Select Medical Holdings Corporation (SEM) Q1 2017 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 2017 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 call over to Mr. Robert Ortenzio.

Good morning, everyone. Thanks for joining us for Select Medical's first quarter year earnings conference call for 2017. Before outline our operational metrics for the quarter, I want to provide some highlights for Q1. We continue to make good progress on our LTCH business. Our key volume indicators continue to improve nicely, and Martin will provide you with the updated statistics through April 30. Occupancy rate for this quarter was 68%, which compares to 61% and 63% for the third and fourth quarters last year. Our average patient impact for hospital per day has dropped to 1.7 from 2.5 at the end of last year, and the percentage of complaint patients to total patients was at 99.9%. We had a nice improvement in our per patient day rate, which is primarily driven by admitting only LTCH complaint patients which tend to have a higher acuity. We experienced an increase of $91 for patient day for the quarter compared to the same period last year. We realized a decrease in our cost of services as a percent of patient revenue for the quarter. Finally, despite having seven fewer LTCHs, last year's Q1 period, our LTCH exceeded same period prior year adjusted EBITDA. Our adjusted EBITDA margin improved 120 basis points to 16%. We are very pleased with the progress the LTCHs have made to-date, and expect to see continued improvements over the coming quarters. Concentra had another very good quarter with EBITDA growing by almost 25% and achieving an EBITDA margin of 16.6%. As we have discussed with you before, the management team is focused over the past 18 months has been to realize the valuable synergies post acquisition, and they have done a very good job in achieving over 44 million on an annual basis. They have now turned their primary focus to growing the business. We expect to achieve this through increased sales activities as well as tuck-in acquisitions and the opening of the de-novo sites. During the first quarter, Concentra acquired six new centers and opened two new locations. Our in-patient rehab business continues to grow. Two of the three startups from last year are profitable at this time, and we expect the third rehab hospital to breakeven over the next two quarters. We have four additional hospitals in development at this time and expect them all to be opened by the first or second quarter of next year. As I mentioned on our last call, our development pipeline is robust. This quarter we announced three new joint venture partnerships, including Dignity health in the Las Vegas market, this joint venture will consist of a new 60-bed rehab hospital as well as outpatient rehab services. We expect the hospital to open some time in the fourth quarter 2018. We entered into a joint venture with Riverside Health System in Virginia, which will include those in-patient rehab and LTCH services. The joint venture will consist of a 50-bed rehab hospital and 25-bed long-term acute care hospital. The joint venture is expected to close in the second or third quarter of this year subject to regulatory approval. Finally, we announced a joint venture with Spectrum Health in Michigan, which will be a 36-bed LTCH and is expected to close some time in the third quarter. Our outpatient business has experienced substantial growth in the past several quarters with the acquisition of Physio. Our rehab clinic business grew revenue by more than $60 million on a year-over-year same quarter basis. The number of patient visits grew by 31.7%. Our legacy business was very strong in the quarter with same-store growth and patient visits of 3.7% and pricing increases of 2%. Excluding Physio, our clinics achieved an EBITDA margin of 13.9%. Having said that, we did see some headwinds in our Physio assets as several operational changes were made and we had a negative short-term impact. These changes were necessary to achieve longer-term success. We are very confident that our season-long tenured operators have positioned the Physio assets to achieve our legacy margins 13% to 14%. Let me take you through some of our operational highlights for the quarter. Net revenue for the fourth quarter was $1.11 billion compared to $1.09 billion in the same quarter last year. Net revenue in our Specialty Hospitals for the first quarter was $598.9 million compared to $599 million in the same quarter last year. Overall patient days decreased by 6.1% with just over 317,000 patient days in the quarter. The decrease was in our LTCH hospitals which have now fully transitioned to patient criteria, and the effect of hospitals closures. Average