as sequestration; and an increase from 25% to 50% in the Multiple Procedure Payment Reduction for therapy service as mandated by the taxpayer American Taxpayer Relief Act of 2012, or better known as MPPR. The reduction, both in net operating revenues and adjusted EBITDA from sequestration was approximately $7.3 million in the fourth quarter and $23.9 million for the full year. The reduction in both net operating revenues and adjusted EBITDA from MPPR was approximately $2.1 million in the fourth quarter and $5.7 million for the full year. Net revenue for the fourth quarter was $746.2 million compared to $741.1 million in the same quarter last year. Net revenue for the full year was $2.98 billion compared to $2.95 billion last year. During the year we generated approximately 74% of our revenues from our specialty hospital segment which includes both our long-term acute care and in-patient rehab hospitals and 26% from our outpatient rehab patient segment which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the fourth quarter decreased slightly to $548.4 million compared to $556…

Thanks, Bob. As Bob mentioned the impact from sequestration and MPPR totaled $9.4 million in the quarter and close to $30 million for the full year. Had we not experienced these Medicare payment reductions net revenue would have increased 2% in the quarter, and 1.9% for the year compared to the same respective periods last year. For the fourth quarter our operating expenses, which include our cost of services, general and administrative expense and bad debt expense increased 2.7% to $661.4 million compared to the same quarter last year. As a percentage of our net revenue operating expenses for the fourth quarter were 88.6%, this compares to 86.9% in the same quarter last year. For the year our operating expenses increased 2.4% to $2.6 billion, this compares to $2.5 billion last year. As a percentage of our net revenue operating expenses were 87.7% compared to 86.4% last year. Cost of services increased 1.2% to $627.6 million for the fourth quarter as compared to the same quarter last year. As a percent of our net revenue cost of services was 84.1% compared to 83.7% in the same quarter last year. The primary reason for the 40 basis points increase in our cost of services as a percent of net revenue is the adverse sequestration and MPPR reductions on our net operating revenue. I think this is important point to note because in our specialty hospitals there was no increase in our operating expense on the cost or operating cost on a per patient day basis compared to the same quarter last year. Cost of services as a percent of net revenue without the reimbursement changes would have been 83.1%. Our operators did a very effective job managing the cost this past quarter. For the year cost of services increased 2.1% to…

Thank you. (Operator Instructions). Your first question comes from the line of Whit Mayo of Robert W. Baird. Please proceed.

Hey, thanks Good morning. I guess just on the patient admission criteria I mean you guys have obviously seen the AHA analysis they put out on site-neutral payments which estimates that approximately 53% or so of industry cases were either vent or meet the ICU requirement. Do you happen to know what you complying case load is or any way to think about that?

Yeah, Whit, we haven't put out what Select is. I can tell you that we are better than what the industry is and as there is a lot of time until October 1, 2015 to make some modifications.

Okay. I know there is a lot of uncertainty but I mean do you see any new clinical programs that you guys may need to invest in to ensure that you are successful with this change? I guess I'm curious of what's changed in terms of the conversations you are having with some of your hospitals or what you anticipate will change?

Well, Whit it's Bob, we actually haven't started in depth conversations with a lot of our referral sources but the way we are looking at the criteria, our clinical programs I don't think that we will require new programs. I think we have the programs in place to take care of the patients that are identified as LTAC patients, so the vent patients and generally the ICU patients. We may also have some additional programs that may be less valuable that will be the reduction to the site-neutral patients. So if you look at patients with a primarily diagnosis of wound care for example which would not normally fit the ICU or the vent diagnosis, we do see a fair amount of those patients today, and we may see lots of those patients. So I don't think it's so much an addition of new clinical programs as much as it is an emphasis on the programs that we have that are more likely to see patients that have a three day or greater ICU stay. So the reality is that it's a narrowing and for us the goal here is not necessarily to have the site-neutral payments patients but to have more of patients that fit the LTAC criteria. I hope that helps?

No, it does. And I guess the corollary to that, that I am getting to is that, there are a number of LTACs within the industry that aren't nearly as compliant as you are with respect to the new rule and if am an LTAC today in a market that has a very low vent mix, potentially no ICU patients, how do I adapt to the change? Do you have any thought for how this will evolve, I guess more broadly speaking for the industry?

