Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter 2022 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 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 over to Mr. Robert Ortenzio.

Thank you, operator. Good morning everyone, welcome to Select Medical's earnings call for the fourth quarter 2022. As I have done in previous calls, I'll first give some overall commentary on the quarter before providing some details on each of our four operating division. After that all turn it over to Martin Jackson, who will provide further detail on our progress throughout Q4 and an outlook on labor cost for Q1 for the Critical Illness Recovery Hospital division. As most of you are aware and we've discussed in detail throughout 2022, our most significant headwinds has been staffing challenges in our critical illness recovery hospital division. This past quarter, we've seen some encouraging signs and results as we head into 2023. Our critical illness recovery hospital division's salary raises and benefits to revenue ratio improved each month throughout the quarter. I'm extremely pleased that our combined focus on recruitment, training and retention of personnel has begun to yield positive results. This would not have been possible without all the efforts of our company colleagues during an extremely challenging macro labor environment. The progress achieved reducing labor costs has resulted in an 80% improvement in our Q4 critical illness recovery hospital division's adjusted EBITDA compared to the same quarter prior year. Our focus on labor continues to yield positive results in 2023. As previously highlighted, we believe one of our company's greatest strengths is our diversification. Even as the critical illness recovery hospital division struggled with labor headwinds, both our inpatient rehab and Concentra divisions continued to exceed expectations this past quarter. Inpatient rehab division exceeded prior year Q4 revenue occupancy adjusted EBITDA. We recently announced a definitive agreement with our joint-venture partner OhioHealth to acquire reunion rehabilitation hospital in Dublin, Ohio, which will feature 40 private rooms will be renamed…

Thanks Bob. Good morning, everyone. Consistent with the prior two quarters, I'd like to provide some additional details with the progress we've made regarding our labor costs within the critical illness recovery hospital division. This past quarter, we had a sequential reduction from Q3 to Q4 and our total RN agency costs and our utilization of agency. We did have a modest increase in our RN agency rate from Q3, Q4. The reductions we realized rate percent in agency costs. This representing a reduction of $2.5 million on quarter-over-quarter basis and 17% drop-in utilization of agency from 21.9% beyond 18.1%. Agency hourly rates increase sequentially by 7% from $86 to $92. Consistent with prior quarters, we did experience a reduction of our agency utilization as the quarter progressed from October to December of 13%. Ending the last month of the year at 16.8%. We fluctuate within the quarter in both RN agency costs of $9.3 million in October, $9.5 million in November and this decreased $8.4 million in December. And our agency rates, which were $88 in October, $99 in November, and this decreased to $91 in December. This quarter we saw a 21% decline in orientation hours compared to Q3 of '22. We experienced a 39% decline in orientation hours as the quarter progressed from October to December. Other areas, we saw improvement compared to sequential compared to the sequential-quarter wasn't declining nursing sign-on an incentive bonus offers of 24%. And area of opportunity we mentioned last quarter was hospital administration costs and we did experience modest benefit from the third-quarter. We expect a continued decline in this area over the next several quarters. Overall, our SW&B to net revenue ratio improved over 8% compared to the third-quarter from 64.7% to 59.8%. We experienced a 11% reduction in our…

[Operator Instructions] Our first question or comment comes from the line of Justin Bowers from Deutsche Bank. Mr. Bowers, your line is open.

Hi good morning everyone. So just starting with LTAC, it sounds like there's a lot of development activity going into 2023 and into 2024. Can you just give us a sense of how much - how many additional beds are planned for 2023? And then I just wanted to clarify what the SW&B was in 4Q and then the exit rate in December, I think you said 55.8%. Is that sort of where you're trending now in the segment for -- during the first couple of months?

