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 2018 Results and the company’s 2019 Business Outlook. Speaking today are the company’s Executive Chairman and Co-Founder, Robert Ortenzio; and the company’s Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and then open the call for your questions. Before we get started, we will like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding operating results, growth opportunities, and other statements that refer to Select Medical’s plans, expectations, strategies, intentions, and beliefs. These forward-looking statements are based on the information available to management of Select Medical today and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical’s fourth quarter and full-year earnings conference call for 2018. Before I outline our operational metrics, I want to provide you with some summary comments and some updates since we spoke last quarter. On an overall basis, 2018 was a year of nice growth for us in terms of net revenue and adjusted EBITDA. Net revenue adjusted EBITDA exceeded the prior year by 16.4% and 19.9% respectively. We acquired U.S. HealthWorks last February and our Concentra team is doing a great job of integrating this acquisition. We also signed or closed several new joint ventures, commenced construction on several new JV hospitals and expanded our service lines in some of our existing joint venture partnerships. During 2018, we added two new rehab hospitals. One in partnership with Ochsner Health in New Orleans and one was an additional hospital in our Baylor joint venture in the Austin market. We also started up one new critical illness recovery hospital, while closing four critical illness recovery hospitals throughout the year. Our hospital on Panama City, Florida remains temporarily closed due to the devastation caused by Hurricane Michael. Also, entered into a joint venture with Banner Health, which started without patient services in 2018, and currently includes two new rehabilitation hospitals on a construction in Arizona scheduled to open in 2020. We also announced plans to expand our Ohio Health joint venture to include outpatient services and announced the partnership with UC San Diego Health to open both a critical illness recovery hospital and a new rehab hospital in the San Diego market. The UC San Diego critical illness recovery hospital joint venture opened earlier this year and we expect construction on the rehab hospital to commence later this year. Additionally, we…

Thank you, Bob. Good morning everyone. For the fourth quarter, our operating expenses, which include our cost of services and general and administrative expenses were $1.1 billion. This compares to $978 million in the same quarter last year. As a percentage of our rate revenue, operating expenses for the fourth quarter were 88.9%. This compares to 89.3% in the same quarter last year. For the year, our operating expenses were $4.5 billion. This compares to $3.8 billion last year. As a percentage of our net revenue, operating expenses for the year were 87.8%. This compares to 88.2% in the same quarter last year. Cost of services were $1.09 billion for the fourth quarter. This compares to $947 million in the same quarter last year. As a percent of net revenue cost of services were 86.5% for both the fourth quarter of this year and last year. For the year, cost of services were $4.3 billion. This compares to $3.7 billion last year. As a percent of net revenue cost of services were 85.4% for the year. This compares to 85.6% last year. G&A expenses were $30.3 million in the fourth quarter. This compares to $30.6 million in the same quarter last year. G&A expense in the fourth quarter last year included $2.8 million in U.S. HealthWorks acquisition costs. G&A as a percent of net revenue was 2.4% in the fourth quarter. This compares to 2.8% of net revenue for the same quarter last year. For the year, our G&A expense was $121.3 million. This compares to $114 million last year. G&A as a percent of revenue was 2.4% this year. This compares to 2.6% last year. As Bob mentioned, total adjusted EBITDA was $147.1 million, and adjusted EBITDA margin was 11.6% for the fourth quarter. This compares to adjusted EBITDA…

Thank you. [Operator Instructions] Our first question is from Frank Morgan with RBC Capital Markets. Your line is open.

Good morning. Thanks for the clarification there and the LTACH volumes when you pulled out those divestitures, but I’m curious 1.7% growth, which is effectively like a same-store, if I understood you correctly, so just wanted to get a little more color on how you see growth going into the year, and maybe talk a little bit about what’s implied in your guidance there? So, I guess a two-part question, how is the uptake in those local markets growing with patient criteria and the ability to attract those patients and then what’s the implied growth in your guidance with regard to the LTACH segment?

Thanks for the question Frank. The guidance moving forward is, we’ve assumed we have 96 LTACH’s and we will continue to have 96 LTACH’s through all of 2019. There is no – we did not increase any LTACH’s during 2019.

