Good morning and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the First Quarter 2020 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 plan, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today and the company assumes no obligation to update these statements as circumstances change.At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's First Quarter Earnings Conference Call for 2020. Before I outline some of our operational metrics, I want to provide you with a summary comments regarding the effects of the COVID-19 pandemic on our operations.As a company, the past two months have proven to be some of the most challenging times we faced both clinically and operationally. During this unprecedented period, our ability to learn collaborate and adapt has been put to the test. I'm proud to say that, our team has risen to the occasion, and I could not be more proud of the work they have done in the face of this health crisis.Our teams have shown tremendous leadership passion and courage in maintaining the highest quality and safest patient care environment. The level of resourcefulness hyper vigilance and innovation is unmatched. For the past two months, we have had daily virtual huddles led by our Chief Medical and Chief Quality Officer Dr. Buddy Hammerman and attended by operational, clinical and functional leaders from across our organization. These huddles, which began on March 3rd, cover 15 areas to ensure we are informed and responsive in meeting the quickly changing and critical needs of our patients and employees across all lines of business.Among other indicators, we review COVID incidents by region, clinical review of COVID infections, availability and sourcing of PPE and ventilator equipment, patient management strategies, decisions in preparation for treating COVID-19 patients, communication strategies and staff contingency planning.In broader terms, this pandemic has also cast new light on the role of our critical illness recovery hospitals in the continuum of care. In addition to uniting with our joint venture partners and host hospitals to combat this virus. Newly established coordinated efforts between criticalness illness recovery…

Thanks, Bob. Good morning, everyone. Before I provide financial details for the quarter I wanted to highlight some of Bob's comments. The first quarter for Select was really the tale of two periods, the pre-imposed COVID periods. We had nice revenue growth, double-digit adjusted EBITDA growth and EBITDA margin expansion in all four of our business segments and the quarter-to-date through February.Then in March, we saw the stay-at-home requirements of most states being mandated along with the suspension of elective surgeries, which had a significant negative impact on our outpatient and occupational medicine businesses. Our operators have done a terrific job making the appropriate changes to rightsize our costs but the key area they are spending most of their time on now is regaining volume. Volume is the primary driver to get us back to pre-COVID status.Moving to the financial details. For the first quarter our operating expenses, which include our cost of services and general and administrative expense was $1.23 billion and 87.3% of net operating revenue. For the same quarter last year, operating expenses were $1.16 billion and 87.7% of net operating revenues.Cost of services was $1.2 billion for the first quarter compared to $1.13 billion in the same quarter last year. As a percent of net revenue cost of services were 84.9% for the first quarter this compares to 85.5% in the same quarter last year.G&A expense was $33.8 million in the first quarter. This compares to $28.7 million in the same quarter last year. G&A as a percent of net revenue was 2.4% in the first quarter compared to 2.2% of net revenue for the same quarter last year.As Bob mentioned, total adjusted EBITDA was $187.3 million and adjusted EBITDA margins were 13.2% for the first quarter. This compares to total adjusted EBITDA of $170.1 million…

Thank you. [Operator Instructions] Our first question is from Frank Morgan with RBC Capital Markets.

Good morning. I noticed in the commentary as you talked about since the end of the quarter some optimism as states start to open up specifically more ambulatory surgical centers opening up. Curious can you maybe tell us what percentage of your overall outpatient and Concentra business comes as the result of outpatient surgeries? And just any more color around what you've seen so far or what stage you would expect to see the early recovery?

Yes, Frank this is Marty. Quite candidly we really can't give you what states we expect to open up. I mean that's a crystal ball type of thing. What we can tell you is that about 21% of our outpatient rehab visits come from elective surgeries. And that's basically what we've seen over the past year. So, when these elective surgeries come back we expect to see some nice volume increases.

And Frank this is Bob. We are starting to see that in some states that there have been approvals for elective surgeries down in the Texas market. Certainly we've seen that and we're starting to see the opening of some elective surgeries here in Pennsylvania and some of the southern states.So, that's starting to happen kind of as we speak although it's not as they say flipping the switch. It will take a little bit of time for those to -- for the precautions and for the surgeries and then there's a lag time before we see the patients.