net revenue per patient day increased 5.1% to $1,716 in the first quarter compared to $1,632 in the same quarter last year. Net revenue on our outpatient rehabilitation segment for the first quarter increased 7.4% to $255.8 million compared to $238.1 million in the same quarter last year. The increase is a result of additional volume from our physiotherapy clinics, which we acquired during the first quarter of last year, as well as continued growth in our existing clinics offset by the sales of our contract therapy business at the end of the first quarter of last year. For our owned outpatient clinics, patient visits increased to almost 2.1 million visits compared to 1.6 million visits in the same quarter last year. Our net revenue per visit was $102 in the first quarter of this year compared to $103 per visit in the same quarter last year. The slight decrease in net revenue per visit was a result of the acquired physiotherapy clinics having lower average net revenue per visit. Net revenue on our Concentra segment for the first quarter increased 2.1% to $256.1 million compared to $250.9 million in the same quarter last year. The increase is primarily from newly acquired and developed medical centers. For the first quarter, revenue from medical centers was $223 million and the balance $33.1 million was generated from onsite clinics, community-based outpatient clinics and other services. For the centers, patient visits were over 1.88 million and net revenue per visit was $118 in the first quarter compared to 1.85 million visits and $118 per visit in the same quarter last year. Total adjusted EBITDA for the first quarter was $138.9 million compared to $128.6 million in the same quarter last year, with consolidated adjusted EBITDA margin at 12.5% for the first quarter compared to 11.8% margin in the same quarter last year. Specialty Hospital adjusted EBITDA for the first quarter was $88.7 million compared to $86.8 million in the same quarter last year. Adjusted EBITDA margin for the Specialty Hospital segment was 14.8% compared to 14.5% in the same quarter last year. The increase in adjusted EBITDA is primarily related to a decline in startup losses at our newly opened specialty hospitals. Adjusted EBITDA startup losses were $2 million in the first quarter compared to $3.8 million in the same quarter last year. Outpatient rehabilitation adjusted EBITDA for the first quarter increased 8.6% to $31.4 million compared to $28.9 million in the same quarter last year. The increase resulted from both the acquired physiotherapy clinics, as well as our existing clinics. Adjusted EBITDA margin for the outpatient segment was 12.3% in the first quarter compared to 12.1% in the same quarter last year. Concentra adjusted EBITDA for the first quarter was $42.6 million compared to $34.2 million in the same quarter last year. Adjusted EBITDA margin was 16.6% compared to 13.6% in the same quarter last year. The increases in adjusted EBITDA and adjusted EBITDA margin were primarily related to cost reduction initiatives implemented in 2016. Earnings per fully diluted share were $0.12 in the first quarter of this year. Excluding the loss on early retirement of debt and related tax effects, earnings per fully diluted share would have been $21 in the first quarter of this year. During the first quarter of last year, we had several one-time events, including a gain on sale of our contract therapy business, a loss on impairment of equity investment and a loss on early retirement of debt. Excluding those one-time events and related tax effects, earnings per fully diluted share would have been $0.22 in the first quarter of last year. Before I turn it over to our Chief Financial Officer, Marty Jackson, I will make one final comment on the recent regulatory activity. As you are probably aware both LTCH and IRF proposed rules for fiscal 2018 have been released by CMS. As a general practice, we don't comment publicly on proposal before they're finalized, however, the recent LTCH proposed rule included an additional year of regulatory relief in the 25% rule. The 21st Century Cures Act extended relief from full implementation of the 25% rule through October 2017 and their proposed CMS rule for fiscal 2018 extends more time on the implementation of the 25% rule through October 2018. Company has long felt that the 25% rule is unnecessary, given the LTCH -- where the LTCH industry is now operating under patient criteria rules, while we will still seek a permanent solution of elimination of the 25% rule extension from relief for an additional year is a good sign for the industry. At this point, I will turn it over to Marty Jackson for some additional financial details before opening the call up for questions.