In terms of what our prospect is Frank in terms of how we’re going, I think that, you know when you have as many hospitals as we do across as many states and local communities, I think we’re generally pleased. I mean we have some hospitals that are just doing phenomenally well, and are at the very high-end of our expectations. And then, we obviously have a group that because of the nuances of the local market driving the senses to back-up to pre-criteria levels is going to take a little bit more time, there’s a little bit more difficult. So, I think the biggest takeaway I can give you is that it’s not even across our portfolio of critical illness hospitals. It’s [decidedly] uneven and when we have some hospitals that are doing phenomenally well and some of our hospitals that were great are just now good and some of the ones that we were struggling with are doing much better. So, it’s a little bit uneven, but we're still pretty optimistic that the portfolio of hospitals that we have is the right one and that over time we will be able to drive the occupancies back up to pre-criteria levels.

Got you. And Marty, I think you called out, in terms of your discussion about margins, some other operating expense line items it was one of the factors and the margin pressure there, could you give us any color there?

Yes, Frank. Actually, I think with the volume decline I think the operators did a very good job controlling expenses. If you take a look at expenses on a year-over-year basis they were up about 1.4% or $5 million for the quarter. You know, the issue was really the line [indiscernible]

Got you. And I'm guessing the other operating expenses are probably more semi-fixed, so you probably couldn't change those as much, but, okay since we’re talking about the guidance, just any other guidance general assumptions that you’re baking in there whether its timing of openings of LTACH’s or start-up losses in tax rate? And then, just on Concentra, I think I know this, but I just want to hear you say it, in terms of any seasonality you see in that business on a sequential basis? Thanks, I’ll hop of.

Yes. Let me address your last question first and that is the seasonality associated with Concentra. I mean Concentra in the fourth quarter is always a down quarter for them. And you can go back over the years and you will see that, you know, first, second quarter margins are north of – since we’ve had it north of 15%. And you will always see in that fourth quarter drop. So, we should make sure that all the analyst kind of built that into their model moving forward. Frank, remind me of the first question you asked.

Yes, just some more general assumptions around your guidance in areas like openings, maybe timing of openings, and now start-up losses you expect, and assume tax rate in the year. That’s it.

Yes, the tax rate, we anticipate it’s about 25% for the year. Openings, we do not anticipate any openings on the LTACH side. And with regards to the in-patient rehab, we should have one hospital opening, our Dignity Hospital should be opening in second quarter of the year and then Shands, which is the University of Florida will be opening by the end of this quarter.

In implied startup losses, you know you are about 900,000 in this [perfect quarter]?

Yes. There is going to probably be for those hospitals. I would anticipate, you know somewhere in the neighborhood of $2 million to $3 million of startup losses per hospital.

Okay, thanks, I’ll hop back in the queue.

Thank you. Our next question is from Peter Costa with Wells Fargo Securities. Your line is open.

Good morning Bob and Marty. So many things going well. The only thing that has been a little slower seems to be the improvement in the LTACHs and you did get the occupancy up 1% year-over-year, but how much of more can you do in a year? Is it going to be something that’s going to be 1% per year or you think you can do better than that and what is it that’s holding you back in those markets that you talked about being a little bit slower, is it competition or is it an education process of either the clinical staff or the administrators?

Pete, thanks for the question. I think you hit the nail in the head. It really is an educational process. Remember that as you go after these compliant patients, the compliant patients are actually in the short-term acute care hospitals. And it’s really just modifying their historical discharging patterns. Our people continue to do a great job I think educating our referral sources and that’s just going to take time. So, I think in terms of occupancy rate increases, I think the 1% a year is probably a good assumption.

Yes, I would say that it would be definitely not competition as a general statement. I mean, with the change over to the new criteria, which as you know we’re taking the LTACH compliant patients exclusively, the high acuity of these patients and the fact that they are coming out of the intensive care units of general acute care hospitals just makes the process in some markets slower, you know you have to demonstrate that you have the clinical wherewithal to take care of some really involved acute patients and in most of markets, we know we have all those relationships and the transition of patients is very smooth. In others, we have work to do. We get some group of those patients and others we have to work harder through education and providing the clinical programs that enabled physicians and discharge planners to feel very comfortable that it’s a good safe environment for their high acuity patients, and so that’s the process and in many of our hospitals we’re there and we have a cohort that we still keep working on.