It's a good question and I do have some thoughts on it. I mean, it depends on that LTAC that you describe, it depends where it is and why it is that it has a low percentage of those patients that will be LTAC patients under the new criteria. For example, it's an LTAC that's in a rural area that doesn't have referral sources that have a lot of ICU beds or a high percentage of those in vent patients then I think there is probably no place for that hospital to go because they are going to be in a market that has a dearth of qualified patients. On the other hand if you are an LTAC hospital in the metropolitan area that happens to be over bedded and that the LTAC compliant, future LTAC compliant cases are spread across many hospitals and you compete for patients and therefore you take a low acuity patient to fill your beds then the market is going to sort that out, right? So not everyone will survive but there are certainly markets. And there is no secret that there are few cities in the country that are over bedded for LTAC and if you look at the data, so you can take Houston for example. There are plenty of LTAC eligible patients in Houston but there are far too many LTACs in that city. So there'll have to be a rationalization because if you have an over bedding situation, more hospitals competing for fewer patients you tend to take a lower acuity patient. And if you look at the data that’s exactly what it shows. The lower acuity patients in LTAC hospitals tend to be in over bedded markets and in more rural markets, with the exception I would say geographically of the Northeast in the Massachusetts area and the like where you just have a different set of facts and history for how LTAC hospitals evolve.

No, that’s helpful and I guess one last one and I will hop off, just Marty on the term B refi, can you elaborate more on some of the details, pricing I think you mentioned an ease in the covenants. Thanks.

What we are looking at is, we have two series, series B and C. Series B currently has a spread of 325. We’re looking to reduce that to 275 and the series C has a spread of 300, we’re looking to reduce that to 275 also. So all-in-all net-net the expected savings on something like this is close to $2.8 million on an annualized basis.

Perfect, thanks.

Hey, Whit great job on that report.

Thanks.

Your next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed. Frank Morgan – RBC Capital Markets: Good morning. I think you made a comment about you might have the ability to add some beds before the moratorium goes into place. Could you talk about where or how many beds and any color on how much you could add before the moratorium starts back?

Well Frank on the first comment on the ability to add beds, as you know there is a window and I think this is -- I won't describe it as a fluke but the moratorium goes into effect in Q2 you have kind of a narrow window but we don't have a lot of regulatory guidance on how the licensure people will look at whether you completed what you needed to complete in order to qualify to come in under the moratorium. So we are still studying that. We have some bed additions that we think that we can do easily and a couple of projects and I don't want to give the impression that these are going to be a lot or meaningful or material new hospital additions in the window that we can add and so we’re still looking at it and I don't know Marty if we have given some information on that.

We have provided information.

Okay

Frank we think it’s probably in the 150 bed range.

That would include any new hospitals that we can get in under the deadline of the moratorium and bed additions. Frank Morgan – RBC Capital Markets: Okay, that’s helpful. And then on the guidance could you maybe also provide a little bit of color about how you see the cash flow and CapEx for the year? I am trying to get a picture what free cash flow might be for 2014?

Yeah Frank with regards to our CapEx we anticipate it won’t be materially different from this year. Frank Morgan – RBC Capital Markets: Okay. Any reason like what about the cash flow from off-site, any thoughts there?

Yeah I think pretty similar. Frank Morgan – RBC Capital Markets: Okay and just on the outpatients out of the business or rehabs out of the business, could you remind us kind of at what point do we kind of lap our way through these incremental negative hits on the regulatory path, do you see that from a modeling standpoint is there -- when do we lap through this and when do the incremental kind of headwinds of that, when do we work our way through that?

Yeah, that's surely the second quarter, I mean April 1 of last year is when sequestration and MPPR commenced. So we will have one more quarter here and then it should be an apples-to-apples comparison. Frank Morgan – RBC Capital Markets: And there is not another level of cuts to MPPR coming, we will be where we are going to be?

We certainly hope so, Frank. Frank Morgan – RBC Capital Markets: Okay. That's what I wanted to make sure. Thank you.

Yeah.

Your next question comes from the line of A.J. Rice with UBS. Please proceed.

