Select Medical Holdings Corporation (SEM) Q1 2014 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for Select Medical Holdings Corporation’s Earnings Conference Call to discuss the First Quarter 2014 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 highlights 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’s plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management for 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. Please proceed.

Good morning, everyone and thank you for joining us for Select Medical’s first quarter earnings conference call for 2014. For our prepared remarks, I will provide some overall highlights for the company and our operating divisions and then ask our Chief Financial Officer, Marty Jackson to provide some additional financial details before we open the call up for questions. I wanted to first note that the results for the first quarter reflect Medicare payment changes that became effective on April 1, 2013 including a 2% reduction in Medicare payments that was implemented as part of the automatic reduction of federal spending mandated under the Budget Control Act of 2011, which we refer to often as sequestration reduction; and an increase from 25% to 50% in the Multiple Procedure Payment Reduction for clinical therapy services as mandated by the American Taxpayer Relief Act of 2012, which we refer to as the MPPR reduction. The reduction in both the net operating revenues and adjusted EBITDA from sequestration was approximately $7.6 million in the first quarter. Reduction in both net operating revenues and adjusted EBITDA from MPPR was approximately $2.1 million in the first quarter. This is the final quarter, in which these adjustments will have an impact on our year-over-year comparative results. Net revenue for the first quarter was $762.6 million compared to $750 million in the same quarter last year. During the year, we generated approximately 74% of our revenues from our specialty hospital segment, which includes both our long-term acute care and in-patient rehab hospitals and 26% from our outpatient rehabilitation segment, which includes both our outpatient clinics and contract services. Net revenue on our specialty hospitals for the first quarter increased 1.2% to $564.6 million compared to $557.8 million in the same quarter last year. Growth was primarily related to volume growth in contracted labor services we provide at certain of our non-consolidating joint ventures. We are able to more than offset the reduction in our Medicare revenue resulting from sequestration reduction, which was $7.2 million in our specialty hospitals during the first quarter. Excluding the effects of the sequestration reduction, net operating revenues in our specialty hospitals would have increased 2.5% in the first quarter compared to same quarter last year. Our overall patient days increased slightly in the first quarter to over 341,000 days compared to over 339,000 days in the same quarter last year. Our occupancy rate was 73% in both the first quarter this year and last year. Our net revenue per patient day declined to $1,539 per day in the first quarter compared to $1,543 per patient day in the same quarter last year. We generated approximately 83% of our specialty hospital revenue from our long-term acute care hospitals and 17% from our in-patient rehabilitation operations during the first quarter. Net revenue in our outpatient rehabilitation segment for the first quarter increased 3% to $197.9 million compared to $192.1 million in the same quarter last year. In the first quarter, the sequestration reduction in our outpatient rehab segment was 4,000 and the MPPR reduction is $2.1 million. Excluding the effects of sequestration MPPR reductions, net operating revenues in our outpatient segment would have increased 4.3% in the first quarter compared with the same quarter last year. In addition, we experienced extreme weather conditions in several of our outpatient rehab markets in January and February, which adversely affected the segment’s net operating revenues in the first quarter. We were able to more than offset the sequestration MPPR reductions and the adverse winter weather impact through incremental volume in our outpatient clinics and by the expansion of our contracted management services in both our clinics and contract therapy operations. Now, revenue in our outpatient clinic base business including our owned and managed clinics increased to $148.3 million compared to $145.2 million in the same quarter last year. For our owned clinics patient business increased 1% to almost 1.2 million visits compared to the same quarter last year. Our net revenue per visit was $104 in the first quarter compared to $105 per visit in the same quarter last year. Net revenue in our contracted services business in the first quarter increased to $49.6 million compared to $46.9 million in the same quarter last year. The increase resulted from new contracts and the expansion of services of existing contracts, which offset reductions from terminated contracts. Overall, adjusted EBITDA for the first quarter was $96.8 million compared to $101.1 million in the same quarter last year, with an overall adjusted EBITDA margin at 12.7% for the first quarter compared to 13.3% margin for the same quarter last year. Our decline in adjusted EBITDA and our adjusted EBITDA margin was primarily due to the sequestration reduction of $7.6 million and the MPPR reduction of $2.1 million in the first quarter. Excluding the effects of sequestration MPPR reductions adjusted EBITDA would have increased 6.5% to $106.6 million in the first quarter compared to the same quarter last year and adjusted EBITDA margins would have been 13.8% in the first quarter. Specialty hospital adjusted EBITDA for the first quarter was $92.2 million compared to $93.3 million in the same quarter last year. Adjusted EBITDA margins for the specialty hospital segment was 16.3% compared to 16.7% in the same