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 2021 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 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 the Select Medical 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 2021. Prior to providing details on the quarter, I would like to thank all of our clinicians and operators for all their hard work and efforts this quarter and for the entire year. Their ability to adjust to the changing COVID variance throughout 2021, is a great testimony to our team's adaptability and their professionalism. Our revenues grew nicely in all four of our business segments, with aggregate revenue growth for the quarter close to 7% and for the year, over 12%. However, we also experienced substantial wage pressure in Q4 in terms of agency, nursing rates and utilization, primarily in our critical illness recovery hospitals. Martin Jackson will cover these labor increases in more detail in his comments. As we have done over the past year, we have outlined our business segment monthly revenue, volume and occupancy statistics in our earnings press release and public filings, including monthly results from 2019. This information will provide a data point for each of our business segments prior to the pandemic compared to the current filing. We will continue to include this information, as long as it provides meaningful insight to the impact of COVID-19 and the company's financial performance. I also wanted to note that we recorded $8 million in other operating income in the fourth quarter, and $124 million for the full year 2021 related to Provider Relief Fund grant payments. In 2020, we recorded $36 million in other operating income in the fourth quarter, and $90 million for the full year 2020 related to these payments. The adjusted EBITDA results for our critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation segments do not include any recognition…

Thanks, Rob, and good morning, everyone. For the fourth quarter, our operating expenses, which include our cost of services and general and administrative expenses, were $1.44 billion, which represents 92.4% of our revenues. For the same quarter prior year, operating expenses were $1.28 billion and represented 87.8% of our revenues. The primary driver of increases in our operating expenses is due to increased labor costs, particularly in our Critical Illness Recovery hospitals. We have seen nearly a doubling of agency nursing rates in Q4, and also an increase in nurse agency utilization in our critical illness recovery hospitals. Our operators have done a good job of controlling other operating costs, as most have decreased on a per patient day and per visit basis. As we have mentioned previous - in previous earnings calls, our critical illness recovery hospital strategy is to continue to admit critically complex patients sent to us by our referral partners, even though our labor costs have increased substantially. We have developed strong referral relations during this pandemic, and we believe, continued acceptance of these referrals will provide for strong relationships over the long term. For the full year, our operating expenses were $5.43 billion compared to $4.85 billion in the prior year. As a percent of revenue, operating expenses were 87.6% in both this year and the prior year. As I mentioned in our Q4 operating expense section, the majority of increases in our expenses are the result of increased labor costs throughout the year. Cost of services were $1.4 billion for the fourth quarter. This compares to $1.25 billion in the same quarter prior year. As a percent of revenue, cost of services were 89.9% for the fourth quarter compared to 85.4% in the same quarter prior year. For the full year, cost of services…

[Operator Instructions] Our first question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead with your question.

So just on the withdrawal. Can you maybe just talk a little bit about the philosophy behind doing that? And then, it sounds like the - kind of the labor issues are isolated to critical illness, but we did see some margin compression in some of the other segments in the quarter as well. Is - are you seeing any - some labor issues in the other segments as well? Or do you think it's fairly isolated to LTAC at this point?

So we basically have two questions here. One is, the guidance that we provided, we provided - Typically, when we provide guidance, Justin, we provide guidance that we feel comfortable with, that we have knowledge of. We have very good knowledge on, and very good sight on what our revenue is going to be. The unfortunate thing is, we're looking at macroeconomic issues in the labor market. And to give you historical numbers, we typically do our several ways in the benefits as a percentage of revenue in our critical illness recovery hospital in the 52% range. This past quarter, we were at 66%. And given that large variation, we're just not - we just don't feel comfortable providing guidance or if we did, it would have to be the spread would have to be so large. It just wouldn't give anyone any comfort. So for that purposes, we provided on the revenue line, which we feel is very strong. And, as we go throughout the balance of this year and we see changes in - we hope to see changes in the labor market. We'll be able to provide clarity at that point in time. Your second question, could you repeat that, Justin?

Yes, it was just around if - kind of what the labor issues are isolated to LTAC, or if you're seeing anything in the other segments as well? It did look like margins were - came in a little lower in outpatient rehab and Concentra to some degree, and if you're seeing anything there, or in health as well?

Yes. Got it.

And I guess, more importantly, on a go-forward basis, are you are you anticipating any margin contraction in those segments like for 2022, just directionally?