Hi, everybody. A couple of questions, if I might. First on the patient criteria, hopefully, I've heard your comments. Obviously your model has been skewed historically more to hospitals and hospital versus free standing although you have some free standing too. Would you say you are thinking about the relative attractiveness of either one of those approaches improves under patient criteria or maybe gives us a little flavor for what those models allow you to do under patient criteria?

Well A.J., again it's fairly out in the future. But I will tell you that I think we are feeling pretty good about the HIH model under that new criteria. If you make some assumptions, if you say that the universal eligible patients will be small and I am not saying that it will be but let's just say for the moment that if you made that assumption then and are high acuity patients then smaller hospitals closer to the referral sources should have a bit of advantage. So if you lose some of our patient population or HIHs tend to be smaller in bed size than free standing, they tend to be closer to the larger referral hospitals that maybe have more ICU beds, so that's not universally true but it's true in the main then I feel pretty good about the HIH model. As is always, the benefit of the free standings where you have more beds, is that your opportunity to make more dollars and spread your cost further are greater. So it of course depends on the market and it of course depends on the location. But if you look across our -- all of our LTACs as we are looking at the new criteria I think we feel very good about the HIHs. And if the moratorium was not in existence we would probably be looking at those markets. Now you have to balance that with the fact that 25% rule is still from a regulatory standpoint is still temporary even though it's a couple of years and it could come back and your HIH rules if it goes to 25% naturally penalize the – can over times penalize your HIHs more than your free standing. So it does cut both ways but you asked for a comment I would tell you I am feeling pretty good about our predominance of our HIH model right now.

Yeah, now that's helpful. I guess as we think about the doc fix coming in potentially in the spring whether it's a permanent one or now increasingly looks like it might just be a short-term one again. There has been a lot of discussion about post-acute care being one of the areas to look for pay-fors. Do you believe that the fact you offered savings in the patient criteria will somehow sort of take sales tax off the table or do you have any broader thoughts on what the doc fix might mean?

Well, I have no view on what the doc fix might be. I would hope that the significant cuts or gives, pay-fors from the LTACs would not be part of future doc fix. I think that my general view of how the LTAC legislation that contributed $3 billion to the short-term fix in December was looked at by a really good cross section of both the House and the Senate both committees Senate Finance and Ways and Means and leadership, I mean I think it was generally acknowledged across most all of the leadership that the LTACs were contributing pretty significantly in a meaningful way and a material impact to the business even though it has some out years. So my assumption is that if the doc fix is going to be paid for by provider, pay-fors I think that it will not come in the main from LTAC. Of course that's what we'll certainly -- our representatives in DC will certainly be pushing that and reminding to guys in jurisdiction and leadership that this was -- we were part of the first temporary doc fix pay-for.

All right and then real quick I have got separate two detail questions. So I must take it from your comments on the G&A in the fourth quarter that sort of the 3.2% is more indicative of the run-rate to go forward and then also on the 1 million in the non-consolidated subs year-to-year that doesn't look much different but it certainly is a pick up from which we've been reporting, can we say that the losses on the new investments and start-ups are starting online and may be $1 million a quarter run rate is a reasonable run rate for 2014?

A.J. the answer to your first part of the question on the G&A, we think that that is a -- we had to take a hit because of that, that really increased the 3.2%. We think the applicable rate is probably in the 2.3% range.

Okay.

And with regard to the $1 million a quarter that's probably a pretty good run-rate.

Okay, all right. Thanks a lot.

Your next question comes from the line of Kevin Fischbeck with BofA. Please proceed.

Okay, great guys. I guess a couple of questions, the commentary in the press release around the dividend and I guess you had a similar commentary in the 10-Q but just wanted to see it sounds like you are kind of backing off a commitment to pay the dividend every quarter, or is it that was just the reason you had put in or whether you are trying to signal and may be free cash flow won't be used for share repurchase or other?

I think that to your comment this is more of a detailed description by counsel is I think more of an explanation for the change in the language. And I think as Marty and I have already said that the company is constantly looking at where is the best use of our free cash flow and I think that the point that's made is that the Board will make a decision every quarter about the dividend but that was not meant to signal that the dividend is in jeopardy in the near term. But that the Board takes a look at it every quarter and I assume that there could be certain things that happened in the company that would have the Board change their view on the dividend if we made a big acquisition and levered up because of it for example but I think that you shouldn't read more into that then just counsel refining the language to make it clear that the Board decides on divided every quarter.