quarter last year. The primary reason for the decline in adjusted EBITDA and margin in our specialty hospitals in the first quarter is again due to the sequestration reduction. Excluding the effects of sequestration, adjusted EBITDA in our specialty hospitals would have increased 6.5% to $99.4 million in the first quarter compared to the same quarter last year and adjusted EBITDA margins would have been 17.4% in the first quarter. Outpatient rehabilitation adjusted EBITDA for the first quarter was $21 million compared to $22.8 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 10.6% in the first quarter compared to 11.9% in the same quarter last year. The primary reason for the decline in adjusted EBITDA and margins for outpatient rehab segment was due to MPPR and sequestration. Excluding the effects of sequestration MPPR adjusted EBITDA in the outpatient segment would have increased 3.1% to $23.5 million in the first quarter compared to the same quarter last year and adjusted EBITDA margins would have been 11.7% in the first quarter. In addition, we experienced extreme weather conditions in several of our outpatient rehab markets in January and February, which adversely affected the segment’s operating results in the first quarter. For the outpatient clinic portion of our business adjusted EBITDA was $17.1 million in the first quarter compared to $19.4 million in the same quarter last year. Adjusted EBITDA margins for the outpatient clinics was 11.6% for the first quarter compared to 13.3% in the same quarter last year. For our contract services adjusted EBITDA was $3.8 million in the first quarter compared to $3.5 million in the same quarter last year and margin was 7.7% in Q1 compared to 7.4% same quarter last year. Our reported earnings per fully diluted share were $0.24 in both the first quarter of this year and last year. Our earnings per share for the first quarter of this and last year included non-recurring loss on early retirement of debt. Excluding those losses and their related tax effect adjusted income per common share was $0.25 in both the first quarter this year and last year. I also want to provide a couple of updates since our fourth quarter earnings call in February. In conjunction with our earnings release yesterday, the company announced that our Board of Directors declared a quarterly cash dividend of $0.10 per share at its meeting on April 30th. The dividend is expected to be paid on about May 28th, the stockholders of record on May 16th. The Board of Directors also approved a $150 million increase to our common stock repurchase program to $500 million and extended the program to December 31, 2016. During the first quarter, the company repurchased 10 million shares of common stock under our authorized share repurchased program at a cost of $10.95 per share and now had capacity under the program to repurchased $216.9 million of additional stock. I also want to comment on the LTAC proposed regulation from CMS that was released on Wednesday evening. The proposed rule would increase overall LTAC PPS payments by 810th of a percent in fiscal year 2015 compared to fiscal year 2014. This update includes a 2.7% market basket adjustment, a 410th of a percentage point cut for productivity, a 210th percentage point additional cut mandated by the ACA and the final year of one-time budget neutrality adjustment of negative 1.3 percentage points which CMS state accounts for overpayment in fiscal year 2003, the first year of LTAC PPS. I want to emphasize the drag is proposed and our team is still working through the entire rate to understand all possible implications. I can’t say, however, several things after initial review of the proposed reg. First, CMS discusses in some detailed implementation of the new LTAC hospital criterion that was signed by the President on December 26, 2013. As you heard me say another occasion, the LTAC criteria a lot better defines the types of patients will belong in the LTAC hospitals. The new three day ICU stay requirement adopted by Congress will service necessary if also somewhat arbitrary proxy to measure patient acuity and to justify possible admission into an LTAC hospital. The new rule resolved a great deal of regulatory uncertainty hanging over the LTAC hospital community and we are pleased to support it. Second, I will also say that in the proposed Reg CMS seems to be implementing the new LTAC criteria in a fair manner consistent with congressional intent and recognizing that LTAC hospitals made comprises in concessions to address public policy concerns. For that, we are grateful to administrate (indiscernible) CMS in congress. Finally, I don’t want to switch here, there are number of issues in the proposed Regs that trigger questions from us. I’ll give two brief examples; first, CMS announced have changed the interrupted state policy. We have understood and support the traditional policy that CMS will not pay for two separate episodes of care is an LTAC patient at discharge from the LTAC and readmitted to the LTAC. But as Congress or CMS moves the goal post of 30 days, it does make us at some concern of how far CMS plans to go with this policy. At some point it could look unreasonable. We will continue to stand top of it, address the impact on us in another post acute care provider. Second, we will have questions and comments for CMS about how the site neutral payments will be calculated. CMS noted in the proposed Regs, some of them that did may use to calculate the patients that you not need the new LTAC criteria. Our overall goal is to always insure that the LTAC hospitals are not incented to avoid high acuity patients. For all, the LTACs were created by Congress and CMS look after the sickest patient and we don’t want there to be new untended incentives to avoid those types of patients. At this point, I’ll turn it over to Marty Jackson to cover some additional financial highlights for the quarter before we open it for questions.