Yes. As far as the labor cost in our business segments, it's predominantly in the critical illness recovery hospitals. That's by and far, the largest area. Now, we did see at the end of the fourth quarter, some impact associated with COVID costs, where we had to use agency in the - in our rehab hospitals, and that was in the neighborhood of $5 million to $8 million, those costs. And we did see some impact associated on the outpatient rehab where we had call-offs. We had to close some of our clinics because in many of our clinics, we only have one therapist. So we had missed visits, and that was a couple of million dollars. But again, that was really - it was either, someone that had COVID or had the quarantine because they had contact with COVID patients. So it was really a 10 to 15 day type of impact. We saw a spike in December. We saw that spike continue in January, and that is down very significantly in February.

Okay. So it sounds like the other segments largely in control. Things seem to be isolated to LTAC with the ICU and CCU nurses. And - okay, and then just on CapEx. You've put out a number there, but is that - can you just kind of refresh us on the development plans for 2022 and where the CapEx is going?

Yes. The majority of the CapEx is really maintenance CapEx. We're in that $130 million to $150 million as far as CapEx is concerned. The balance is in development. And - to the extent that we have additional development projects coming in this year, that may go up a little bit. But right now, we feel comfortable in that $180 million to $200 million range.

Your next question will come from the line of Kevin Fischbeck with Bank of America. Please go ahead with your question.

Wanted to go back to I guess the guidance for a minute. I guess your previous guidance had some assumptions about what the right margin would be for each business line. Has your view on the target margin for those business lines changed at all? Or is it more just a near term uncertainty that's causing you to pull the profit guidance?

Yes, Kevin. This guidance is - if you take a look at three of the four business segments, now, those longer-term guidance on those margins that we think are very good. And I think, even in the critical illness recovery hospitals, it is in the near term. We think that - our expectations are for the next couple of quarters, we'll see some equilibrium in the supply and demand of nurses in that marketplace. I think it's important to note that, at Select, being in the post-acute, we compete with the acute care hospitals for our ICU and CCU nurses. And unfortunately, we're not getting that 20% add-on for Medicare, and that puts us at a disadvantage. So, we think that once that 20% add-on expires, we think that will be helpful to us, and see the market adjust pretty rapidly.

Okay. So it's really not just uncertainty of labor market and certainty of labor market in the LTAC business that's causing, I guess, we call the profit guidance?

Yes. I'd say that's accurate. And this is - I know it's not something that you - it's not the first time you're hearing it. So it's - it really is primarily in our critical illness recovery hospital division, and it is nurses. Now, as Martin mentioned, we did have some call-offs, which - if COVID continues to go on the downward trajectory that it has been over the last couple of weeks, I think you'll see that subside, and we'll be back to the margins in all of our business segments that we've had previously.

Okay. That's helpful. And I guess you mentioned COVID deciding that the 20% add-on for hospitals going away. Are there any other levers, I guess, if COVID remains elevated and the add-on is getting extended? Like are there things that you can do from a rate side or from a or management side or anything like else like that to help kind of create some improvement? Or is it really more about the market more broadly normalizing?

Well, yes. There's things that we can do, but they're going to cost money. So you would see a continuation of what - so in a resurgence of COVID, you're going to - you're probably going to see similar to what we saw in the fourth quarter. I mean, we don't expect that. But those things that you mentioned of things that we can do, yes, there will be things that we can do to get - attract and keep nurses, but there's going to be costs associated with that.

Okay. That's helpful. And I guess, I think a lot of the companies are talking about how 2023 should see like a better Medicare rate update or anything like that. So is there a reason to think that there might be some help from there in '23 on the rate side? Or is that not really the way to think about it? Like it's going to reflect the rate increase in 2023?

Yes, Kevin, I think that's fair. I think that, to the extent we see inflationary increases in our expenses, you're going to see that in the basket increases. We would expect to see that in the basket increases for Medicare.

Okay. And then maybe just last question. It seems like COVID started to spike at the end of December and kind of peaked in January. So should we be basically be bracing for a similar cost headwind in Q1 as we saw in Q2 in the LTACs? Or is it actually something you'll be able to, first in Q1?

Yes, Kevin. I think you should expect to see that. Now we will say that, we certainly saw it in January, we've seen that come down significantly in the month of February. So I think, as long as there's no other spike, I think you should see a downward trend between February and March. But we did see a significant impact in the January timeframe.