Okay. And then on the out-patient side the volume number was up a lot and you obviously had [some issues] year-over-year but is there anything going on there that's sort of started that kind of growth I think in the volumes?

Kevin the operators have done a terrific job increasing the volume and I mean again what they've done is they have continued to add incremental programs. For example hand therapy is an area they really focused on and they've done a good job and you've got hand therapists coming on board, they bring their patients with them, not just the hand therapist but other patients also. So we are very pleased with what we've seen on our outpatient business and expect that to continue.

Yeah, the outpatient really is at operators business. I mean if you look across the outpatient industry you'll find some companies that are doing well and some companies that are not doing well. And I think the difference is really in the execution and so just want to echo what Marty said we're very pleased and proud of what our operators in the outpatient business have been able to perform this past year.

Okay. And then just to clarify, when you say you're doing better than the industry as far ICU compliance admissions or LTAC compliant admissions are you referring to the ASA 53% number as your benchmark or some other number that you are -- you seem to use just trying to say we're doing better than that?

Yeah I mean it's a combination of the lot of day and the information that we look at. I mean it's not just AHA data but other things that we look at in case mix index and percent of ventilator patients and the like. So as a general statement not pointing necessarily to one data set or anything that's generally our view to look at the information we have available to us.

Okay. Just last question, I think as we take the midpoint of our guidance this year and then may be add back, maybe $9 million of sequestration cuts, I guess if you kind of call it 385ish which would be high 4.5% EBITDA growth, is that the way to think about what's this business generally should be able to grow each year, absent additional rate pressures or is there something either a tailwind or headwind effecting that growth rate this year?

Kevin, no, I think that's probably fair for this year coming up. I think what we have done is we also have some -- as one of the previous callers had asked about additional beds, we got additional beds coming on board. So we think that's going to be helpful, we've got the JVs that are out there bringing in additional revenue and EBITDA. So ultimately, we think now that we have clarity in our space we think we'll be able to grow and probably -- albeit at a decent clip.

Okay, great. Thanks.

You next question comes from the line of Chris Rigg with Susquehanna Financial Group. Please proceed. Chris, your line is open. Your phone may be muted.

Can you hear me?

Yeah go ahead.

Okay. Just following up on the last question a little bit with regards the growth. You've sort been on a decline with regard to sizable [runway] over the last year so just waiting for the visibility on the LTAC side. I guess at this point can you give us a sense for what the deal pipeline might look like philosophically where your minds are right now, just any sort of way to put sort of the M&A outlook into context? Thanks

I would say that the clarity on the -- that comes from the legislation allows us to be a little bit more thoughtful on the M&A front across all of our lines of business. Recall where we were at the last conference call, at the end of the third quarter with the uncertainty and looking at the potential of CMS regulatory action on the LTACs it put the company just in a very uncertain position and made committing capital really a difficult judgment for management. Now that we have this, I think it allows us to think about allocation of capital towards acquisitions and I would tell you that we would be more aggressive in looking at opportunities across all of our business lines. That would include rehab, inpatient and outpatient and LTAC and that could involve small transaction what's available to us that are strategic and we think provide good value. It will not represent a departure from our normal discipline about what we pay for assets and we are still in a low interest rate environment. We still get a lot of competition for acquisitions from financial sponsors that are looking at paying some pretty healthy premiums for assets set that may not be able to yield the kind of return that we look for. So I think we will be more aggressive at looking at stuff across our business lines.

Okay, and then on the inpatient rehab side, have you guys ever disclosed if as part of the budget process here longer term doc fix, short-term doc fix what a phase up to the 75% threshold could mean in your IRF franchise?

We have not and we probably would not. We have a pretty disciplined policy about not commenting on proposed legislation regulations and in the case of rehab in the 75%, I know that's been chatted about but I think our strong view is that we wouldn't comment on that and we would resist that from a regulatory or legislative, we would resist that rigorously.

Understood. And then just lastly….

I believe for the rehab what was paid for from other cuts from rehab industry some years ago when it was solidified at the new levels at the 50%.