Thanks, Bob. Good morning everyone. For the first quarter, our operating expenses which include our cost of services, general and administrative expense and bad debt expense were $977.1 million. This compares to $966.9 million in the same quarter last year. As a percentage by net revenue, operating expenses for the first quarter were 87.9% compared to 88.8% in the same quarter last year. Cost of services were $928.4 million for the first quarter compared to $922.3 million in the same quarter last year. As a percent of net revenue, cost of services decreased 120 basis points to 83.5% in the first quarter. This compares to 84.7% in the same quarter last year. A decrease in cost of services as a percentage of revenue was primarily due to the sale of our contract therapy business, specialty hospital closures, and cost reductions achieved by Concentra. G&A expense was $28.1 million in the first quarter, which as a percent of net revenue was 2.5% compared to $28.3 million or 2.6% of net revenue for the same quarter last year. G&A expense in the first quarter of last year included $3.2 million of Physiotherapy acquisition costs. Bad debt as a percent of net revenue was 1.9% in the first quarter compared to 1.5% in the same quarter last year, the increase in bad debt expense is primarily related to the physiotherapy entity and high bad debt at Concentra compared to the same quarter last year. As Bob mentioned, total adjusted EBITDA was $138.9 million and adjusted EBITDA margin was 12.5% for the first quarter compared to adjusted EBITDA of $128.6 million and adjusted EBITDA margin of 11.8% in the same quarter last year. Depreciation and amortization expense was $42.5 million in the first quarter compared to $34.5 million in the same quarter last year. The increase is primarily due to new inpatient rehabilitation facilities and the addition of Physiotherapy, we previously mentioned the company was in the process of refinancing a senior credit facilities, we completed the refinancing on March 6 and during the first quarter, we recorded a loss on early retirement of debt of $19.7 million. The new select credit facilities includes a new seven-year $1.15 billion term loan priced at LIBOR plus 350 and a new five year $415 million revolving loan price debt LIBOR plus 325. The refinancing transaction will reduce our annual interest expense by approximately $17 million to $18 million and extend the maturity of our senior secured debt to 2024. We also had a small loss on early retirement of debt in the first quarter of last year. During the first quarter of last year, we also had several one-time gains and losses included including the gain on sale of contract therapy business and impairment loss on our equity investments. These items were recognized on our income statement as non-operating items, we generated $5.5 million in equity, in earnings of unconsolidated subsidiaries during the first quarter, this compares to $4.7 million in the same quarter last year, this increase was driven by improved performance in existing In-patient Rehab joint ventures where we hold a minority position. Interest expense was $40.9 million in the first quarter compared to $38.8 million in the same quarter last year, the company recorded income tax expense of $13.2 million in the first quarter, the effective tax rate for the quarter was 36%. Net income attributable to Select Medical Holdings was $15.9 million in the first quarter and fully diluted earnings per share were $0.12 excluding the loss on early retirement of debt in the quarter and related tax effect, earnings per share would have been $0.21. At the end of the quarter, we had $2.8 billion of debt outstanding and $65.2 million of cash on the balance sheet which includes $10.3 million of cash at Select and $54.9 million of cash at Concentra, our debt balance at the end of the quarter includes $1.15 billion in Select term loans, $335 million in Select revolving loans, $710 million in the Select six and three eight senior notes, $619.2 million in Concentra term loans, $50.1 million of unamortized discounts premiums and debt issuance costs that reduce the overall balance sheet debt liability. And we had $29.3 million consisting of other miscellaneous borrowings in the notes payable. Operating activities used $55.9 million of cash flow in the first quarter, the use of operating cash for the quarter is primarily driven by an increase in accounts receivable, some reductions and accrued expenses, our days sales outstanding or DSO was 56 days at March 31, 2017 this compares to 51 days of December 31, 2016. The increase in our days sales outstanding and related decline in our operating cash flows is primarily related to the current underpayments we're receiving through the periodic interim payment program for Medicare in our LTCH. These under payments will be corrected over the next couple of months as our periodic interim payments are reconciled and reset our fiscal intermediaries. Investing activities use $41.2 million of cash in the first quarter, use of cash was related to $50.7 million in purchases of the property and equipment and $9.7 million in acquisitions and investments which were offset in part by $19.5 million in proceeds from asset sales during the quarter. Financing activities provided $63.3 million of cash in the first quarter and provision of cash primarily related to $115 million net borrowings on our revolving loans which were offset in part by net term loan repayments and financing costs totaling $34.9 million repayment of bank overdraft of $17.1 million and $3.6 million in distributions to non-controlling interest. As I mentioned select refinance to senior credit facilities during the quarter and the impact of the financing has now been included in the update to our financial guidance for calendar year 2017 which was included in our earnings release yesterday. This includes net revenue expected to be in the range of $4.4 billion to $4.6 billion adjusted EBITDA expected to be in the range of $540 million to $580 million. Fully diluted earnings per share expected to be in the range of $0.69 to $0.87 adjusted earnings per share which excludes the loss on retired, on the retirement of the debt and this related tax effect to be in the range of $0.78 to $0.96. Finally as Bob mentioned I will update the key volume indicators we've been providing to you since the LTCHs have gone into criteria. Our last update of these indicators was December 31, 2016 and we're going to update you on through April 30 of 2017. Total post criteria average daily census ADC grew to 2703 compared to 2656 the percentage change in ADC on a per-post comparison has dropped to 5.9% from 8.7%. The daily patient impact has improved by 85, ADC and now stands at 169 and our patient impact for hospital per day has dropped 1.7 from 2.5. This concludes our prepared remarks and at this time we'd like to turn it back over to the operator to open up the call for questions.