Thanks Bob. As Bob mentioned, the impact on sequestration in MPPR totaled $9.7 million in a quarter. We’re not experienced these Medicare payment reductions and net revenue would have increased by 3% and adjusted EBITDA would have increased by 6.5% in the first quarter. We also had the adverse impact of how winter weather in many of our outpatient markets in the first quarter. In the first quarter our operating expenses which include our cost of services, general and administrative expense and bad debt expense increased 2.5% to $667.9 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the first quarter were 87.6%, this compares to 86.9% in the same quarter last year. Excluding the impact of sequestration and MPPR operating expense as a percentage of our net revenue would have declined by 40 basis points to 86.5%. Cost of services increased 2.2% to $638.8 million for the first quarter compared to the same quarter last year. As a percent of net revenue cost of services was 83.8% compared to 83.3% in the same quarter last year. The primary reason for the 50 basis point increase in our cost of services as a percent of net revenue were the sequestration and MPPR reductions. Cost of services as a percent of net revenue excluding the effects of these reductions would have been 60 basis points lower than the same quarter last year. G&A expense was $18.1 million in the first quarter, which as a percentage of net revenue was 2.4% compared to $17.4 million or 2.3% of revenue for the same quarter last year. Bad debt as a percentage of net revenue was 1.4% for the first quarter, this compares to 1.3% for the same quarter last year. Total adjusted EBITDA was $96.8 million and adjusted EBITDA margins were 12.7% for the first quarter. This compares to adjusted EBITDA of $101.1 million and adjusted EBITDA margins of 13.3% in the same quarter last year. Again excluding the effects of sequestration and MPPR reductions adjusted EBITDA would have been $106.6 million and adjusted EBITDA margins 13.8% in the first quarter. Depreciation and amortization expense was $16.2 million in the first quarter as compared to $15.8 million in the same quarter last year. We generated $900,000 in equity earnings of unconsolidated subsidiaries during the quarter compared to $1.1 million in the same quarter last year. Interest expense was $20.6 million in the first quarter. This was down from the $23.5 million in the same quarter last year. The reduction in interest expense is primarily related to lower interest rates on borrowing which have resulted from our refinancing activities. The company recorded income tax expense of $22.1 million in the first quarter. The effective tax rate for the quarter was 39.1% compared to an effective tax rate of 37.3% in the first quarter of last year. The first quarter of last year was favorably impacted by a reduction in the valuation reserves related to a state net operating loss carry forward and with the principal cost of the favorable effective rate in the first quarter last year. Net income attributable to Select Medical Holdings was $33 million in the first quarter and fully diluted earnings per share were $0.24 compared to $34.4 million of net income and fully diluted earnings per share of $0.24 in the same quarter last year. The Medicare payment reductions for sequestration and MPPR had a $0.04 negative impact on fully diluted earnings per share in the first quarter of 2014. During both the first quarter of 2014 and 2013 we incurred losses on early retirement of debt related to refinancing activity excluding these losses and the related tax effects adjusted net income per share was $0.25 for both the first quarter of this year and last year. We ended the quarter with $1.61 billion of debt outstanding and $4.7 million of cash on the balance sheet. During the first quarter we made a prepayment of $34 million on our existing term loans related to our excess cash flow for 2013. We also repriced the remaining term loans with more favorable terms reducing borrowings by 25 and 50 basis points on the two different term loan tranches. In addition, we issued $110 million add-on to our existing 6.38% senior notes. The add-on was priced at 101.5% for an effective yield of 603. Our debt balances at the end of the quarter included $775 million in term loans, which are net of the original issue discounts, $711.6 million in the 6 3/8 senior notes, which includes an issuance premium, $105 million in evolving loans, with the balance of $20.6 million consisting of miscellaneous debt. Operating activities used $16 million of cash flow in the first quarter. The use of operating cash flow primarily resulted from increases in our accounts receivable, which was offset in part by cash income and other changes in working capital. Day sales outstanding or DSO was 55 days at March 31, 2014 compared to 48 days at December 31, 2013. The change in DSO was primarily due to the timing of our periodic interim payments we received for Medicare for services provided at our specialty hospitals. Investing activities used $27.8 million of cash flow for the first quarter. The use of cash was primarily related to property improvement and equipment purchases of $27.3 million and investments in businesses and acquisition payments of $500,000. Financing activities used $44.2 million of cash in the first quarter. The primary use of cash resulted from the proceeds of $111.7 million related to the issuance of an additional $110 million of senior notes and the incremental net borrowings of $85 million on our revolving line of credit. This was offset in part by $109.5 million used to repurchase common stock, $34 million to make a mandatory excess cash flow prepayment required under our term loans, and $14.1 million in dividend payments in the quarter. And finally, I would like to review the financial guidance for calendar year 2014 that we provided in our earnings release. This includes net revenue in the range of $3.05 billion to $3.15 billion, adjusted EBITDA in the range of $365 million to $385 million. We have adjusted our prior business outlook for fully diluted income per common share and included adjusted income per common share for estimated financial impact from our refinancing and share repurchase activity in the first quarter. We now expect adjusted income per common share, which excludes the loss and retirement of debt and its related tax effects for the full year 2014 to be in the range of $0.89 to $0.97. We now expect the fully diluted income per commons share for the full year of 2014 to be in the range of $0.88 to $0.96. This concludes our prepared remarks. And at this time, we would like to turn it back over to the operator to open up the call for questions.