Right. And then now last question just with regard to the cash flow I think you said you would expect to be about the same in '14 as it was '13 but you did have that build, I think on the Medicare AR side, is that AR build just in the base line going forward or should we actually expect that to help you out a little bit this year? Thanks.

Chris I would assume it's just in the base line.

Okay, thanks a lot.

Your next question comes from the line of Walter Branson with Regiment Capital. Please proceed.

Thanks, so just a couple of things I may have missed this but on the G&A for the quarter, which I had up about $4.5 million after factoring out the asset sale gain and the stock comp, was that healthcare cost thru-up in the fourth quarter?

Yes, it was.

Okay. And then can you comment on commercial rates, are you seeing commercial rates holding in okay and do you expect them to continue to holding okay or is there any deterioration going on there, I am talking about for the LTACs?

For the LTAC the LTAC commercial rates were a little down in the third quarter, they came back in the fourth quarter. I anticipate that there will be -- what we are finding is it's hand-to-hand combat in negotiating those rates. So we've -- our projections were probably 1% to 2% increases.

Okay. And then just on the 25% to make sure I have it right I thought that was a four year delay but you are saying that it actually will be coming back as of now for the HIH's in October 2016?

Yeah the four years that they were talking about has to do with four years of prior legislation.

I see, does include the extension that's already occurred.

Right.

Got it, thanks.

Sure.

Your next question comes from the line of Miles Highsmith with RBC. Please proceed.

Hi, good morning guys. I am curious if you've looked at this. When I think about the Medicare payment rate in terms of the LTAC rate versus the IPPS plus outlier I know it's going to vary sort of by code and how long that patient is in general acute care hospitals in there and looking at outlier payments that would trigger, but I am just wondering kind of as a general though have you looked at that differential as it relates to compliant and non-compliant cases between the LTAC rate and IPPS plus outlier? And then Marty another question for you is the RP capacity, thanks.

Yeah Miles could be a little more definitive on the IPPS versus the LTAC rate, I am not sure where…

Yeah in terms of what Medicare is paying, the LTAC rate versus the IPPS post outlier rate that differential is it different between compliant cases and non-compliant cases is there anything just to say there?

When you say compliant versus non-compliant what do you mean?

Those that would be ultimately be compliant cases, through the ICU 96 plus hours that versus those that would…

Are you talking about patient eligibility, so if they are eligible for LTAC payment versus IPPS payment?

Correct.

Yeah, I mean the issue on the -- we talked to a number of investors where there is a little bit of confusion on the IPPS rate because it is the IPPS per diem and that is defined basically taking a look at that particular DRG, with the DRG payment divided by the geometric mean average length of stay, to get to your per diem. And I think some people are saying are -- in some cases depending on the DRG the IPPS per diem rates greater than the LTAC per diem rate. But the thing that I think is missing is that there is a cap on the IPPS rate. The cap is the full DRG payment.

Right.

Okay. So if I have a DRG, if I have an LTAC DRG it has a geometric mean of 20 days versus an IPPS it's five days. It's going to take a -- there is really no comparison, I mean the fact of the matter is the LTAC payment is going to be a much greater than the IPPS payment.

Yeah, okay. That’s what I thought, great and then the RP?

The RP currently is on the bank side its $87 million, on the bond side it’s 135.

Thanks very much.

Thanks Miles.

Your next question comes from the line of Barney Casey with Fort Washington. Please proceed.

Yeah, that was kind of my question but maybe I am just looking for maybe a little more guidance. I guess the difference between an LTAC rate in the most general terms between an LTAC rate and the fully phased in site-neutral rate, is that might that be 20% cut, I am just looking for the roughest guidance.

Bernie when you say a fully phased in IPPS rate could you describe?

It phases in over two years, right?

Yes, so you are saying assume you are getting paid a 100% of the IPPS per diem.

Yes.

Yeah it really depends on the DRG itself. So I know a lot of people are taking a look at what's a rule of thumb and I think it’s fair to say that probably there is no rule of thumb. But let me tell you that it is a substantial discount to the LTAC DRG payment.

Thanks.

Sure.

And with no further questions I would now like to turn the conference over to Mr. Robert Ortenzio for closing remarks.

Yeah thanks everybody for joining us and we look forward to updating you again after the first quarter.