[Operator Instructions] Our first question or comment comes from the line of Frank Morgan from RBC Capital Markets. Your line is open.

Good morning. I was hoping you could give us a little more detail on this stabilization and improvement in the LTCHs as you kind of get further into criteria, what are you really seeing out there, you think it's getting better because of just general education in the market and just time has passed, people are getting used to it, is there anything you're doing from a process standpoint that you think is differently? That would be my first question.

Thanks, Frank. Just thought -- from -- I do think it's all of the above. There is a certain element of just consistency in an individual market, fine-tuning your programs, working with your referral sources, so, yes under the broader heading of education, yes. Certainly, in terms of our process, I think what we're seeing today is hopefully the positive results of all the processes that we put in place, and that we've been talking about for the last year as we've gone into criteria. And we've kind of reshaped our hospitals to be these highly specialty acute care locations, where we just see the Post ICU and the ventilator-dependent patients. So yes, I think it's both of those. And I think at this point it's just continuing to push -- it's what we would consider more blocking and tackling now, I mean I think, we feel good about our decision to go the direction we did, and we just need to continue to do more of what we've been doing. And I think we can achieve kind of the goals that we set out and laid out at the beginning of the year and to our value.

Is there any particular area where you're noticing the most improvement? I mean is it just because simple as facilities have been on criteria, the longest they are doing better or is there anything unique to markets? Any insights on where you're getting the most traction?

No, I can't say that we've been able to draw any discernible pattern that makes a difference either regionally; the only thing that we have said previously which I think holds true, is that our larger facilities tend to struggle a little bit more than our smaller facilities for reasons what we've outlined. And I think that makes intuitive sense. So, no, we haven't been able to discern any pattern that says any geographic area in particular does better than another, I mean I think, we're seeing the results that you see I think generally you can assume it's spread throughout are 1809 LTCH.

Got it. And I was glancing through the 10-Q last night, just to verify whether it was showing the improvement, is that still aggregate specialty hospitals or does that break out the LTCH from the IRFs and -- yes, I guess it would be my question.

It's the aggregate, Frank. What we do was in the beginning where as Bob was going through some of the highlights what we did was we outlined both the LTCH improvements, some we took a look at some of the margins and margin improvements, that was the LTCH specifically, we talked about the in-patient rehab but in the 10-Qs we are talking about the Specialty Hospitals in aggregate.

Got it. Just one final question I know we've talked about wage and labor issues in the past and certainly you have your staffing levels there anticipating this volume recovery, just any color there, and I will hop out. Thanks.

