Good morning, and thank you for joining us today for the Select Medical Holdings Corporation’s earnings conference call to discuss the fourth quarter and full year 2017 results and the company’s business outlook. Speaking today are 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 order – 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 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 would like to turn the conference call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. And thanks for joining us for Select Medical’s Fourth Quarter and Full Year Earnings Conference Call for 2017. Before I outline our operational metrics, I’d like to provide you with some summary comments and updates since we reported last quarter. Our LTACs, Inpatient Rehab Hospitals and Concentra business segments had a very good quarter with strong double-digit adjusted EBITDA growth on a same-quarter year-over-year basis. We also realized nice volume increases in both patient days and visits as well as increased pricing. We continue to be pleased with the progress our LTAC operators are making since the transition to patient criteria. The fourth quarter was the first full quarter of comparable year-over-year results since all of our LTACs were operating under patient criteria. For the quarter, our admissions increased 4.2% compared to the same quarter last year. Our occupancy rate in our LTACs was 65.2% in the quarter, up from 62.6% in the same quarter last year. Our occupancy rate on a same-store basis was 66.4%. Our improved occupancy and continued focus on managing cost has resulted in a 240 basis point year-over-year improvement in adjusted EBITDA margin in our LTACs. Our LTAC’s adjusted EBITDA this quarter was up 24.9% compared to the same quarter last year. Our Inpatient Rehab segment continues to experience significant growth in terms of both revenue and adjusted EBITDA. On a same-quarter year-over-year basis, revenue grew 24.7% and adjusted EBITDA increased 65.1%. Our JV pipeline remains strong. Just after the first of the year, we announced the signing of a new joint venture partnership with Banner Health in Arizona. The joint venture with Banner will consist of both inpatient and outpatient rehab, with the ultimate, building of 3 new rehab hospitals in the market. In addition, as I mentioned…

Thank you, Bob. Good morning, everyone. For the fourth quarter, our operating expenses, which include our cost of services, general and administrative expense and bad debt expense, were $998 million. This compares to $953 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the fourth quarter were 89.4%. This compares to 91.9% in the same quarter last year. For the full year, our operating expenses were $3.9 billion as compared to $3.8 billion for the prior year. As a percentage of revenue, operating expenses for the year were 88.4% which compares to 89.6% for the prior year. Cost of services were $947 million for the fourth quarter. This compares to $910 million in the same quarter last year. As a percent of net revenue, cost of services decreased 210 basis points to 84.9% in the fourth quarter compared to 87% in the same quarter the prior year. For the full year, cost of services was $3.73 billion. This compares to $3.66 billion last year. As a percent of net revenue, cost of services decreased 150 basis points to 84% for the year. This compares to 85.5% in the same period last year. The decrease in cost of services as a percent of revenue is primarily due to improved operating performance in our startup Inpatient Rehab hospitals and relative cost reductions achieved by our LTAC and Concentra segments. G&A expense was $30.6 million in the fourth quarter. This compares to $25.7 million in the same quarter last year. G&A as a percent of net revenue was 2.7% in the fourth quarter. This compares to 2.5% of net revenue for the same quarter last year. During the fourth quarter of this year, we incurred $2.8 million of U.S. HealthWork acquisition costs that are included…

[Operator Instructions] Your first question come from the line of Kevin Fischbeck from BoA Merrill Lynch. Your line is now open.

This is Catherine Anderson on 2015 before criteria? We’re just trying to get a sense of where margins could rebuild to.

Yes. If you can hold on just for a second, we’ll look that up. Catherine, we are looking at 12.6% for the year of 2017.

Okay, And could you give more details on the progress on Physio margins? Last quarter, you indicated it would take about 6 to 9 months to get them back to historical levels. Does that timeline still hold?

Yes. We’d certainly be happy to do that. With regard to the Physio integration, we have identified a number of markets where we have some issues. And we certainly monitor that on a weekly basis. And we are seeing some nice traction in some of the areas. We still have a couple of specific geographical locations where we need to work on. And we think that 6 to 9 months is truly the appropriate time frame where we will see some nice improvements.

Okay, that’s helpful. And then lastly, what will be the incremental cash flow from tax reform? And how do you plan to use it?

Yes. I mean, the amount. Yes, I mean, we really have not quantified the total dollar amount. As you know, we’ve talked about our effective rate’s typically in that 38% to 40% range. We believe it will be in the 27% to 28% range for 2018and beyond.

And for the allocation of that capital, primarily, it will go to the rehab joint ventures. And other than that, we’re really focusing on 2018 and 2019 as a delevering period for the company. So I wouldn’t look for much in the area of M&A, certainly, nothing significant. And a lot of our free cash will go toward the rehab joint ventures.

Okay thank you very much.

Your next question comes from the line of Peter Costa from Wells Fargo Securities. Peter your line is now open.

Can you contrast for us the – how you expect the performance of U.S. HealthWorks to go relative to the tremendously good improvement that you had at Concentra from that transaction, versus the Physio transaction, where it’s, a little bit, been weaker here. Can you talk about how you see U.S. HealthWorks progressing going forward?

Well, I mean, I think there is – we’re coming off a very successful integration of Concentra post the acquisition from Humana. And those numbers have been out there, and we’re certainly very proud of the work that the Concentra – the new Concentra management team did since the acquisition from Humana. The U.S. HealthWorks is a mirror-image business. And I think we’ve been open about what we think the synergies can be. We have a very detailed plan. I think it’s worth noting that most all the synergies that we’ll see in 2019 are mostly all cost synergies. They have been pretty detailed and identified by the management team, and we think that the execution of those will be very well done. So we have a lot of confidence that the plans are detailed, and we think it’s – we believe that, at least currently, it’s gone very smoothly.