(Operator Instructions) And your first question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

You have had some success obviously with getting this patient criteria put in place it sounds like the proposed rule for fiscal ‘15 looks generally acceptable, I am curious if you all could maybe assess how you see the runway on visibility for the industry going ahead? And could you comment maybe on this recent development with this impact legislation floated in House, Ways and the Senate Finance on a post-acute bundled payment system or site-neutral payments? Thanks.

Sure. Frank, I am going to take the first one, your first question, which how we see the criteria impacting the broader LTAC community. I think it’s going to be choppy. It’s the – first of all, we really don’t have full implementation or even any implementation till 2016, so cost reports after late 2015 that is. So, I think it’s going to kind of – you are going to see kind of business as usual in the short-term, but when the criteria takes full effect, I mean, I do think as with a lot of these more significant regulatory or legislative changes, the impacts are going to be relatively uneven, you’re going to have – I think some providers are going to struggle and others will be able to adopt and do well. So, for us we’re really focused on our business and our hospitals fortunately, we generally have taking care of a patient population with much higher case mix index over the years. So, I think that positions us pretty well. I think our model which is the primary model, which is the hospital within a hospital more smaller hospitals also positions us fairly well so, I think we feel pretty good about the run rate that we have, the current profile of our hospitals and our prospects for adapting to the new criteria. I will add that it is our current strategy do not emphasized the site neutral payments, but to be more focused on the LTAC eligible patients. So, I’ll take a follow-up on that Frank if you like, but as you think about that, let me make a comment on the impact bill, for those of you who don’t follow as closely as many of us still the impact bill is the improving Medicare post acute care transformation bill and draft of that was released in March of this past year. That bill represents couple of years of work by both House Ways and Means and Senate Finance committees, it is relatively bipartisan. So, I think the main takeaway is that Congress is really looking at post acute care and I think that we were a little gratified with that they came generally to the same conclusion that we have been saying for some years and that is that there is bundling payments and preserving access to care is going to be a lot harder than some of the more abstract policy research suggested. So, I think the possible bundling approach acute services is still some years off and not take needs to be because of the complexity associated with bundling care in the post acute. Having said that, I don’t want to minimize the point that Congress and many policymakers would like to see greater integration across post acute care and we’re certainly find with that. So, I hope that answers the question, Frank, if it does not, I’ll take a follow-up.

No, that’s got it. Maybe just one more and I will hop off. Could you just talk a little bit more specifically about the strategies you are putting in place as we in early stages here in patient criteria? Thanks.