Yes I mean, look I don't think that I think probably what you've heard from providers across the board is that we do have a nurse staffing shortage, we have seen headwinds on rate, we've seen increase in agency labor and I think we'll continue to see that. So we're managing through that as I said it's not our first nursing shortage that we've seen, although it's been a while since we've had one and it does become difficult now that is an area where you do see some individual hospitals are struggling more than others maybe in terms of filling open nursing positions. So we have seen an increase in our wages and we have seen increase in agency.

Thank you, our next question or comment comes from the line of Gary Lieberman from Wells Fargo. Your line is open.

Good morning, thanks for taking the question. If I could just follow up on one of Frank's question, is it possible to get a breakout of the EBITDA for the IRFs separately from the LTCHs?

As far as total EBITDA is that what you're looking Gary for both?

Sure.

Sure. If we take a look at the -- if we take a look at the LTCH, the LTCH EBITDA for the quarter was $72.3 million and the EBITDA for that was 16.3.

Okay. So, are you happy to have how that compares with the year-over-year?

Yes the LTCH's prior year was $71.5 million and the IRFs were $15.2 million.

Correct, that is very helpful, thank you. And then in the past you guys have discussed and Bob you sort of alluded to it, the difference in the performance of the hospitals ahead greater than 50 beds in the hospitals that had less than 50 beds, do you have any statistics just to breakout the performance of how those two categories were?

Gary, what we can tell you is that the larger hospitals continue to lag the smaller hospitals, the smaller hospitals are I would say are probably very close to pre-criteria volume, there is less than one patient for hospital per day whereas the larger ones are greater.

Okay, is the gap closing or the -- it would appear the larger ones must be improving?

The larger ones are improving.

Yes, I think they'll continue to improve.

Okay, that's helpful and then maybe just to move the consent for the margins were extremely strong there should we expect that to continue or should they revert back to a more normalized level.

Yes, as we said historically we think the that business, your expect margins somewhere in that 15% range as you know there's seasonality in that business, Q4 is typically of low EBITDA margin during the fourth quarter. But on average I think what you're to assume on an annual basis you're really looking at 15%.

Okay.

Yes, I think that's our best estimate we think that the markets have been strong and I will just tell you that the management team at Concentra just continues to surprise on upside and they are really doing a very good job so, there margins have been very strong and hats off to them.

Okay, great. Thanks very much.

Thank you. Our next question or comment comes from the line of A.J. Rice from UBS. Your line is open.

Hi, everybody maybe on the just following up on the questions regarding the improvement and performance in the LTCH. In terms of senses and all is I know last year there was some discussion about some of your competitors maybe there you as you're going through criteria now that others they're going through the process of converting to criteria and still in the early stages of that, is that change the competitive dynamic should they get anywhere or is that less of a factor. And I wondered if there was a target where you thought you settle out and I don't know whether right metrics is occupancy which you obviously stepped up the last three quarters and occupancy of 68% today, do you think that settles out so we're in the 70s or any view on that.

A.J this is Bob. On the first question about when we were going through the criteria competitors targeting up I just want to be clear that, that was suggested by others then us I mean that was suggested in the when the investor community that those community I mean. We did say that we didn't think that was the case for a couple reasons, because of overlap where markets were competitive and for other reasons so, we didn't really see that and I would tell you that as those LTCHs that are going through criteria now later than we did. We really don't have a good sense of you know how they're doing or what's happening in the market, what we do try to watch for is as an indicator is closures, as we have been Martin and I have been vocal that we thought that by the completion of the full implementation of criteria including the 50-50 bland that there, that we felt that there would be a lot of LTCHs that would, that would close, that wouldn't be able to get through either because of the market or they just weren't able to navigate the criteria. And so, we do watch for that and we do continue to see, one off closings here and there and I think that is a sign that the criteria will continue to have the impact and this industry is being reshaped and that at the conclusion of the 50-50 bland I think you will see a different industry. And we continue to believe that but in terms of disadvantage, disadvantage of the timing of when you go in, we do not see that there is any more advantage or disadvantage in terms of a market position of whether you work earlier as we were or whether you were as later as a some of the other participants in the industry. Does that answer your question?

