Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter 2023 Results and the Company's Business Outlook. Speaking today are the company's Executive Chairman and 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.

Thanks, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3, 2024, we announced that our Board of Directors has approved a plan to pursue the separation of Select Medical's wholly-owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be affected in a tax-free manner to Select Medical and its stockholders and to be completed in 2024. We expect in the very near future to receive a private letter ruling from the U.S. Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the separation is still subject to customary conditions, including favorable market conditions, completion of necessary financing transactions and final approval by the Select Medical Board of Directors. I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year. We experienced double-digit adjusted EBITDA growth over prior year in every quarter of this year. In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions again exceeding prior year revenue and EBITDA. For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year. Our consolidated adjusted EBITDA margin was 10.9% for Q4, compared to 9.4% in the prior year. Our critical illness recovery hospital division continued…

Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 prior year, down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed. Our year-to-date basis with regards to SW&B as a percentage of revenue decreased from 63.4% in '22 down to 57.2% in '23. Thus far in 2024, our SW&B as a percentage to revenue has continued to trend favorably and we expect to finish at or below 55% in Q1. This past quarter we had a sequential reduction from Q3 to Q4 in our RN agency costs with a decrease in both utilization and agency rates. The reductions realized were 17% in RN agency costs, a drop in RN utilization from 15% to 14%, and a decrease in agency rate from $78 to $70. RN agency utilization decreased throughout the quarter from 14.4% in October, 13.8% in November and 13% in December. Nursing sign-on and incentive bonuses dollars also decreased by 5% and we had a 26% decrease in orientation hours. Moving on to our financials. In Q4, equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter prior year. Net income attributable to non-controlling interest was $15.5 million compared to $10.2 million in the same quarter prior year. Interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter prior year. The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of…

Thank you. [Operator Instructions] Our first question comes from the line of Justin Bowers from Deutsche Bank.

Hi. Good morning, everyone. Could you talk about some of the moving parts in the guide and then any additional color you can give us by segment would be appreciated as well. How you're thinking about some of the segments playing out for the year?

Yeah, Justin. This is Marty. The outlook that we provided is really a function of -- taking a look at the four business segments, taking a look at some of the headwinds as well as the tailwinds. Obviously, the inpatient rehab is doing quite well. Concentra is doing quite well. We did have some headwinds, though, in the -- both our critical illness recovery hospitals with regards to the high-cost outlier, and we had cuts on the Medicare portion of our outpatient rehab. So, -- and all of that's reflected in the outlook. So I think you can expect that the critical illness recovery hospitals and outpatient rehab was a little bit muted because of that. But both inpatient rehab and Concentra continues to do quite well both in terms of revenue growth and EBITDA growth.

Okay. Understood. And I just wanted to ask one about a couple about LTAC and then one on outpatient rehab. So I think you said that LTAC is tracking towards 55% SWB in first quarter. I just want to clarify that I heard that correctly. And then is that sort of the implication there, that volumes are up sequentially? And then just one more. Do you have another LTAC coming online in 2024 this year? So, I guess, a bit of a three-parter.

Sure. The first part of the question was the 55%. And yes, you did hear that correctly. We are trending towards 55%. We have seen volumes up in the first quarter, and we do have a hospital coming on and critical on this recovery hospital in Q2.

Okay. Got it. And then just on outpatient rehab. I know that there's -- obviously there's been some headwinds with Medicare, too, but you guys have been chopping some wood operationally as well over the last, I think, four quarters to six quarters. Is that segment likely, like, are you expecting margins to improve in that segment this year and sort of any thoughts on the trajectory to get back to that low to mid-teens margin that you guys target?

Yes. As I mentioned before, we did have the cuts from Medicare, and that muted the growth there. We do expect -- we're seeing clinical efficiencies improve and we expect within -- probably within the next two years to three years that we will be in that low to mid-range teens as far as margins are concerned.

Okay. Thanks. I'll jump back in queue.

Thanks, Justin.

Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck from Bank of America.

Great. Thanks. Maybe just to go back to the guidance, the range, I guess, from a percentage perspective, looks a little wide. What are the things that you think are kind of the things that could push you to the high end or the low end of the guidance range?

I think the primary item for us, Kevin, is the potential impact on the high-cost outliers on the critical illness recovery hospitals. And that's why we were pretty wide on the range.