Got you. And then on the Concentra side how do you think about that in terms of just what's happened with unemployment? What are your thoughts around the ramp-up there? And what are you hearing from some of your customers there? And I'll hop. Thank you.

Well, as you know and we've said in the past that Concentra is an employment-driven business. So this is -- hits them pretty hard. But as employment comes back and if we have a V or a U shape, I mean we would expect to see the Concentra business respond correspondingly.If the recovery and employment is slower then I suspect we'll see that in the Concentra volumes as well. So, again hard to tell. But it will improve as employment continues to go back up. And as businesses even not just driven by unemployment statistics, but just as general economic activity returns that Concentra volumes will grow.

Do you have any early color on the month of April some of the other companies have kind of given us some insights? Anything you could share with us there and I'll be done. Thanks.

April is going to be very, very tough month in particular on our outpatient business, both outpatient rehab and Concentra. I mean in the early part of April, we were seeing 50% reductions in our outpatient about 45% on Concentra. We have seen that basically bottom out and we started to see growth come back in the last week -- the last two weeks of April.

And on the other hand in our critical illness recovery hospitals I think we see them as being strong because of the position that they have taken in the face of the pandemic. So, I think that part of the business will be stronger.

Thank you.

Thank you. Our next question is from Justin Bowers with Deutsche Bank.

Hey, good morning everyone and congrats on the performance, especially during the first two months. And I think putting up double-digit EBITDA growth over the entire quarters nothing to scoff at given the last few weeks there. And I appreciate all the disclosure in the press release and the 10-Q last night.So, just kind of piggybacking on Frank can you help us kind of understand where volumes are maybe on the critical illness side like relative to March or how they're trending? It sounds like that you've kind of picked up a little more on the LTAC side, just the commentary with 350 COVID patents?And then on inpatient rehab, I was a little surprised that kind of the decline towards the end of March there? And just kind of trying to get a sense of if you feel like you've bottomed there and where things are now in that part of the business?

Yes, Justin this is Marty. Let me take you through where we are with LTACs and the IRFs with regards to volume. I mean, the LTACs have had a pretty strong April. And we expect those numbers to continue. We're -- ADC is up nicely and we expect that to probably continue through June. On the inpatient rehab side, we were hit relatively hard up in the North Jersey area with Kessler. And one of the things that we had decided to do was a number of the Kessler hospitals had semi-private rooms. And what we've done is in essence move those semiprivate to private. So we have basically limited the number of patients we can take in one per room, just because of the transmission of the virus. So as soon as we start to see that decline, we will ultimately go back to semiprivate.

Okay. Got it. So it sounds like disproportionately hit in Jersey and not as steep in some of the other markets. And then maybe just flipping to cost structure, excuse me, has there been -- I mean, it sounds like you're comfortable with where you are now, just with the commentary focusing on volumes now versus costs? And so can you kind of give us a sense of maybe some of the additional actions you've taken at the end of the Q1? And then more broadly, how you think about variable versus fixed costs on the cost of services line?

Sure, Justin. The -- on the inpatient side, there really hasn't been -- our group there, the operators have done a terrific job. And for the most part, the volumes are in particular in the critical illness recovery hospitals are maintaining or exceeding where our expectations were. So there's really not many changes that are happening there. On the inpatient rehab side, we've seen a little bit of reduction or flexing of staff there. And then on the outpatient and rehab side and Concentra, we have flexed pretty significantly on staffing. And as you probably know, salaries wages and benefits represent a significant portion of our cost structure.So the interesting thing is on our outpatient rehab, I mean Select's model is to have critical mass in the geographic locations where we are. So if we've seen a 50% reduction in our volume, we have 20 clinics in a certain marketplace what we have done is dropped -- we've temporarily closed 10 of those clinics and furloughed those -- basically the employees that were working in those 10 clinics and moved all the volume over to the other 10 clinics. And then on Concentra, the same type of thing. We took a look at that same type of activity. And then when the volume comes back our expectation is we will very quickly bring those clinics up, those centers up with the employees coming back.