Yes, I think the other part of your question was on occupancy. Yes, I mean our target was get back to the same occupancy levels that we had free criteria, all indications are as is that achievable I think it'll probably take a little bit of time but we're well on our way.

Yes, I think the another thing that we've said we've said previously on the criteria and our return to pre criteria senses that I know I have said publicly is that I do believe that is the question of when and not if. And if you look at the first quarter I'm encouraged and I will reiterate that statements that I do believe we can get back I've said I've made comments like whether it's going to be in 2017 or 2018 or whenever we will and I would say that all indications right now that I'm actually more bullish about the timeframe that will be able to achieve return to our pre-criteria levels of occupancy.

Okay, I'll ask another follow-up on another topic, I mean it's quite large of the swing factor from the startup cost last year to hitting probability this year. It was up to I think to move the whole company results. Can you just give us an update on where you stand with the California rehabilitation institute, are you sort of at the level of profitability to expect to be after the full-years or continue to be a ramp this year progresses, and then also on the development side I think you started there's a mention in prepared remarks are pretty well with three new announce deals so far this year. I know we want you to announce as many as possible because that's a long-term positive, but it also and as a start up costs associated with it. Can we assume that the start of costs associated with those deals is embedded in the current guidance that you have or is there leeway in case you do a few more deals for more already sort of just doing as you announced some?

Well, AJ, there are so many lot of questions in that one set or you just gave. Let's talk about CRI. CRI as of now profitable state we're past breakeven and you are going to see that climb nicely and that as you said that will have a nice impact on the company's earnings. Cleveland Clinic which is one of the other three start ups that we had last year is also in the black, and TriHealth is the only one left to read right now and we anticipate over the next two quarters that to be in the black also. The four projects that are going to that actually in the ground right now, that's really those probably will not open up until the first and second quarter of next year. You will see a bit of start of losses, but I would anticipate there's going to see those start up losses be somewhere in the neighborhood of $500 to $500,000 to a million dollars a quarter and that make then they go up a little bit the fourth quarter. And what we have said is that, if you will probably not see another hospital that will have the start up losses that California rehab just because of the size of the lease, the regulatory environment that we found ourselves in with the reimbursement in California, which is unique to that state and very challenging so that the losses from last year were just proportionately weighted toward the call back California location so you we wouldn't expect the other deals at least not the ones we've announced that would have losses, that would even approach that the kind of losses that we saw there so. And your question as to the development what we will continue, we get an opportunity to do a transaction like an [indiscernible] or a dignity or the others that we've done previously or recently announced. We will continue to do those that is long-term value and that is our really our first priority for allocation of capital.

Okay, great. Thanks a lot.

Thank you. Our next question or comment comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

Great, thank you so much for taking the question here. I just want to follow-up on the commentary around LTCHs and so in terms of admissions and how they were flap in Q1 I mean there's some impact from closer, there are two, so did you disclose same store excluding closures number and also on that front, was there impact from those [indiscernible] some other seasonality to some of the providers talking about?

We did not disclose and we're not disclosing kind of same store without backing out the exposures I guess of the seven hospitals we don't have and now comment on any necessary impact on illnesses flu of the like I think that was your second question, when you have pockets of this I mean when you have LTCHs as many states as we have you may see outbreaks and serve it we certainly haven't had any kind of nationwide epidemic of flu or other respiratory that would drive, so I would say that nothing you need to report on that score and nothing on that and really don't have any more guidance that we can give you on the close hospitals.

Okay. And now on the cash flow I appreciate the commentary on increasing those, but can you kind of just flush it out exactly what's that are the payments or it just that this fiscal intermediaries are holding the payments longer than the past or is there anything specific there and then on the front you mentioned your expect this to get some improvement next few months. So are you willing to think about that sort of full-year operating cash flow outlook?