Next question will come from the line of Bill Sutherland with Benchmark Company. Please go ahead with your question.

So Marty, you were just referencing on that trend, the total compensation costs to revenue in LTAC, when you said it was still very elevated in January, improving this month into March. Well, were you referring simply to the - just the labor cost? I mean - it's one the same.

It is purely focused on the labor cost, Bill. When I gave the numbers of 52%, salaries, wages and benefits as a percentage of revenue - So it was really just the labor cost, and we saw that spike in Q4.

And then - so the January number was very much like that for the Q4 number, and then you're saying it's starting to improve in February.

We are saying, we are seeing improvements in the February timeframe and expect to see that in March.

Was it elevated earlier in 2021? I'm trying to remember what the margins were.

Not to the extent that we saw in Q4. I can tell you that in Q4, agency rates on average was about $140 million - $138 million to be exact. It was about $118 million in the first quarter of '21. That dropped to $107 million, and then down to $102 in the second and the third quarter. So we saw it trending downwards, and then we saw this big spike in Q4.

And that was pretty much nationwide - that's interesting.

Well, that was across all of our critical illness recovery hospitals.

Yes. Okay. And what was the - your quarantine rate? Did it get up into like the mid-single digits at the peak?

The quarantine? No, it was - I mean.

Are you talking about - for company-wide or a specific division?

Well, I'm thinking - yes, it will both be - I'm just kind of curious how you were impacted by that. It was 5% or 6% for some companies.

No. It was double digit, Bill. I mean it was - it had a two handle on it. It was in the north of 20% range for outpatient, Concentra, or inpatient rehab.

Okay. Switching gears. Last question is on just your priorities for cash. Now that the Concentra purchase is complete, what are - how should we think about your priorities on cash going forward and how to return cash to shareholders?

Well, those priorities could always be shifting. Marty and I have been consistent that we want to be pretty opportunistic. I would say that our plan is to continue the dividend. I would say that, that's a priority that will not be abated. We have development projects that we're constantly looking at, as well as some smaller M&A projects on the outpatient and Concentra area, some development projects in the inpatient rehab, and the critical illness side of the business. And then, we obviously will be looking at debt repayment or stock buybacks. So, I mean, I think all of the above is on the table. I don't want to be evasive in the question. But we will - we're monitoring all the time in real time of where the best opportunities are. So - and they can change.

I understand there's no reason to set a priority list 1, 2, 3, 4, just without the circumstances.

Right. At any given time, at any given month, some opportunities rise to the top as being compelling, and that could be an M&A opportunity, or something else, or stock opportunity.

Your next question will come from the line of A.J. Rice with Credit Suisse. Please go ahead with your question.

Just a couple of questions maybe. On the Concentra purchase. I know a year ago or a little over a year ago, January '21, the stake you bought was about half as big as the one you're buying now. And I think the sense was, it was about $0.10, $0.11 accretive. Is it fair - I know a lot has potentially changed over the last year, but is it fair to think because this stake is about twice as much, it's potentially about twice as much accretive as that original - as that purchased last year?

Yes. I mean that's - you're in the ballpark, A.J.

Okay. And I know you just mentioned about some of your capital deployment priorities. But is there anything about the Concentra business because on 100 - and I mean, you couldn't pursue unless you own a 100% of it. You'll move forward with some initiatives more rapidly, or move in a little bit incremental way?

No, I don't think so. I mean I think that when we were operating Concentra in the joint venture with some of our minority partners, we - I think the way we thought about the business was the same way we would think about it when we owned a 100%. I mean, they have some good initiatives going on right now. And I think they put out an announcement that we've allocated some capital for them to do some more cutting-edge stuff on the work comp business for employer Services, and so we'll deploy some capital to that. We'll continue to do acquisitions, one-off or two-off on the med centers, and continue to do development. I think they've accelerated some de novo projects which we were not pushing as much during the time that we had minority partners. But we think that, that's a good use of Concentra cash to do some de novos as well. So some strategic investments, some de novos, and continue with their small acquisitions, I think, which is very consistent with the way Concentra was run prior to the last buyout of the minority partners.