Got it. All right. So we should see some improvement. I mean, you guys just didn't have any chance to respond like in March things just happened so quickly. I will hop back in queue and congrats again.

Thank you, Justin.

Thank you. Our next question is from Peter Costa with Wells Fargo.

Good morning. And thanks for stepping up with the COVID patients here this past quarter and a great job in January and February before all this started. My question is what's going to happen when we get to the other side of this having seen the changes that you've seen. What do you think will happen in particular in the critical illness recovery business with your relationships with providers and what they've seen in their dealings with you in terms of your referral sources? And then also on the outpatient side, do you think that's going to go and stay more mobile going forward? And what does that mean to you in terms of your flexible cost in that area?

Yes. Thanks Peter. On the critical illness recovery hospitals, I firmly believe that we will come out of the pandemic stronger than we went in for a number of reasons. We've had many hospitals that are in -- that have been in the hotspot Northern Jersey that services -- we got New York City, Detroit, New Orleans and other markets. I think we have probably over 60 hospitals that are treating COVID patients. So we have become critically important to many of the big hospital ICUs. I mean, we have gotten referrals from hospitals that we had never gotten before and there was I think a very strong appreciation and recognition of the kind of services that we can provide. We are probably one of the largest providers of ventilator services in the United States with probably over 2,000 ventilators in all of our hospitals.And I think that the other thing that has become more appreciated is for all the talk about the shortage of ventilators, I think there's become a greater appreciation that it's just not the ventilators that it is important because of the sophistication, because of the acuity of the patient and the sophistication of the machines, it's not just enough to wheel a machine in. You have to have the kind of staffing and protocols, with not only pulmonologists, but infectious disease doctors, respiratory therapists who can work and calibrate these machines, in order to get the maximum efficiency and to successfully wean patients off the ventilators.So, I didn't ever thought in my career that I would get to a point where virtually everybody in the United States knows what a ventilator is. I mean, that was certainly not the case a couple of months ago. And I think that our hospitals have very much run…

Pete, one of the things that we have seen change on the outpatient rehab side as well as Concentra on the oc-med side is telerehab and telemedicine. Prior to COVID we were doing about 50 visits a day. And in April, we averaged a little over 1,600 a day. As Bob mentioned, we have trained over 2,000 clinicians to provide these types of service.And while -- we think that's terrific. A lot of the payers have seen the benefit of telerehab, telemedicine and are now paying for it. We think some of that will in particular with Medicare population, we think that that will -- and now that Medicare is taking a look at paying for it, we think that the Medicare population will probably continue to utilize that. In many cases, we think the commercial patients will be coming back to the clinics or the centers.

All right. Just as a follow-up. Thanks for all that color on the critical illness recovery hospitals. But on the outpatient question, can you talk a little bit about the financial impact to you in terms of how you get paid and what your cost is for a mobile visit versus a regular visit?

Yes. It's a great question. For the most part, the rates are basically fixed for telerehab and telemedicine. So there is really not any difference between a visit, a physical visit versus a telerehab or telemedicine visit.

And your cost, is it similar?

It is very similar. Yes. Because remember, it really is the amount of time that you're spending with the patient. It's an essence of one-on-one time that you spend with the patient, so the costs are the same.

Okay. And then just as a last follow-up on that. What do you think is going to happen on the outpatient side? Do you think you'll see a migration towards more of these televisits, or do you think, providers are going to come to you more often to work with you going forward? What do you think will change in the outpatient side of the world going forward?

Well, I think, as I had mentioned, I think that we'll see the telehealth the telerehab volume probably decline as more and more people are no longer staying at home. But we think a certain portion of the population, specifically the older population will probably continue to do telerehab.