Sure. It's really does have to do with criteria and how to payments work and just as a tutorial what we have to do is kind of go through, how if actually works? In the increase in receivables is really due to, it's referred to as PIP. PIP is a bi-weekly Medicare payment process where we get paid based on the estimated volume and rate that set by our fiscal intermediaries. The pip amount for each hospital is reset based on the historical claims data and the reset happens about every six months. As more of our hospitals call for poor periods and the hospitals transition into new patient criteria payment model, we started to be overpaid through our bi-weekly PIP payments. This occurred because the volumes dropped as we focused on only accepting compliant patients and then continued through December of 2016, the beginning in January the situation began to reverse itself and all of our hospitals had gone through a reset cycle. So in February and March we really started to experience significant underpayments as our volumes increased. Additionally because we had our increasing CMI we were realizing higher case rates which also not fully reflected in our current PIP payments. And I think if you we talked about being overpaid, we repaid the fiscal intermediaries in the first quarter $46 million. So combining the underpayment from PIP and then the payment or repayments that were made, that's really what caused that the substantial increase in growth in AR. Is that helpful?

Yes, that's very helpful. And then, would you enter into talking about what the annual outlook for cash flow for the company?

Yes, I think is the same as we've provided before which I think was north of $100 million free cash flow.

Free cash flow okay.

Yes.

Great. And then if I may, on the DNA, just to clarify those it was up in Q1 year-over-year clearly, and even sequentially was up, but in for the year the number that you gave in the year of closures in the press release and imply that up while the third quarter number will come down to add up to 157, I guess, for the year or so how would you describe that?

Yes. Could you -- Joanna [ph] could you repeat that question again?

Yes, so it was the DNA in the quarter when I have to explain the reason it makes sense that you have new openings for the $42.5 million. But for the year you talk about 157, today implies that it's going to come down a couple of million dollars down third quarter. So is there any particular reason I thought you talk about new hospital opening so I would expect to be [indiscernible] client, for that's what I'm trying to reconcile the full-year number versus the quarterly numbers.

Yes, the quarterly number had some one time impacts we had close some hospitals so there were some write-offs associated with it.

Okay. That makes sense. That's all from me, thanks..

So, it's tough to annualize that number…

Okay. So, are you saying that this is not a good run rate number to use, okay, good.

That's correct.

That's helpful. Thank you.

Thank you. Our next question or comment comes from the line of Whit Mayo from Robert Baird. Your line is open.

Okay, thanks, good morning. I think you mentioned in your prepared remarks that you made a few acquisitions within the Concentra segment, is that right, is it something new or maybe just any commentary to frame up the contribution and how active you plan to be there going forward?

Sure, what we did, we acquired six centers in the first quarter and now you have to recognize that these are typically one off types of acquisitions and they're very, very modest in size. So if you take a look at the six that we acquired I think the total payment for those six was about $9.7 million.

Okay. Any correct theory around how you target those transactions or the focus on your new market target to complement other assets just kind of curious how you think about it.

For the most part, what we like to do is we like to do tuck-in acquisitions. So it's really locations where we already have a critical mass and just are able to add to an additional center in those markets.

Got it, and these are all in the joint venture correct?

So these are ongoing venture with Welsh, Carson yes.

Yes. Any more detail you can provide around I guess the [indiscernible] headwinds in the outpatient division what changes you made? What the impact was just expectation going forward?

Sure, the change that were made were both operational we've got standard operating procedures that we have in place and all over 1000 clinics before the Physio acquisition and what we were doing was implementing that into the 600 were in by Physio. And we've also made some management changes on the Physio side too. So between those two, there a little bit happened.

Okay, and maybe one more I think there have been an advocate the efforts from the industry trying to push expanding the types of cases that can be in the LTCH criteria rule and I think wound care has been tossed around is, there any traction being made at all that I know congress but a lot of things are focused and just curious what your view is that the process that CMS revisiting that believing that you be a really advocating yourself?