Thanks, Justin, it's Bob. Let me address the first part of your question, which is development on the critical illness. Yes, I think that over the last year, we have seen an increase in development opportunities and deals that we're signing. Interestingly, many of those, you'll notice are also joint ventures, which is a bit of a departure of what we've seen in the past. To your specific question, I don't have exactly the number of beds that will come on. But around probably, you've got to think about 110 to 120 new beds that will be coming on with current signed deals. And our expectation, just based on what we're seeing out there is that we may see more development opportunities on the critical illness side. In the norm, they will be a hospital within a hospital, but there may be an occasional freestanding. But if we do a freestanding, it will typically be in conjunction with a, rehabilitation hospital distinct part units. So if you look at the model for that, not necessarily of this size, but if you look at our project in Chicago with Rush, that is what we're characterizing as a post-acute care building that has both rehab and critical illness beds in the building. And we have a few more of those that are in progress in the development pipeline throughout the country. So I do think that, that's a testimony to an appreciation of the role that LTAC or, in our case, critical illness plays in the continuum of care in a post-pandemic world where you have a greater recognition of the importance to decompress the intensive care units of large acute care hospitals, and they are more interested in having those in their market and in their continuum of care on a go-forward basis. So on the salary, wage, I'll turn it over to Marty and let him address the second part of your question.

Yes, Justin, on the SW&B as a percentage of revenue, we are experiencing what we saw in January and for the most part of February, we are in that 55% to 57% range.

Got it. And then maybe just a follow-up on outpatient rehab. It sounds like volumes and margins are improving year-over-year. And the question would be is - do we expect that trajectory to persist in 2023? And sort of what changes have you made in the segment there to ensure that, that happens?

Yes, on the outpatient side, what we've seen is we've had some difficulty actually throughout the entire year of '22 with a lot of COVID call-offs. And what we've seen is that's really trending downward now. So with that trending downward, we'll be able to see - we believe a lot more patients. I think the other thing is just the clinical efficiency, which we've really focused a lot on, which is when we talk about that, we're really talking about visits per therapist per day. We're seeing that increase.

Yes, I think it's proper your characterization of us feeling confident about the trajectory and what we see in the early part of the year gives us some good confidence that we have some good momentum on the outpatient side.

Appreciate it. I'll jump back in queue.

Thanks. Operator, do you want to let the next question through? Operator, are you there? For the participants on the call, we're showing - the call is still connected. So if you bear with us as we get the operator to let the next question in the queue through. For the participants on the call, it looks like we're having a problem with the operator, the manager of the call. So why don't we give it another minute or two, if we can get - admit people into the call to ask questions. Okay. For those on the call, while we're waiting to admit more questions, why don't -- Marty and I give some more commentary and maybe we anticipate some of the questions that we've got - we have gotten some questions in the past about the seasonality of the Concentra segment. And Marty, you want to address that?

Sure. One of the things we've noted with some of the analyst reports that they're talking about the drop-off from Q3 to Q4. If you take a look at Concentra pre - the pandemic, historically, what we've seen is about a 390 basis point drop. So - and when I say that, I take a look at years 2016 to 2019. And that's really just a reflection of seasonality. So we thought that was important.

The other question that we typically get - and just as an update, we do have some people on the call line that are working on restoring the ability to let questions in. But while we continue - we think - Marty, I do get questions from time-to-time about allocation of capital. Certainly, as we progress through 2023 with the increased EBITDA generation over last year, we do expect that leverage will continue to come down. But we do have a target over the next year or two to bring leverage down considerably from where we are right now. At the same time, we do have - we are allocating capital to development activities. And I think what you can expect to see through 2023 is not any big transactions, anything that could in any way be perceived as transformational, but we're seeing great opportunities for one-off transactions in each of our divisions. You noticed I commented on the individual transactions and deals that Concentra is doing with fold-ins. We certainly would like to sign a couple of the big rehab joint ventures with large systems. And on the LTAC side, we'll continue to see opportunities to do a hospital within a hospital and outpatient can continue to grow through de novo, signed leases as well as small acquisitions. So I think we're ready to let in the next question. So if someone's in the queue. I think we've restored the question line.

Thank you. Our next question comes from Ben Hendrix from RBC Capital Markets. Your line is open.