I think, the question is more on…

No, I don't think that the outpatient business, the color is that, you look for a systemic change. I mean, I understand that there are certain businesses that, whether it be concerts or sporting events, where you collect tens of thousands of people in close quarters, these outpatient rehab locations are pretty much made for social distancing. I mean, you don't have a lot of patients in the clinic at the same time. You have therapists. It's really a relatively easy environment to have the kind of safeguards that people are talking about. So it's hard for me to project any kind of systemic change in that industry.

All right. I was really trying to get what the impact would be on your competitors in terms of will some of them go out of business because of the pressures that you're seeing now with mobile going -- taking some of the business away or we're just running the business being more complicated? And will some of those providers go away and then actually help you with those providers come work for you?

Well I think the trends that we saw before the pandemic may accelerate a bit. I mean I think our belief always was that the future of that business was going to be fewer larger providers that had the efficiencies in the economies and we're able to be dominant in the markets where they provide. I think that it will continue to be difficult for one-off providers in the outpatient rehab business because of the compliance requirements because of the cost because of what payers want in markets.And I guess you could make an argument that that could be accelerated as a result of this event, but I'm not sure about that but I don't think -- it may change the cadence of those changes, but I think that it will just be a continuation of the things that we've seen and been talking about for some time.

Okay, thank you.

Thank you. Our next question is from A.J. Rice with Credit Suisse.

Hi everybody. I'm glad to hear everybody is well. Maybe just – obviously you were able to take some steps by the end of the first quarter. And I see that you -- it looks like you closed down fully 131 of your outpatient rehab clinics and maybe about 19 of the Concentra centers. Is that -- were there additional closures that have happened since the close of the quarter where do you sort of stand on those numbers at this point?

Yes A.J. good question. Of the 131 that were temporarily closed 114 of those were in the Kentucky marketplace where the Governor of Kentucky determined that outpatient rehab was nonessential. We had thought that -- and now those clinics are back open. So what we've seen is an increase in the opening of clinics. Those 114 were required by the government -- the Governor's requirements to close. We did not want to close them.

Okay. So there's not a material increase in either Concentra or it sounds like it's less in the outpatient rehab that are closed today versus at the end of the quarter?

That's correct.

Okay. I know we've been talking around the cost reduction efforts and the fact that you really -- the decremental margin in the last couple of weeks of March was very severe in the outpatient and Concentra business. Is there any way to size what all of those items you mentioned in terms of cost savings might aggregate to in terms of dollars or perspective on the relative margin hit as you've seen in the early part of the second quarter versus what we saw in March?

There really isn't AJ. As a matter of fact if you take a look at when this really impacted us it was really March 16. It was right after World Health Organization declared the pandemic that that third week was when we really started to see the volume decline and in the fourth week, we started making changes. But there is very little if anything savings from the changes that we made that occurred in the first quarter -- in that March period.

Yes. No, I understand that. I'm just trying to see is there any way to talk about an order of magnitude of what you have since implemented and how that may mitigate some of the revenue pressure? It sounds like it's a moving target. Is that the way to think about it?

Yes.

Yes.

Okay. Just the last question, some of the other post-acute providers have expressed some caution about these -- not so much the advanced -- accelerated Medicare payments but more than some of the grant money. A; whether they can justify it, or B; whether they feel comfortable with all the attestations, where do you guys fall out with respect to that?

A.J., we are currently going through and pulling together all that information right now. And we're -- at this point in time we can't give you a definitive answer on that.

But you're right it's complicated and it seems to be shifting. So we'll just continue to work on it. Fortunately we have access to all of our costs and our data information. So whatever requirements -- if we're not able to keep some of the grant money it won't be because we don't -- we are not able to allocate it, we'll be able to do all of that. So -- but we're working through that now.

Okay. All right. Thanks a lot.

Thank you. Our next question is from Kevin Fischbeck with Bank of America.

Maybe just a follow-up on that stimulus money number. You said the $10.1 million in entities where you're minority partnered. Is that the amount attributable to you, or is that the amount that your partners got and you would get a minority share of that?