Okay. And then, I guess the improvement that you made in the Q4 on the labor side of things happened with volume being a little bit weak. And I just want to see, it seems it should be easier to staff when volumes are a little bit light. It sounds like you're expecting volumes to kind of come back. Is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say, as volumes normalize, you still be able to make progress on the temp staffing side of things?

Yeah. For us, what we've seen is we are back to pre-pandemic with regards to our staffing. If you recall, we talked about, on average, pre-pandemic what our different buckets of nurses are in. So we have our full-time nurses. That's pretty much back to where we've been pre-pandemic. We think we're seeing PRN actually increase, which is a good thing. And historically we've been in that 15% to 18% as far as agency nursing, and we're down to 13%, 14%.

I think what the..

I think all that [Multiple Speakers]

But then, say, if you're -- if you kind of back from a staffing level, what's the lever to get further down as a percentage of SW&B, is it just occupancy and leverage from that, or is it rates?

Yeah. It really is. It's volume. Volume will do wonders to get that percentage down. Yeah. I mean, volume is going to increase your top line.

Yeah. Okay. And then maybe the Concentra spin-off sounds really interesting. I was wondering if you could just maybe provide us or remind us kind of how you're thinking about the growth of Concentra and what that company might look like as a standalone company. You've done a really good job bringing the margins up in that business. Is there still room on the margin side, or is it more about organic growth, de novos and tucking acquisitions? How should we think about the growth of that business as a separate?

Well, it's Bob. I think Concentra is just a fabulous company because of their dominance in that occupational medicine space and their various levers they have to grow. I mean, they can grow by de novo, they can grow by acquisitions either in new markets or existing markets. So they have a lot of levers that they can press, and I think that they enjoy solid margins. Now, I'm not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they do have a lot of opportunities for growth. So we're pretty excited to have Concentra, as you know, all these years that we've had it, and I'm pretty enthusiastic about their prospects as a standalone company.

All right. Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Hey. Thank you very much. You guys are continuing to deliver a really impressive margin in the inpatient rehab business despite what looks like a fairly aggressive development strategy. I just wondered if you could kind of go in a little bit more into your development pipeline, how you're thinking about that, and if there's any risk that we could see some drag on the margin over the next several quarters given the expansion. Thanks.

Yeah. As you pointed out, we are a pretty -- we feel pretty good about the development pipeline for inpatient rehab given our strategy. Our strategy as our new development is in partnership with large acute care systems. So in some regards, we don't have complete control over the cadence of when those hospitals come on. Now, as you know that we -- our policy is not to announce our rehab projects until they're signed and commenced. But we did go a little bit further on disclosure today when I talked about the hospitals in 2024 that we had hoped to have under construction or complete. So that's 533 rehab beds and a much smaller number of critical illness beds in 2024. Any drag on earnings as a result of that development, you can assume, is factored into the guidance. So, I think that we're of a size and the platform there is that we feel we can bring these on and not really compromise our growth rate in that division.

Thanks. And just if I may ask a different question here, we're getting some questions about the recently announced subpoena in California for Concentra. And I know these types of things pop up from time to time. But is there anything unique or notable about this subpoena, and is there any potential for it to delay your timeline on the spin? Thanks.

No. We do not believe that it will have any delay on the separation of Concentra. These subpoenas you can get for all kinds of reasons. This one comes from the California State Department of Insurance. And you can have -- I think investors in healthcare are used to the various qui tams that are often times announced because of whistleblower suits. And that can happen in state agencies as well as federal. We never like to get them, and I'm a little old to say that these are routine, but they have become routine over the years. And so we disclosed it as we feel is our obligation. But beyond that, I really can't predict the outcome. And -- but I can tell you that we will vigorously defend our business practices in California with Concentra.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Bill Sutherland from the Benchmark Company.

Thank you. Good morning, guys. Hey, Bob, you mentioned that volumes were starting to improve quarter to date for critical illness. Can you just give us a little more color on that and maybe the -- how you think about the sustainability?