Hey thanks guys. Given the staffing progress and critical illness and the roll-off of training hours, how do we think about the time line from here to pre-pandemic margins? And what are those key levers that you can pull to affect that timing then related? What do we need to see before you get enough comfort to provide full year guidance? Thanks.

Yes, Ben, this is Marty. We anticipate for '23 that we will probably remain in that higher range, 55% to 57% in '23. Remember, it's not just the expenses that we see, but it's also the increases that we're getting on our - contracts. So we would anticipate that, that would go into '24 and possibly even '25 to see us get back to historical range, which is in that 52%. With regards to comfort, I think that we're continuing to gain comfort with where we are on the labor side. And I think we're going to evaluate this first quarter, see where we are and then make a determination as to whether we provide guidance on EBITDA and EPS moving forward. And whether its next quarter or the quarter after that, we'll have to wait and see.

And as we feel comfortable, even if it is before the next quarter's earnings release, I mean, we would certainly consider putting guidance out after the first quarter, but even before we filed the Q. So we - that's a topic of discussion internally at the company because we do appreciate the analyst community would like to see us give some more guidance on EBITDA and EPS. And when we feel comfortable, we just don't want to go out prematurely and then have to constantly revise it and update it. So - but I do think that you will see it at some point during the first half of this year.

Thank you. Our next question will come from William Sutherland from Benchmark Company. Your line is open.

Hey good morning guys. I was curious, Bob, as you look across the four groups, are you - is hiring been an issue as far as being able to kind of run those groups at the productivity levels that you'd get there built to do?

Well, it's a great question. And I think the answer is that it varies in each of the divisions. I mean it's kind of very evident how difficult it has been in the critical illness recovery hospital division because we're we were competing with short-term acute care hospitals for highly trained near ICU-level nursing staff. And I think it's well known that, that has just been a really big challenge in the past year. Now on the rehab side, you'd think, well, specialty hospitals, especially hospital, but the rehab employment tends to be a bit more sticky because of the nature of the work and the longer tenured employees that are there being a little bit more therapy-driven as well as some nursing. So the rehab hospital division hasn't been near the challenge, anywhere near the challenge that the critical illness has been. Outpatient has been a little bit of a surprise. I mean, and for a different reason, it is impacted by the macro labor environment, particularly on our front desk people, but it's also because of the smaller nature of outpatient clinics that a call off for illness or suspected illness or pre-COVID test really disrupts the efficiency of that business model. So that -- and I think you've seen that to a lesser extent in the outpatient, but it still exists. And as we commented earlier, we seem to be coming out of that here now. And then that leaves Concentra. Concentra because of the nature of that business, they have had their staffing challenges. Of course, they have as every employer has. But the nature of the Concentra Medical Center is that it puts stress on the existing staff when they're short staffed, but the volume does not fall off because it's a walk-in business. So what we see there is potentially increased wait times and those kind of difficulties, but you haven't seen it show up in the revenue or the margin line. But each of these businesses, have a little bit of a different dynamic. -- begin of Concentra, the we've talked about this in the past, they will have a bigger challenge in a really down economic cycle, that will be a bit of a headwind, which we certainly have not seen to date, mainly because that whatever downturn of the economy we've had, it's really not hit labor. And as employers are still hiring, consents going to continue to have a robust business so, I hope that answers your question.

That's helpful color. What - how should we think about the high and low end of the revenue range kind of, I mean, I know a lot of things get thrown in as you put together your model, but what would be some of the key factors for being at one end or the other?

Yes. It's really senses, Bill. When we take a look at sense especially the hospital side, certainly and the volume on the outpatient rehab side Concentra is probably pretty predictable. But I mean, that's the reason we put a range in there is because of uncertainty there.

And I think - I appreciate your hesitancy to guide on EBITDA before you have a real handle. But it feels like with all the information you provided that there's a range there that I think you guys have a sense of. And I'm just kind of curious what else you kind of need to see at this point.