Well, some of the strategies are just as being more intensive in areas that we’ve been working on for some time obviously you want to do everything that you can to build an efficiencies in your hospitals. We want to expand and become better at those programs, those clinical programs that will attract those LTAC eligible patients. Beyond that, we’re really looking at a lot of dataset that allow us to identify where those LTAC eligible patients are, where they’re currently going or discharge destination and be able to identify those and really a market specific area at the same time looking at our competition in those markets, our market share and our position so that we can put ourselves in place to be able to replace any loss volume because of the criteria with LTAC compliant volume and I’ll let Marty comment a little bit on some of the information in data that we’re building and using around that strategy.

Before I comment on the data, Frank, I just like to point out that we’re very pleased with the operators and how they really focused on cost management. We think they’ve really done a very, very good job and one other reasons that we’ve been saying, we’ve been talking about sequestration and MPPR, I think it hides that. If you take a look at what we’ve done with our cost in our per patient day basis, the operators have done a traffic job. With regards to the market analysis that we’re doing, we really have done a deep dive into each of the different regions that we have and really identified specific patient populations that are compliant and what we’re doing is we’re retooling the marketing strategy that we have in each of those regions to really glad to those patients and that’s really two prong approach with people that are actually on the ground in those marketplace as long as well as with our Chief Medical Officer and his staff.

Great, thank you.

Your next question comes from the line of A.J. Rice with UBS. Please proceed.

Hi, everybody. Maybe just first kind of a question then I want to ask you about criteria as well, but the capital spending in the quarter of $27 million that is a higher run rate, I mean I think it is 70 or year last year. Is there anything worth highlighting there that or is that – is there a step-up this year that you’re expecting in capital spending?

A.J., you’re absolutely right, the first quarter was up to $27 million, a significant portion of that or good portion of that actually had to do with expenditures of that we made with regards to moratorium and different new projects that we had. There was a requirement that in order to be in a position to open-up new hospitals you had to have expanded 10% of cost of the projects and we accelerated some of those costs. I think historically what we’ve talked about at least the last earnings call we talked about – we thought we would be north of a 150 additional beds during this moratorium period. Today, we believe we’re going to be north of 300.

Okay.

Okay.

Alright. And then just going to the commentary on criteria, I mean, the strategy of really emphasizing the LTAC eligible mix of all the sense and deemphasizing some of the services lines that attract more of the site neutral. I guess I’m trying to think through so, we certainly have a two year still a fully or even start to facing really the new criteria. Do you start that process now and start shifting the patients over or shifting the emphasis for the patients who attract over or do you wait your closer to the timeframe and if you just start switching now is that a positive impact under the current roles financially or is that a drag financially, currently if you make that transition?

A.J., our plan at this moment is pretty clear. We will not be shifting over and then accelerating the model to comply with the new criteria in any significant way in advance of when it’s applied to our individual hospitals. So, well, we will be talking in future quarters about our preparation and what we’re doing and what we’re looking at which I think we’ll be targeted in significant efforts. I don’t see that’s changing our models very far in advance of the criteria. In some ways because our acuity is pretty high and because we have a pretty high percentage higher than the average percentage of compliant patients, now, we just don’t see any reason to start excluding patients that are currently eligible.

Okay.

A.J., now that doesn’t mean that we will be pursuing the compliant patients so for those hospitals that we have and have a capacity to the extent that we’re going through the retooling of the marketing process that we put in place. We anticipate that we’ll be in a position to take on some of those newly complaint patients. But as Bob said, the elimination of the non-compliant, we don’t see that happening until after new rates go in place.

Maybe just follow-up quickly on that so taking on more of the LTAC complaint wants today is not – does not have any negative financial implication to it right now under the old rules and then second when you do decide, they really push this I know you’re only talking about switching out probably 6 to 8 patients in every on average in the facilities in the hospitals and hospital model. How quick do you think you can execute that switch when you say, hey, this really make that happen?

Well, our plan is to be prepared and to do it as quickly as possible when the time is and that’s really what the preparation is now over the next year to two years. So that’s what we are planning for and that’s really in the execution.

And with regards to your – the first part of your question on the profitability of the compliant patients we anticipate that those patients are actually a little more profitable than…

Under the current system.

That’s correct.

Okay. That’s right. Thanks a lot.

Sure.