Well, I can't give you much more color on that. I mean, we are trying to give a little bit more disclosure, and for us to give how the first quarter is shaping up is, as you know, probably a little unusual for us, but we were pleased that volumes are up. Now, it is -- seasonally, this is the time, and those volumes can be affected by lots of things. But it was pretty broad-based and across the country for our critical illness hospital. So I thought that was noteworthy. I mean, I -- it's hard to say without more current data whether it's because you have more respiratory cases or whether there's COVID or other acute illnesses that are driving that volume. Normally, our critical illness volumes go up when the ICUs at acute care hospitals volumes go up. So when we look at our volumes, I think you can assume that in large measure it's because volumes at our referral hospitals in their ICUs are up as well. So sustainable. I'd like to think so. I mean, I don't think there's anything to suggest that there has been an outbreak of health in the United States. I think we'll continue to see patients that, particularly with an aging population, that have the kind of respiratory conditions that land them in ICUs and make them appropriate for our level of care. So I'd like to think so. But as you've seen over the years, that census can go up and down. And Q1 is seasonally one of the better quarters because of the winter and the colder months.

Yeah. It was interesting on a year-over-year basis. It's because you were kind of flattish last year. At Concentra, curious if you could give us a little more color on the blend of the business and why the employer visit side is not as strong and what might be the outlook for that. I know it helps the mix, but just curious about that.

Yeah, Bill. This is Marty. Yeah. The employer side that there's -- the different things that they have there or the different activities they perform is pre-employment physicals, drug testing, to a certain extent, it has to do with the drug testing is down a little bit. And I think that may have to do with some of the -- we've increased some of our pricing. And there is some -- there is a lot of price elasticity associated with that product.

But that's a -- but it has a pretty standard, I mean, steady demand side, the drug testing?

Yeah. There is [Multiple Speakers] As you probably know, there's Department of Transportation requires drug testing for all truck drivers. So that's certainly been good. And there is some -- as far as the employment, employment's been pretty steady.

Okay. Thinking about outpatient rehab for a second and the revenue per visit and I know the pressure there from Medicare. How do you think things could go this year for that number? [Multiple Speakers]

I think we're going to see -- yeah -- I think we're going to see net revenue per visit increase. Our expectation is to see that increase at least a couple of dollars, whether it's $2 or $3.

Okay.

By the end of the year.

Right. And then kind of -- just kind of a more high-level question, Bob. I'm looking at this big expansion plan for beds for rehab hospital relative to critical illness. And I'm wondering if this is just timing or is this kind of a Board and Management view of capital allocation relative to -- given the margin profile of rehab hospital and I think the market growth opportunities relative to critical illness?

Yeah. I mean, it's a good question about how we think about allocating capital. It's truly all an allocation of capital assessment. The rehab, the critical illness has historically been our largest division. We have a footprint of over 107 hospitals. I see that there will always be, I think, opportunities there. Although we have fought some reimbursement headwinds in the critical illness, and this high cost outlier threshold issue that we've talked about is certainly a headwind. That's not to say that rehab hospitals will not have headwinds in the future. But I think the way we look at it is as we work with the kind of large partners of the type that we have signed, when you have those opportunities to do those deals, I think those are the ones that become a priority for our capital. And typically they involve using capital to build new hospitals, which are not inexpensive. The critical illness opportunities do come about, and we tend to treat -- choose the ones that are absolutely the most compelling. So we will continue to do that and add new hospitals to critical illness. But when we have an opportunity to work with a great partner as the profile of the ones that we have for inpatient rehab, we certainly want to move on those. And our development pipeline that we've been working for years and years and years is just very robust right now. And there are some great opportunities to sign some rehab deals with just some great partners. And what we've seen over the history of the company is these partnership deals and returns and growth within the partnerships is absolutely compelling. And so -- well -- and I think because of the way we structured those with the partners, they tend to have a larger moat around them and give you the comfort that even in the face of perhaps some reimbursement headwinds, if and when they come, you'll be able to navigate them better with a very large system. And I think the other thing that's not particularly well recognized is not only the signing of the new partnerships, but the growth within the partnerships. And we mentioned today that we are getting underway with the construction of our fourth inpatient rehab facility in partnership with the Cleveland Clinic in their market. And so these opportunities just are really compelling. And sometimes building replacement facilities or taking units out of hospitals in partnership and building those are just really great deals. So I think you'll continue to see growth in both, but perhaps a bit more of an acceleration of the inpatient rehab and with the planned separation of Concentra, as we look at the growth rate for the company, we'll see it in outpatient rehab, inpatient and in the critical illness. But the rehab is a good opportunity.