Yes, Bill, we just need to see consistency. If you take a look at what transpired at the end of '21 and all through '22, there was a lot of fluctuations. And we just need to see a period of time where we can kind of predict what's going to happen in the next couple of quarters.

Yes, Bill, as I mentioned earlier, this has been the subject of a fair amount of discussion internally with the management and with the Audit Committee of our Board. And of course, where we stand here, we could give guidance with a fairly wide range, and we feel pretty confident on that. I mean I think it's just more of a philosophical thing internally that if we're going to come out with guidance, we'll try to make it in a little tighter range as we've done in the past. And we just don't want to come out with guidance and then have to revise it. So I think that, that's just a style thing for us relative to other companies that may be providing guidance now rather than a view that we have that much uncertainty about the business.

Right so it doesn't really have any - it's not an issue, it sounds like in terms of your overall view of the business. So that's appreciated. All right that's it for me.

No, it does not. And that's well said and that's clear. I mean this is not a signal that we think that the business is going to be. That's volatile across 2023. It's really just more of a signal that since we suspended guidance that we just want to be pretty comfortable and have a pretty tight range before we issue again.

Right, thank you guys.

Thank you. And our next question will come from Miles Highsmith from Deutsche Bank. Your line is open.

Hey good morning guys. Thanks for taking my questions. I had just a few clarifications and then a couple of questions after that. I think you gave it, so I apologize if I'm re-asking but I was hoping 4 numbers for the full quarter of Q4, if you'd be able to give me the agency rates on a dollar basis, the full quarter utilization rates percentage-wise? And then the Q4 on a dollar basis, the total agency cost in the Q4 investment nurse costs on a dollar basis? And then I have a couple of follow-ups?

Sure, Miles, let's see.

You got a lot there. Come on Miles.

Okay. Okay, Miles. Get your pen and paper ready.

I'm ready.

Q4 RN expenses, was $27.1 million. The Q4 RN hourly agency staffing rate, $92 and the utilization rate in Q4 was 18.1%.

Okay great. And did you quantify the Q4 dollars related to investments in nursing?

No, we did not.

Okay, thanks. And then just a couple of others I guess, is there any way you'd be able to just characterize the proportion of your more recent hires that are in that kind of seven to eight-week period where they're training and you have some duplication still maybe Q4 versus Q3 or however you might be willing to characterize it. And then just lastly on the potential for EBITDA guidance I definitely heard what you said in the last call or response. I'm just wondering, seeing that stability. Is that largely LTAC still or critical illness still? Or is it now a function of needing to see kind of where productivity is also on the outpatient rehab side or other variables?

While Marty is looking for that earlier stuff, let me - I'll comment on the second part of your question. I would say, yes, it's probably critical illness and outpatient. Those are the areas that we would see the greatest improvement. I mean, if you look at the business and even over the last couple of quarters, the rehab hospital business and the Concentra has been pretty stable. And critical illness obviously, is the one that would have the most improvement over 22 because of the labor environment, which is, as you see, and as Marty pointed out, we're giving you monthly splits on how that has increased. So you can see that the improvement in the staffing and critical illness is, I think, fairly dramatic. And so if that continues, that's obviously going to be the biggest mover - outpatient to a lesser extent, but the same thing, you're going to see more improvement in the outpatient and in critical illness than you will see in inpatient rehab and Concentra, which has been pretty stable.

Miles on a sequential Q3 - Q4 over Q3, we saw a 21% decline in the number of orientation hours. So obviously, it's coming down. And then within the quarter, from October to December, we saw a 39% decline. So a lot of that is running off. Now there's still going to be orientation out because we're going to continue to have hiring, but we're getting back much more towards normal processes as opposed to what we saw over the past five quarters.

Got it okay, that's super helpful. Thank you so much guys. Appreciate the detail.

Sure.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to management for any closing remarks.

Okay. Thank you, everybody, for joining us and we apologize for the white space there in the kind of the middle of the Q&A, and thanks for your questions, and look forward to updating you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.