Okay. And then another question was - I understand you're not giving expense guidance and probably try to keep talking about that, but you are giving revenue guidance. And I wonder if you would give us a sense of what your assumptions you baked in? Where do you see Concentra? Where do you see the outpatient rehab business? Is it back to sort of pre-pandemic levels, maybe even a little better in terms of same facility type of comparison? And obviously, the critical access - or critical illness hospitals have - were benefiting from some COVID patients and some quicker discharges out of acute care ICUs into your facilities. Have you sort of assumed that, that moderates a little bit? Can you give us any parameters around that?

Sure, A.J. Let me start with the critical illness recovery hospitals. We have seen a substantial reduction in COVID patients that are being admitted to our hospitals. And one of the things that we're very pleased with is, those strong relationships that we've talked about with our referral sources - we've seen this reduction in COVID patients, and yet, occupancy remains very strong. And not only does occupancy remains strong, but case mix index is up. So we think that really it is - as we look into the future, we believe that, that is really a terrific event that's occurring there. On the Concentra and on the outpatient rehab side, I think in most cases, we're well above where we were even on a pre-pandemic basis, and we continue to see nice growth opportunities in both of those areas, and certainly, on the inpatient rehab. That continues to grow strongly, too, and the pipeline looks very good there with regards to joint venture partners.

Okay. Maybe one final thing. Obviously, there has been some benefit with the public health emergency around the site-neutral payments for the critical illness facilities, and then there's the Medicare sequestration benefit. Can you just - if that rolls off in the second half of the year, can you just remind us what the - I guess, quarterly run rate of benefit that might go away in the back half of the year is for those two things, and anything else that we should highlight from that kind of thing?

Well, Marty can comment on the sequestration. I'll say that, on the site-neutral change, we don't expect any change. We have not utilized the exception to take the site-neutral patients, and we'd be opposed to extending that. We've been long time believers that we want to position the LTAC industry to be a segment that takes highly acute patients. And right after the public emergency, we're supporting back to criteria patients - to have full criteria patients to benefit from a higher reimbursement and to return the site neutral to the much more reduced reimbursement. So for your sequestration question, I'll let Marty comment on that.

Yes, A.J. When we take a look at sequestration in the back half of the year to the extent that, that does not continue, that represents about an $18 million headwind for us.

Is that for the full second half or per quarter?

For the full second half.

Your next question will come from the line of Ben Hendricks with RBC Capital. Please go ahead with your question.

This is Michael Murray on for Ben. It looks like Concentra's screening and testing revenues decelerated during the quarter, and really over the course of the year. Given the current environment with rapid tests, how do you view the testing and screening outlook for 2022? And could you give us a general sense of cadence for this segment as we look at year-over-year costs?

With regards to the screening, yes, we anticipated that would decrease towards the end of '21. And certainly, going into '22, we don't anticipate the same amount of revenue and EBITDA coming in from those activities. As far as - could you repeat the second question?

Just given that declining revenue source, could you just help us with cadence through the year and year-over-year comps as COVID wanes, but the testing revenues also decreased?

Yes. I mean I think Concentra is doing a very good job replacing those dollars associated with the screening and testing. So I would anticipate that we'd still see a growth in revenue for Concentra in '22.

We do have a follow-up from the line of Justin Bowers with Deutsche Bank. Please go ahead.

I just wanted to follow up on A.J.'s question and your commentary on Acuity being up and COVID patients being down. I just - was the - when you look at kind of your mix of patients in LTAC in 4Q and maybe throughout the year, was that lower than 3Q or earlier in the year, in terms of like the mix of COVID patients? And then, can you tell us what the case mix index was in 4Q as well? It sounds like that was up sequentially.

Yes, Justin. The case mix index was up in Q4 to 1.32. And I think we've been in that 1.3 range. So yes, it's up nicely. With regards to admissions of patients with COVID, through the first three quarters, it was a little bit north of 20%, and the fourth quarter, it was about 7%.

Okay. And then just a quick modeling one. Now that Concentra - now that that's wholly owned, what - what's kind of the level of NCI we should be thinking about on a go-forward basis? I just think it would help everyone with the models.

Yes. Justin, we're going to have to get back to you on that one. I think - if you don't mind - we don't have that with - Yes. I mean, as you know, as we acquired more and more of Concentra over the past two years, that has come closer to what we anticipate NCI will be, but I don't have the exact number for you.

With no further questions in queue at this time, I would now like to turn the call back over to Mr. Ortenzio.

Thank you, operator. Thanks, everyone, for joining us, and we look forward to updating you again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.