Yeah, Kevin that's the total amount.

Total amount that they received, okay. And then just wanted to get a little more color on the first two months of the year. Obviously you had leap year in there, which probably helped the numbers a little bit but the growth there was incredibly strong and much stronger than what we would have been looking for, for the quarter. Trying to understand maybe a little bit, how that performance matched up against what you guys were really expecting as you try and think about what Select might look like on a new normal? Were those the trajectories you would have expected for the year more broadly, or is there anything unusual going on in those first two months of the year?

No. I mean, they were certainly a little bit better than we had anticipated. And again, it's I think across all four business segments, the operators have done a great job bringing in – taking market share, bringing in volume. It's really driven by the volume.

Yeah. I think it was just a continuation of the momentum you saw from third quarter, fourth quarter of last year. I mean, I just think a lot of the changes and a lot of things that we did were really beginning to show. And we would have been exceedingly pleased with the results of the first quarter have we not had the disruption in March, but I think we believe we can get back to that.

Okay. And then the comment about 21% of outpatient visits coming from elective procedures, I guess what we've seen broadly speaking is that you've seen declines in utilization across almost every provider group bigger than what we would have thought. I just wanted to understand exactly how you were thinking about elective procedures. Is that saying what you would have determined as an elective procedure three months ago, or are you tying it back into procedures that have had some visibility into and have been deferred specifically as it relates to this?

I'm not sure we understand the question Kevin. Can you say that again?

I think you said earlier that 21% of outpatient rehab visits come from elective procedures. And so you were optimistic that elective surgeries come back then outpatient visits will come back. But I guess we've seen surgeries down 70%, outpatient surgeries down 70% in April. So you've seen a much bigger drop in surgery than we ever would have thought you could have seen before. And so I wasn't really sure if what we're seeing as kind of deferred procedures in April is really the typical definition of what we would think of as elective procedures.So when you say 21% visits come from elective surgeries, I just wasn't sure if you were kind of using the 70% down this month or whether you're saying, well on average historically we thought this is what it was, but we're obviously seeing a much bigger impact right now?

Yeah. In essence what we do is we took a look at those visits that we had coming from elective surgery being done so post-op. We took a look at those over the last 12 months and basically divided that by the total number of visits that we had. That's how we arrived at the 21%.

Okay. So that's not necessarily real time. The impact is obviously bigger right now but it sounds like…

Yea, exactly.

Yeah, it's not real time but historic. And I think that -- I think we think that all of those surgeries that ultimately find their way to our outpatient, those will not be gone. I mean there's just going to be pent-up demand. So we certainly believe that there's going to be -- there will be an acceleration at some point because those surgeries while we refer to them as elective, they are going to have to be done at some point.

Yeah. And then I guess my last question. On the rehabs, I think the rehab side, I guess we did see the patient days being up even though the admissions were down a lot. Can you maybe talk about what was going on there? Was there some issue about being discharged from the hospital? Is that a dynamic that we would expect to continue the length of stay would keep increasing, or would we ultimately expect rehab volume patient days to be similar to the admission trends? Thanks.

Yeah. I think as far as length of stay, I would expect in the future you're going to see it go back to historical levels that this was a the pandemic is just a very unique situation with regards to admissions and discharges.

Okay, great. Thanks.

Thanks.

Thank you. Our next question is from David Common with JPMorgan.

Great. Thank you, good morning. And thanks for fielding all our outlook questions, recognizing that there's so many uncertainties. I was hoping to follow-up a little on A.J.'s questions particularly with regard to Concentra. And maybe you could give us just a bit more qualitative commentary on the cost structure and the ability to avoid operating losses for any length of time. I was thinking that maybe comments about performance during the global financial crisis might be helpful. If you could remind us of that, and then sort of similarities and differences in the business since then.You mentioned rent deferrals, which actually, I wasn't expecting and it just jogged my memory to ask about the significance of rent burden in both the outpatient businesses and whether permanent closures would be part of the mix as you go forward? And then finally just thoughts on whether this makes the valuation on the put call a little tricky looking at a little bit? Thank you.

