Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Third Quarter 2023 Results and the Company's Business Outlook. Speaking today are the Company's Executive Chairman and its Co-Founder, Robert Ortenzio; and the Company's Senior Executive Vice President of Strategic Finance and Operations, 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 call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the third quarter of 2023. We have a lot to be positive about as Q3 was another strong quarter. We continue to sustain our improvement in labor costs within the Critical Illness division. Q3 was the sixth sequential quarter that we have seen a reduction in agency expenses. RN agency usage dropped to our target percentage of 15%, which is lower than our pre-pandemic levels. We also announced promotions within our Executive Management team that I believe will position the organization for continued long-term success. All 4 of our operating divisions exceeded prior year revenue and EBITDA. Overall, revenue grew 6% and adjusted EBITDA grew by 27% compared to prior year Q3. We’ve received $8.1 million of CARES Act grant income in the prior year, which was a headwind heading into Q3 when comparing current to prior year performance. For the quarter, total company adjusted EBITDA was $193.8 million compared to $153.1 million in the prior year. Our consolidated adjusted EBITDA margin was 11.6% for Q3 compared to 9.8% in the prior year. Our critical illness recovery hospital division experienced the most significant increase in performance compared to prior year, with a 7% increase in net revenue, a 320% increase in adjusted EBITDA along with a 10% reduction in their salary, wages and benefit to revenue ratio. Consistent with prior quarters, Marty Jackson will provide additional detail regarding this division's continued progress with labor within his commentary. Critical illness incurred $5 million of start-up losses related to new hospitals this quarter compared to $707,000 in the same quarter prior year. As previously mentioned, we have an agreement to open a critical illness recovery hospital with a Distinct Park Rehabilitation Unit in Chicago with our joint venture partner,…

Great. Thank you, Bob, and good morning, everyone. Consistent with the past year, I would like to provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. This past quarter, we had a sequential reduction from Q2 to Q3 in our RN agency costs and utilization, but had a slight increase in the RN agency rate. The reductions we realized were 17% in RN agency costs, having $22.1 million versus $18.4 million this quarter and a drop in RN utilization from 18% to 15%. The agency rate increased by only 1% from $77 to $78, and we experienced very little change in the rate throughout Q3. RN agency utilization during the quarter inched down from 15.6% in July, 15.5% in August and 15.1% in September and the related costs were $6.2 million in July, $6.3 million in August and $5.8 million in September. Nursing sign-on and incentive bonus dollars remained consistent with Q2 at $7.8 million, while we had a 19% increase in orientation hours, 143,000 hours compared to 120,000 hours with the fluctuation during the quarter from 44,000 hours in July, 51,000 in August and 48,000 in September. Moving on to our financials. In Q3, equity and earnings of unconsolidated subsidiaries were $11.6 million. This compares to $8.1 million in the same quarter last year. This increase in earnings was the result of increased earnings in a few of our unconsolidated joint ventures. Net income attributable to non-controlling interest was $12.6 million compared to $11 million in the same quarter prior year. And again, this increase was primarily due to the improved performance of our consolidated joint ventures. Interest expense was $50.3 million in the second quarter. This compares to $45.2 million in the same quarter prior year. The…

[Operator Instructions] Our first question comes from Justin Bowers with DB. Your line is open.

Hi, good morning, everyone. Bob, I may have missed this in the prepared remarks. But are there any additional LTAC? Is there additional LTAC capacity coming online the rest of this year or into 2024 and -- or any deals that you announced in the quarter?

Well, we have Rush next year, which is the combined rehab and critical illness post-acute building that will be next year. I don't know that we have any other critical illness openings next year that we've announced. I mean it's possible. Orlando will be 2025. But we typically don't announce those deals until they're signed. I mean it is possible that we could do a critical illness if it's a hospital within a hospital that we would sign between now and the end of the year and could be potentially in service next year, but we haven't announced any.

Got it. And then with respect to the guide in the rest of the year, what are some of the swing factors in the guide, the big swing factors as you look into 4Q?

Yes, Justin, as you know, we provide guidance on an annual basis. And from that perspective, we're going to keep the guidance that we have provided. I know you guys do it on a quarterly basis. We anticipated that we would have the quarter that we did in Q3 and for the balance of the year. We think the guidance that's out there on an annual basis is a good guide for the Street.