Well, I can say that on relief from criteria we are not putting in right now any direct advocacy efforts. I do understand just peripherally that some LTCH hospitals are asking congress for relief from the new criteria. We have to appreciate that the CMS does not really have the flexibility to modify the criteria because the criteria was a legislative, not a regulatory one. So yes, my understanding is that some hospitals are asking congress to look at the criteria so that they continue treating patients with some conditions that are currently excluded. Wound Care would be probably an obvious example of that for us we obviously would have been happy to continue to treat the complex one patient. But I'm not sure how realistic it is politically to think that it will be changed by I. I don't really want to say anything more about to that I mean I just think it that's enough, that's an uphill battle I mean we really don't have full implementation yet. And even see a math on something as that they could do something about which was a 25% rule have been allow to even roll that back even in the face of new criteria, so although I'm encouraged that the new CMS administrator and secretary price did put into the proposed rule, I mean I think that's a very positive step, but that does fit into trying it kind of the idea that we should eliminate regulations that are really no longer needed. But I feel think that trying to change the legislation on the criteria in uphill battle.

Thanks, guys, appreciate it.

Thank you. Our next question or comment comes from line of Bill Sutherland from Benchmark Company. Your line is open.

Thanks, and good morning; all I have left now is I know you guys like talk about first CMS rules but various of you have studied this short stay out layer outlier adjustment, but they're talking about fiscal '18 and just at a high level what you think? What kind of impact that might have?

Sure Bill. We have done some analysis on it and we'll be commenting on the proposal I guess our major concern is the reduction in the standard rate, they're basically saying we're going to do is change it from a cost base type of setting to per view and because that's going to be better. It's going to be a better price for the old tax then what we've got to do is deduct that benefit from the standard rate and we're not sure how that actually works? So we're doing a lot of work analyses on that. And whether the reduction rate is really appropriate or not?

Okay, so hard to figure at this point.

Yes, it is.

That's all right. Thank you, guys.

Thanks, Bill.

Thank you. Our next question or comment comes from the line of Frank Morgan from RBC Capital Markets. Your line is open.

Hey, I just had a couple of follow-ups, could you tell us where you are on Physio therapy on the synergy recognitions, like where you are relative to your initial goals?

Sure. I mean on the synergy side, we're doing well, and we're -- because most of the synergies are coming from back office administrative types of things, we're certainly achieving that, where we're seeing some headwinds that we've talked about as really on the volume side, Frank.

Okay.

Once we get the volume back, we'll be fine.

?:

Well, you probably want us to break that out between LTCH and rehab, as you know, we have a very large joint venture with Baylor. Frank, we have four rehab hospitals…

But yes, I'm sorry, I have to say LTCH; I'm sorry.

Well, on the LTCH, we have exited the Houston market last year, and I think we have a couple LTCHs in Dallas and I think one other we had San Antonio but that was included in the swap. I think we have four total LTCHs in state of Texas I think at one time we probably have 10 or more maybe 12.

So number of beds is probably in that 630 to 200 bed range.

And the one LTCH is in the large Baylor hospital, Baylor University Medical Center downtown, and I think two others in Dallas and then…

Okay, that's good. Glad to hear that. An then finally, as you have gone through…

You got something again, Texas, Frank?

Well, one of your competitors was talking about how Texas was so over-bedded and very competitive, so…

Yes, that's actually true. The Houston market was legendary as being over-bedded, and I think that's really been rationalized, but yes, I see what you mean.

Okay, and then finally any…

Frank, the total number of beds in Texas is 166.

Okay, all right. In the last one any changes you're seeing in payer mix if you kind of go through this process and can you talk about they were really picking up some on the Medicare advantage side here, but are you seeing any it is most of what we're talking about here related to your traditional fee-for-service business or is there anything going on in Medicare advantage that might be an opportunity? Thanks. I will hop off.

Sure Frank, we continue to see Medicare advantage grow as a total percentage of our payer mix, and we expect that to continue.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the conference back over to Mr. Ortenzio for any final comments.

Thank you, Operator. No further comments, thanks everyone for joining us this morning.