And is it educating the clinical staff more or is it educating the administrators to get the referrals?

I think for these patients it’s more of the clinical staff.

In spite of the employee cost on the critical illness recovery hospitals as being one of the contributors to the weakness, how much of that is just raises, you know pay raises versus having more staff on board, trying to get ready for more patient volume?

Pete, it really is a question of the annual increases to the staff.

Yes. It’s more of the former. The latter that you mentioned is, really been and done. And we’ve prepared for that going into criteria. So, it’s very much the former. I mean, this is just a – the critical illness hospitals is just a difficult venue for clinicians to work. Taking care of this population of patients it’s very tough work and it’s hard to recruit into that area. It’s hard to retain in an area in a time when there is nursing shortages. So, it’s very competitive for staff out there and I think that that’s what’s driving it.

And do you think that’s getting worse or getting better as we go forward?

I would say the same although it is different depending on the geography and depending on the market that you’re in, but I don’t think we see it getting worse. I think we see it kind of, I don’t know that we would characterize it as getting better at this point, but certainly probably not getting worse.

Thanks. Appreciate the time.

Thank you. Our next question is from A.J. Rice with Credit Suisse. Your line open.

Hi, thanks. First of all, let me ask about the Concentra U.S. HealthWorks business as you anniversary that, I think in the first quarter of this year, what is sort of the combined organic growth that you would look for that business to generate on the top line if [you don’t mind]?

Yes, A.J. as – I think you’ve got it correctly that the acquisition took place February 1 of last year. So, first quarter you will see a little bit of – you will see January of 2019 really be that – we won’t anniversary, I guess. What I’m trying to see is, we won’t anniversary until the second quarter because it was acquired in February 1 of 2018. The topline organic growth that we see is probably in the 2% to 3% range.

Okay. When I look at – I guess also for this year in your guidance, you will have one quarter of this new care tool that the IRF business is going to have to be impacted by, I know it’s not a huge business in your overall mix, but I wondered are you assuming sort of status quo with that transition or is that a headwind, how would you describe what your view is on that at this point?

We’re assuming status quo. We are not anticipating it as a headwind.

Okay. And then on the interest expense guidance, I guess in the fourth quarter are running about 50.5 million of interest as mentioned in your prior remarks Marty and you’ve got to think of a guidance of 200 million. I know there is various things going on in there, but I wondered, how much of your debt at this point I know you mentioned the tranches, I don’t know if you’ve got any of that hedged, assuming you probably do, how much of your debt is floating rate or what are you assuming about that and then is there any assumption about the ability to call or refinance anything that might impact the interest calculation to go behind that 200 million?

A.J. we are good with the 200 million. The expectation is that, we will pay down some debt over the next year. With regards to what the composition of our debt is, we have our senior notes at 6.375% which are fixed in the balance of our debt is floating. In our guidance, we assumed that LIBOR would be in that 2.75, we are going on one-month LIBOR we assume it will be 2.75% to 3%.

I might just slip one last one in. You mentioned the Panama City situation in your prepared remarks, was that immaterial consolidated results or was that a drag in the fourth quarter in any way and will it be a drag in the early part of 2019?

It was certainly a drag in the fourth quarter. The Panama City on an annualized basis on EBITDA does around $5 million. And I think we incurred a loss in the fourth quarter of about $700,000, $800,000.

I mean, assuming that persists for 2019 or are you assuming that at some point you get up and running?

Yes. We don’t think the Panama City will come back on board probably until the fourth quarter of 2019.

Alright, thanks a lot.

Thanks, A.J.

Thank you. Our next question is from Patrick Feeley with Barclays. Your line is open.

Hi, good morning, everyone. Just a follow-up on that question. Do you expect any insurance recoveries for Panama City to come in?

Yes, we do. I mean under the business interruption, portion of our insurance policy, we expect that to come in play. We probably won't realize that, again until the third or fourth quarter of 2019.

Okay. And just my other question on the outpatient rehab side. First on some of the issues in Physio you experienced in the past. Can you just give us an update on where you stand with replacing some of those therapists you lost post-acquisition? Has that stabilized by now? And the other question – I'll let you answer that and come back with the follow-up.