Okay. Got it. And then in terms of SWB and sort of the targets that you've laid out over the next several years returning to normalization with critical illness. Like how are you thinking about that? Any sort of updated thinking around what that trajectory may look like over the next couple of years?

Yes, Justin. I mean our expectation is that by the end of 2025, when all of the contracts, all of the payer contracts are renegotiated, we anticipate we should return to somewhere in the range of 52% SW&B as the as a percentage of revenue.

Okay. And would that sort of look like a linear sort of progression from now until then? Or is that a reasonable assumption?

Yes. I mean I can't tell you that I specifically know when the contracts will be renegotiated I'm not so sure that the -- if we've got two-thirds left in the last 2 years, whether those are linear or not. But I think when you get to the end of '25, you can assume that our expectation is will be in the 52% range.

Appreciated. I’ll jump back in queue.

Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.

This is Michael Murray on for Ben. Just focusing on LTAC, the sequential decline in EBITDA is steeper than what we were modeling, agency labor continued to improve. The occupancy decline 400 bps sequentially, which seems larger than the typical sequential decline that you would see even pre-pandemic. Can you shed some light on some of the inner workings there, what drove the lower occupancy leverage?

Yes. I think one of the things you really have to do is you've got to take a look and add back that $5 million of startup losses. So if you take a look at those margins, if you added that back, you had basically a 90 basis point improvement in the margins, right.

Are you talking sequentially?

Well, you realize that when you take a look at historically for us, I mean, if you compare Q3 of '22, sequentially it's really irrelevant because of the seasonality in the business. So what you really have to do is take a look at it on a same quarter year-over-year basis. I mean we normally have a dip in occupancy rate in Q3.

Yes, the 400 bps sequential decline, even that seems at a higher magnitude than even pre-pandemic levels. So what we're driving -- what drove the lower occupancy levels?

Yes. I think that we'll have to -- I think what we're going to have to do is talk off-line on this, and we'll go through the details. I'm not sure that we fully understand that there's a difference you're saying. Next question.

Our next question comes from William Sutherland with The Benchmark Company. Your line is open

Well, guys, I was wondering the -- you've had some good progress in outpatient with -- despite the rate headwind. What are -- do you have some like goalposts out there that you think you can move the productivity and margins to for outpatients? I'm just trying to get a sense of kind of where that business can run now. And maybe you have some color or some insight on where you think rates are heading in the following year.

So Bill, I'm assuming you've got 2 questions there. One is improving of clinical productivity, and we do see some continued improvement in that area. And then with regards to rates, I think our expectation is we're going to see an increase of probably over the next year somewhere in that 2% range.

Okay. So that will be a nice switch and then you'll be doing your commercial -- I mean your commercial is going to be, I assume, the same positive trend, that you've been able to negotiate?

Yes, commercial should be higher than that 2% that I mentioned, Bill, but then we have the offset with regards to Medicare.

Right. So 2% is the blended, Marty is what you're saying?

That's correct.

Okay. Are you all in the course of just improving the whole network of clinics at pruning as you add like when you talk about the ads each quarter, those -- that's not net adds, is it?

Yes, that would be net adds.

Okay. Are you -- okay. That's good enough there. And then on Concentra, I know this visit sort of been wrote just up a hair year-over-year and quarter-on-quarter. I just wanted to understand kind of what's going on behind that number a little bit better?

Yes. What we saw, though, is we saw a change in the mix. So we saw employer service volume down a bit, but workers' comp up. So that had a nice impact on the rate.

Is that just something that's kind of occurring this year? Or is there a longer tail to that, do you think?

I think that we saw a significant increase in prior period due to additional employment. And so as that becomes more normalized? And I think that's what you saw in this particular quarter -- this particular year-end actually.

Okay. Well, let’s have a very nice fourth quarter. Thanks guys. Appreciate that.

Thank you. That concludes the question-and-answer session. I'd like to turn the call back over to Robert Ortenzio for closing remarks.

Thank you, operator. No closing remarks. Thanks for your participation, and we look-forward to updating you next quarter.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.