Your next question comes from the line of Kevin Fischbeck with Bank of America/Merrill Lynch. Please proceed. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, great. Thanks. Just want to go back to that last question. I think you mentioned Marty in the response that one that there are going to be some newly compliant patients under the new criteria, I mean how do you think about that opportunities that are expanding for you in terms of kind of percentage of business, is this something where you look at it and you say we are going to lose the X but there is Y, potential offset from a market expansion perspective?

Yes, Kevin the thought process is the compliant patients we are talking about are basically the new, in essence we are looking at the new regulations. So it is really the 3 plus day ICU stay or the 96 hours on a vent. As we are going back, we are taking a look at the MedPAR data. The industry is going back taking a look at the MedPAR data. For 2012 we took a look at what the size that market is. It’s a very large size and then we have broken it down by region. So when you take a look at it by region and then by discharging who is the discharging hospital, so being able to identify that we think will help us in the marketing approach.

But just to be clear and I think the comment that you made there are no newly compliant patients, I mean patients that are compliant now will be compliant under the new criteria are all compliant now. And I think the point that Marty and I have made consistently is there is a universal compliant patients out there that the industry and certainly select are not getting now, but they would still be compliant under the old criteria as well as the new criteria. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, that’s how I understood it as well. So I guess in that context, I guess it sounds like you have got maybe better data today than you did a couple of years ago which – this business a little bit better, but wouldn’t you expect this is the big competitive response of most of your peers as well that they are going to be going more aggressively after the compliant plans and how comfortable are you in your ability to kind of gain that share within that population.

An immediate response to your question is we are very confident that we can gain share. The fact is that we think we have done a pretty good job with the data sets that are out there. A lot of the data sets that we are reviewing are relatively new. So from our perspective we feel pretty comfortable with that.

And the other thing in terms of taking share, the other thing that I think plays into this is the moratorium. So this is the competition that’s there by and large is the competition that’s going to be there and that’s why I have always said that the moratorium cuts both ways for us. It is a barrier to growth in our LTAC division, but on the other hand it does allow you to execute on the new criteria without having additional competition in the local markets. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, that makes sense. And…

Kevin, the other thing I think you need to think about is when you take a look at there is a real bifurcation in the industry today between higher acuity providers such as us versus lower acuity providers. And if you take a look at the case mix index, there are a number of providers that have a very low acuity. And the ability to switch your clinical programs, the ability to change out your staffing to address the needs of that higher patient acuity is a very, very difficult thing to do. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, great. Thanks. And then I guess you mentioned I think in some of the prepared remarks that there is obviously going to be rate pressures to one of the offsets you highlighted was I think you said services provided system of the hospitals, (indiscernible) JV partners, can you talk a little bit about what those are and kind of where the run rate is for that line item?

Yes, I mean with a number of our JV partners, we actually take on all the employees and to a certain extent, we pass back those services on a cost basis and consequently that has a negative impact on the margin. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay. And so that number though should continue to rise as you see more joint ventures?

Yes, as we see more joint ventures that will continue to rise. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, regarding JVs. And then I think just it’s the last question, could you give us a status on the JV opportunity out there?

We’re pretty pleased with where we are in our pipeline and our prospect for getting to our goals this year. And I think we said we will get another one to three new deals this year and I mean, I think I feel pretty good about where we are in terms of the game we get this. Kevin Fischbeck - Bank of America/Merrill Lynch: Okay, great, thanks.

Your next question comes from the line of Chris Rigg with Susquehanna Financial Group. Please proceed. Chris Rigg – Susquehanna Financial Group: Good morning guys, thanks for taking my questions. Just wanted to follow-up to A.J’s first question on the CapEx spending and I understand sort of big picture, the acceleration with regards to moratorium, but is that continue at that level because you now have to – you jump them 150 to 300 beds. And then secondarily can you give us sort of timing as to when those bends will be coming online?

Chris, to answer the first part of your question, the expenditures we’re really accelerated to make sure we made the deadline. Chris Rigg – Susquehanna Financial Group: Okay.

So, it will not be – we don’t think it will continue at that. We certainly don’t think it will continue with that base. Chris Rigg – Susquehanna Financial Group: Okay.

Okay, and the timing of those beds, we’ve had some beds come on this quarter and it will actually go through probably the first and second quarter of 2015 until we have all this bench on board. Chris Rigg – Susquehanna Financial Group: And is there any income statement impact in terms of the drag on earnings like why you bring them up the speed.