Sure. David, let me address your last question first is that – remember that the put that our minority partners have in Q1 of 2021 is 11.3 multiple times the LTM EBITDA. And given the expected drop in EBITDA in these last two months, we would anticipate and we've actually had discussions with our partners and we do not anticipate that they would exercise that put come Q1 of 2021 and they will basically postpone that and exercise that put come Q1 of 2022.

Okay.

As it pertains to the cost structure, I had mentioned before that the outpatient businesses, a significant amount of their costs are really the salaries wages and benefits. So the way that we take a look at that is it's variable expense. And to the extent that the volume isn't there, the clinicians are basically flexed. And in essence that's what has occurred over the past month. Those clinicians have been flexed. So costs are down considerably.

Okay. And then rent deferrals reductions closures?

Yes rent deferral, I wouldn't think about that being a large amount. As a matter of fact, I believe, what we've seen is probably less than $1 million of cost savings on an annualized basis.

Okay. And then global financial crisis, any just reminders of performance and again difference in not just cost structure but similarities or differences that make up the business? Thank you.

Yes. David, we don't think that there's a comparative – there's no comparison between what happened in 2008, 2009 to what we have today. You're looking at 30 million people being unemployed over the last month. And to the extent the states begin to open up, we think a lot of those people will basically be reemployed. So unlike what you saw in 2008, where it was over a period of time, we don't anticipate that's going to occur here.

All right. Well, again thanks for filling the question.

Sure. Thanks, David.

Thank you. Our next question is from Bill Sutherland with the Benchmark Company.

Thanks and hello, everybody. Just one or two at this point. I've been thinking about the very strong utilization number you had in patient rehab, 79% for the quarter, despite all the complications in March. And wondering, if there's a cadence to the quarter to utilization. And where do you think particularly given the mix of patients going forward utilization can run for that business?

Yes. Bill, as far as the way we took – we take a look at utilization is really on an occupancy rate basis. And as you remember, we had opened up two new hospitals in the first quarter of 2019. And so what you've seen is a good portion of that volume that you're seeing is really a function of those hospitals opening up. And then some of the hospitals that we've had from the prior year maturing. So for us, we think that ultimately you can probably get on a mature basis in that occupancy rate of 85%, 86% on the rehab side.

Okay. And even with the complications of housing the COVID patients?

Yes. Yes.

Okay. The other thing I know – I wanted to ask you guys about is CMS came out with yet another set of waivers a day or two ago that apply to both your rehab and long-term hospitals, basically permitting reimbursement for any Medicare admit kind of regardless of patient criteria or where they're referred from. Would you – I know you've committed to handling COVID patients, would this allow you to just even take on more ADC, or to have your – just have more census in those locations as a result of that?

Yes. My understanding of the rules were -- that was really to assist the short-term acute care hospitals decompress their senses and be able to just find a discharge destination for those patients. As far as we're concerned, I think, what we'll do is we'll continue to handle the highly acute patient population that we've always handled.

Yes.

Yes. The waivers that were historically on the LTAC that came early on which was the ability to bill fully for the site-neutral patients and the what they call the 50-50 rule we didn't take advantage of those at all. I don't -- I think that -- and I would say that completely universally across our network of 100 critical illness hospitals. We are sticking to the high-acuity ventilator-dependent patients that will be the, I think, the mission and the best patients for us coming out of this and for Select Medical for us right now as well. So we haven't really taken advantage of any of those waivers.

All right. That makes total sense. The last one for me is on your time line for your new rehab hospital development. Can you -- is there an update there or any change?

I think the construction has gone on unabated in our Arizona hospitals with Banner and we expect the two that are under construction to open on time in Q4.

Okay. Great. Thanks for all the color, guys.

Thank, Bill.

Thank you. And ladies and gentlemen there is no further time for questions. I will hand it back to management for closing remarks.

Yes. Thank you everybody for joining us. And we will certainly look forward to updating you next quarter.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.