Got it. Thanks, Bob.

Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice from UBS.

Hi, everybody. A couple of questions maybe. I just want to make sure I understand on the -- talked a couple of times in response to questions about the outlier threshold increasing on the critical access facilities or critical illness facilities. What -- that went into effect, I think, October 1. Do you get a pretty good read right away as to how that impact is? I guess I'm trying to figure out why it still is a big swing factor in the guidance if we've got a quarter's experience already.

A.J., it really takes some time to evaluate something that significant with regards to the high-cost outlier. I mean, we went from 38 -- a little bit north of $38,000 up to $59,000. So, it's -- and remember, the length of stay of our patients is not five days to six days, it's over 30 days.

I think the other thing, A.J., is it's not hard for us with our kind of robust systems and data collection to understand the impact. We understood the impact way in advance of it going into effect. It's a question of how your mitigation strategies are going to work. And so it's not so much understanding the impact, but over the course of this year, how will -- how successful will the operators be in the mitigation and that is -- that tends to play out and is not as easy as you would think, because it's -- you want to keep your referral sources happy. But at the same time, you have to appreciate that the more high-cost outliers that you hit, the more of the losses you're going to sustain. So I think that is a reason why we've left ourselves some room on the guidance.

Okay. Can you probably have given this before, can you just remind me what percentage of your admissions, or your volume, however you want to describe it, end up falling into that status typically? I know it'll change with the increased threshold, but is there -- can we give an order of magnitude of how many -- what percentage of your patients are impacted in that business?

Yeah, A.J. It varies pretty significantly hospital by hospital and then on average also. So we really have not provided that because of that variation.

I can tell you that as we look over the entire industry, Select Medical probably has more higher cost outliers than the average of the rest of the industry because we take higher acuity patients. You'll recall that our strategy long held was not to take site-neutral patients and to only take the highest-acuity patients. We believe that that was the intent of the 2014 criteria. We built our clinical programs around being able to take care of those very complex patients. And so -- and this has been part of our efforts with CMS, is that the high-cost outlier increase of the threshold actually hurts those providers that are actually taking care of the very patients that the policy wants the LTACs to take care of. So, ours tend to be higher and so we're affected more.

Okay. That makes sense. And, I think in the fourth quarter, you called out that you had about $3 million of startup costs for development, and that's similar to what you had in the fourth quarter of '22. Have you talked about the total amount given the development projects that are underway, joint ventures, et cetera? How much '24 startup costs will be compared to what startup cost ended being up in '23? Is it a headwind, tailwind? How does it shake out?

I think for '24, our projected startup loss is $12.3 million, and that is reflected in the business outlook.

And then how does that -- do you have -- off the top of your head, do you have how that compares with 23? Is it a similar amount [Multiple Speakers]

Yeah. It's a similar amount in 2023.

Okay. All right. And then just last question. Marty called out that obviously some of these interest rate caps and swaps, et cetera, expire in September. What is your assumption when you think about your outlook as to what happens in the fourth quarter with respect to your borrowing cost or what mitigation strategies are you thinking about, or any comment on that?

Yeah, A.J. We anticipate that we'll see probably about a $20 million increase in interest expense for the fourth quarter. On an EPS basis that's about $0.12 a share.

Okay. And is there anything -- any way to mitigate that in any way or not particularly that sort of -- it is what rates are what rates are?

Yeah. At this point in time, the only way to mitigate it to have the indices come down, right?

Okay. I was thinking maybe pivot to paying down retiring debt or something like that. I know you said you didn't do any buybacks this quarter. I didn't know if anything like that was in the -- was under review or not.

We will take any -- we will be very opportunistic as we always are, A.J., and take advantage of any opportunity we can to get that interest expense down.

Yeah. We'll -- we're looking at it at this time. It's -- we've got a good six months plus to think about what opportunities they are. And that is, as Marty pointed out, that's $0.12 off the EPS that we reflected in the guidance, which, because of the cap going off. But we will find opportunities.

Okay. All right. Thanks a lot.

Thank you. At this time, I would now like to turn the conference back over to Mr. Ortenzio for closing remarks.

No closing remarks. Thank you, operator, and thanks, everybody, for joining us.

This concludes today's conference call. Thank you for participating. You may now disconnect.