Sure. The Physio integration, we think that the – our operators have done a great job, and you can see that in the past couple of quarters. You can see the improvement that's been made, and for all intents and purposes, yes, the Physio has been fully integrated and we're comfortable with where we are right now.

Great. And the other question on the outpatient rehab. The other revenue bucket, while it's not terribly material, it's been up pretty materially 20% or so. Can you just comment on what's driving that? What's in that bucket? Is that primarily management fee revenue from the non-consolidated JVs driving that? Just any color there? And how to think about that for 2019? Thanks.

Yes, there is – you're absolutely right. That is going up as we continue to do more JVs and some of those JVs are non-consolidating. There's two primary components that are in that. That is as you pointed out the management fees, but there is also a line item called – we do a labor pass-through. And both of those categories as we can – as – actually we did the Banner and the Ohio health deal, and also the Baylor. Those are all non-consolidating for us. So that's why you see the big increase on that line item.

Got it. Thanks very much.

Thank you. Our next question is from Kevin Fischbeck with Bank of America. Your line is open.

Great. Thanks. I wanted to go back to the LTACH margins. I guess, you guys closed four sites year-over-year. I would have thought that might have helped boost the margin profile for some of their underperforming sites? Many of the margins were down year-over-year, I don't know if there is any other color you can provide there?

Yes, Kevin. The four hospitals that we closed those were hospitals where the lease was coming up and when you take a look at the marketplaces there wasn't – when we take a look at five years out, we thought that there just wasn't a sufficient EBITDA increases to continue the five-year lease. All four of – I think at least three of those four were actually generating positive EBITDA. But it was moderate EBITDA.

Yes, so but I guess still that we're probably implied that your margins were benefited year-over-year by not having them in the same-store number, or in the consolidated number, I should say?

Yes, it's – if we want to talk basis points, I'll have to get back to you on that. I don't – it's immaterial actually.

Okay. And then, I guess your margins were down year-over-year even though on a same-store basis, you were growing volumes 1.7% and you said that going forward you expect 1% to be the right number as a starting point. And if the labor environment is not getting better, does your guidance assume that LTACH margins were down again in 2019?

I want to make sure, we're talking about the same thing. The 1% that we were talking about was 1% occupancy rate, right? So, I want to make sure that the percentages that we're talking about are – it's an apples-to-apples comparison.

Okay. But I guess in this quarter your occupancy was up at 1%, right?

Yes.

And that’s what you are talking about going forward and I guess, I'm just trying to figure out if – it sounds like, you're saying you expect similar volume growth in the future is what you saw here, similar wage growth as you saw here? And obviously margins were down, so I just was trying to understand if you're assuming the margin will be down in 2019 or if this somewhat offset on rates or something else, costs?

Well I think if you like at the – well the rate was up in the fourth quarter the rate was up $26, what was down was Case Mix Index. And Case Mix Index represents about a $26 differential. We think we should be in that 1.25 to 1.26 range. We're at 1.22. That comes back to 1.25, 1.26, we'll be fine.

Okay. And then I guess with – on the IRF side, the margins were down even though the startup losses were down. I guess I think if you take out the startup losses and EBITDA, wouldn't have grown at all, it actually would've been down a little bit. So, what is the – is something going on there to which we think...

Well, I think Bob had mentioned we had an impact from the California Rehab Institute where the Medicare rate was down. We had an Interim Medicare rate in Q4 of 2017 that was – because of the startup nature of that hospital that – the rate actually in – Q4 of 2018 was lower than what it was in 2017. So, that had a negative impact, as well as two hospitals we had. We had some softness in volume. And that really – the two hospitals that were same store.

And how do we think about that California rate dynamic? Is that something that was – still going to be a headwind year-over-year for the next couple of quarters or was that just a onetime thing in Q4 and the comps are normal going forward?

Yes. No, we're – it was the fourth quarter rate impact. So, we will be fine going forward.

Okay. Alright, great. Thank you.

Thanks.

Thank you. And that does conclude our Q&A session for today. I’d like to turn the call back over to Mr. Robert Ortenzio for any further remarks.

Thank you everybody for joining us and we look forward to updating you again next quarter.

Ladies and gentlemen, thank you participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone, have a great day.