And then can you go through the $14.1 million benefit in taxes this quarter from the prior operating loss? What was that? And can you talk about that a little bit?

Yes. That has to do with the NOL associated with the Physio acquisition, Pete. I think there was – $14.1 million is a tax affected number. So I think we were – I think the non-tax affected number was in the $14 million range.

Okay thanks.

Sure.

Your next question comes from the line of Chris Rigg from Deutsche Bank. Chris your line is open.

I just wanted to ask about Concentra in the quarter. Definitely tracked better than we had expected. Can you give some color on the results there?

Sure, Chris. You’re absolutely right. I mean, it – the Concentra operators have done a great job. And what you’ve seen is you’ve seen not just a price, nice price increasing, but you also saw an increase in volume. And especially during this period of – the fourth quarter is typically the low quarter for the occ med business, and they really did a great job increasing volume.

Does flu impact at all? Or is that not a factor in that business?

It really – from our perspective, it really doesn’t impact it all that much.

Flu has, really, a bigger impact on the LTAC operations than in the occupational medicine business.

Got it. And then just on the accounts receivable. Can you give us a sense for what’s going on with some of the Medicare collections there? Just been a thorn in the side pretty much, at least the latter 2/3 of the year.

Well, I think what you’ve seen, Chris, is you’ve seen a reduction in the DSO by three days from Q3 to Q4. And a large part of that has to do with getting the repayment of the underpayment on PIP. And we continued to do that in the first quarter. You’re right, it’s something we’ve talked about. And a lot of this was really – a lot of this really occurred due to going into criteria and the reduction of the volume in how PIP actually works. So what we’re doing is we’re getting back to a state of normalcy which, I think, will certainly benefit you analysts to make sure we don’t have this fluctuation.

Understood, thanks a lot guys.

Sure.

Your next question comes from the line of Bill Sutherland from The Benchmark Company. Bill your line is open.

Thank you. Good morning everybody. On the IRFs, can you guys give us a sense of the capacity growth that you’re going to achieve based on the two Cleveland facilities in Q4; and then Ochsner, I guess, Q1? And then I think you’ve got something in Q3 coming up.

Actually, Bill, we’ve got something in Q4 coming up on Vegas. I think what you ought to do is – I think you’ll start to see breakeven on the Cleveland and the Akron hospitals probably in the third quarter of this year. And then you’ll see operating losses associated with Ochsner probably through the balance of the year, and you’ll start to see losses associated with the Las Vegas hospital in the third and the fourth quarter.

And then your plans with Banner, can you go through that? And I know that’s not going to be – that’s not a majority deal for you guys.

That’s correct, it’s not. The Banner is a joint venture in both the Inpatient Rehab and the Outpatient business. It’s recently – it was recently signed in January of 2018. And while we have plans to construct three new rehab hospitals, those plans are unfolding now. I mean, recently signed deals. So we have architectural, we have site identification, we have all that work to be done. So we’re pretty excited. As many of you who follow healthcare know, Banner is one of the premier systems in the country. So we’re engaged with them now in the planning process of these three hospitals and are working to integrate the outpatient part of the joint venture. I can’t give your really a lot more detail than that at this point.

But as far as impact on your numbers, it sounds like it’s probably more 2019

Yes, 2019, 2020, Bill.

Yes.

Yes, no question. And so you have such tremendous top line growth in IRF in 2017. And so I’m just getting a sense – I want to get a sense of just how much growth you kind of have automatically there just due to more capacity expansion. I guess I don’t know the bed sizes or the relative sizes of the facilities.

Yes. You can assume, Bill, that most of the hospitals that we’re building are in the 60-bed range.

Okay. Nothing major at this time around?

No, no. You’re right. I mean, and it’s a very valid question, especially considering California Rehab. That was by far the largest hospital that we’ve constructed and that was 130 beds. So all of these – all the beds were talking about are really 60 beds per hospital.

Did – I’m just trying to make sure I had my occupancy numbers correct for LTAC since you’re giving out the new level of detail. Did it – did occupancy go down 1 point in 4Q versus 3Q?

No.

It did not.

No, okay. So it stayed around 66% since 2Q, is that right?

Yes.

Okay. So is that just – is there seasonality at work here? Or are you just sort of at a level and then you’re going to go to a next step, stepped-up improvement in the current year?

No. We certainly expect – as we indicated, we expect to ultimately see us back at that 70%, 71% occupancy rate.

Okay, I just wanted – since you leveled off for three quarters, I just wanted to make sure that, that was the case. And then lastly, to that first question that you guys looked back in, for pre-criteria EBITDA margin for LTAC. Are you sure it was only – I think you said 14-something percent, which is what you did in the

Well, you know what, yes. You know what, if the question was, I think, the 12.6% that we gave was actually on – that was on – that was 2015, right?

That’s 2015. Yes, yes.

2015, I think, was – 2015 was north of 14%, I think.

Yes.

Yes.

I mean, I have the consolidated Specialty Hospital number. Actually, the biggest year was 2012, and then it stepped down from there towards criteria.

Well, yes, 2012 was pre-sequestration. If you take a look at, sequestration occurred both in – it was 9 months of 2013 and then full year in 2014. Total impact there was – I think it was $40 million in 2013 and $60 million in 2014.

$40 million to what, Marty?

$40 million to $60 million.

Right, but to – is it on EBITDA? Is that what you’re

yes. It’s really both, right? Because sequestration hits the revenue line, but then it drops straight to the bottom line.

Okay. appreciate all the caller. Thanks guys.

Okay, well thanks.

There are no further questions in the queue. I would like to now turn the call back over to management team for closing remarks.

No closing remarks. Thank you, everyone, for joining us. And we look forward to updating you again in May.