Yes, there were certainly be – there were certainly be an impact on earnings, but we’ve taken that into consideration in our – in the guidance that we provided to you. Chris Rigg – Susquehanna Financial Group: Okay and then I know Bob, you talked about the impact bill and it’s sort of having it’s show way out there, but is that at all, the sort of post keep bundling, you’ve been very focused on LTAC and patient rehab and patient rehab, but that all sort of broaden your horizons or you sort of fixated on the businesses that you are end for the time being.

Well, we are fixated on the business that we’re in. So, it is not broaden our horizons in terms of looking at other business lines if that’s a question. So, I think we feel as though we now with the LTAC criteria legislation we have good visibility on our LTAC division, our rehab hospital group. I think as we feel good about allocating capital there and growing and saying with our outpatient rehab. So, the impact field legislation is really has not changed our focus and more is it likely too in the near to mid-term. Chris Rigg – Susquehanna Financial Group: Understood and then just one last one here. Are you able to quantify the weather impact in the quarter at all?

Yes, we are, Chris, it’s – it was around $3.3 million. Chris Rigg – Susquehanna Financial Group: Okay, great. And that would go straight to EBITDA.

That’s correct. Chris Rigg – Susquehanna Financial Group: Alright, thanks a lot.

Sure.

Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed. Gary Lieberman – Wells Fargo: Good morning. Thanks for taking the question. I think the stated update in the LTAC all about 0.8%. Would you expect that to be similar for Select or because your patient mix would you expected to be materially different from that.

Yes, Gary, we’re evaluating that right now, there is a whole host of variables to go into that calculation and we have typically or historically been under that whatever the number they give, we’ve been under that. You’ve got wage rate index, you’ve got reweighting that take place so there is a whole host variables. So, and we’re going through that right now, we’ll give an indication over time as we come up with those answers.

I think CMS always gives the headline of what they think it’s going to be and I’ve never experienced that it to that. It’s usually less. Gary Lieberman – Wells Fargo: Okay, that’s helpful. And then any initial thoughts on the in-patient rehab, you guys have had a chance to look at it?

No, not really. That really feels that we can comment on that yet. It kind of came out last night and rather than to give a sound bite, we really need to look at that. It does on its face, it doesn’t look like there is anything or shattering to it, but we need to really take a little bit closer look at it. Gary Lieberman – Wells Fargo: Okay. And then maybe just finally, could you maybe just more color on some of the expanded services that you mentioned in the contract therapy business?

Expanded services, I mean, we continue to provide the same types of services. Gary Lieberman – Wells Fargo: Yes, it has.

I mean, the only expanded services, is more therapy per patient. Gary Lieberman – Wells Fargo: Okay.

So there has been no change in that business, but just incremental service per patient. Gary Lieberman – Wells Fargo: Got it. Understood. Alright, thank you very much.

Your next question comes from the line of Whit Mayo of the Robert W. Baird. Please proceed.

Hey, Marty. Can you just remind us, do you have a restricted basket in your facility and just so where is it, I am just trying to think about capital restrictions?

Sure. With currently, we are at on the bank side we are at $32 million. On the bond side, we are about $72 million. But as you know that gets refurbished every quarter. So depending on certain assumptions that you make, you can take a look all the way up to 2016. At the end of 2016, it’s going to be over $300 million.

Got it. And my other question, the LTAC world is relatively small and I am sure that Bob, you had several conversations with maybe some of I guess what you guys have called the low acuity providers. And I mean, I have, and I am just kind of curious what you are hearing from the industry and one small public company has announced that they are going to be exiting that business? And I am just curious if you have any anecdotes that you could share that gives us a sense of what others in the market are sort of thinking about these regulatory changes coming over the next two years? Thanks.

Yes, I don’t know what that I can add a lot to what you may have heard out there. I mean, as I said earlier, just looking at the data and looking at the information, it’s going to be an uneven impact. And so everybody is I think going to have their own strategy about the way they are going to approach it. And I don’t really want to speak for the strategy that others are using or how they feel about their prospects, because it is a little – it is a year or two years out. And so there is ample time for people to adjust, but I think that the providers that have higher acuity now have a pretty significant head start on the process, so…

No, that’s fair. I thought I’d give it a shot. Thanks a lot guys.

And we have no further questions at this time. I will now turn the call back over to Mr. Ortenzio for any closing remarks.

Well, thank you all for joining us and we will look forward to updating you the next quarter.