Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to Discuss the Third Quarter 2024 Results and the Company's Business Outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio, and the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference over to Mr. Robert Ortenzio.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's earnings call for third quarter 2024. As most of you are aware, this quarter, we successfully completed Concentra's initial public offering. Concentra issued 23,250,000 shares and now trades under the symbol CON on the New York Stock Exchange. Select Medical now owns 81.74% of Concentra's stock. We expect to distribute its remaining interest in Concentra to our shareholders by the end of the year, contingent upon receiving the waiver of the IPO lockup, which is based on market conditions. As noted on last quarter's earnings call, Concentra entered into financing arrangements, which included a new senior credit facility consisting of an $850 million seven-year term loan, a $400 million five-year revolving facility, which was undrawn at closing, and $650 million of 6.875% senior notes due 2032. The majority of the net proceeds of Concentra's IPO and related debt transactions were used by Select to pay down debt. Concentra will be holding their Q3 conference call later this morning at 10.30 Eastern time, where they will provide more detailed information regarding their performance for the third quarter. On the development front in September, Select Medical opened a 48-bed inpatient rehab hospital in Jacksonville, Florida with our partner, UF Health. The joint venture hospital is branded UF Health Rehabilitation Hospital North and resides in the new tower of UF Health North. We're also pleased to announce a few new inpatient rehab projects, including an acquisition of a 50-bed hospital in Oklahoma City. It is scheduled to close in December. The hospital will be a joint venture with our current partner, SSM. Early next year, we also plan on opening a 54-bed rehab hospital in Temple, Texas. Contingent upon regulatory approval, we plan on opening a new 68-bed facility in Jersey City, which…

Thanks, Bob. And good morning, everyone. I will begin by providing additional details on the progress we continue to make regarding our labor costs within the critical illness recovery hospital division. Overall, our SW&B as a percentage of revenue ratio was 58.1% this quarter, which is a decrease from 58.4% in Q3 of prior year. In the third quarter of this year, we again saw decreases in the agency cost and utilization from the prior year of Q3. Compared to Q3 of 2023, RN agency costs decreased by 4% and utilization decreased from 15.4% to 14.7%. Agency utilization also dropped 6% from the sequential quarter of Q2, which was 15.7%. The agency rate for RNs remained consistent with prior year at $78 an hour. Nursing sign-on and incentive bonus dollars decreased by 18% from Q3 of prior year from $7.8 million to $6.4 million. Finally, we saw a decrease of 13% in our orientation hours. We're very pleased with the continued progress we have made in regards to these labor costs. On July 26, Concentra entered into financing arrangements, as Bob had mentioned, on their $850 million seven-year term loan, $400 million five-year revolver, which is undrawn, and $650 million 6.875% senior notes, which is due to 2032. Using these proceeds from the Concentra IPO and debt transactions, Select made voluntary prepayments of $1.6 billion on our term loan and $300 million repayment on our revolving credit facility. At the end of July, we also decreased our revolving credit facility by $220 million from $770 million to $550 million. And as of September 30th, we had almost $500 million of availability on our revolver. The net decrease in our consolidated debt balance in Q3 was $498 million. At the end of the quarter, we had consolidated debt balances outstanding of…

[Operator Instructions]. Our first question will be coming from Ben Hendrix of RBC Capital Markets.

First to Bob, our deepest condolences for Rocco's passing. Our thoughts are certainly with you there. And the second question, I guess for Marty, I just wanted to get some more comments on LTAC occupancy trends. I think we may have misconstrued some seasonal occupancy trends as staffing related. It doesn't sound like that's the case. Maybe you could provide just some more detail and kind of what you're seeing from an occupancy standpoint in that segment versus your targets and if there's any outlier threshold influence there.

Ben, the occupancy rate for this past quarter, we were actually pretty pleased with it. It was higher than prior-year same quarter. And it really is seasonality of the third quarter. So it really didn't have anything to do with staffing issues. It's really just a function of the quarter.

And anything that you can comment or observations on outlier thresholds impacting the segment at all.

Our operators have done a very good job managing through the high cost outlier. So we really haven't seen too much of an impact there.

Our next question will be coming from Justin Bowers of Deutsche Bank.

When I look at pro forma net leverage post spin, I arrive around a number of about 3x, maybe a little lower than that. The company is going to generate substantial amount of free cash flow, even after all the development projects that you laid out. Any thoughts or preferences on capital deployment, given what we know now, and is there sort of an optimal leverage range for the company or would you sort of even take that down to two or that level?

I think that I hate to say that the answer has kind of always been similar from Marty on capital deployment. We do kind of pride ourselves on our history of being opportunistic on our deployment. We are fortunate to have lots of opportunities in the development area, as you saw from my comments on some deals that we have, and there's others behind that. I would describe our development pipeline as quite robust right now. And then there is obviously the opportunity to de-leverage through free cash flow or have stock buybacks. All options are on the table, as we like to always have them. I will say that we have worked hard to drive our leverage down to 3 times, and we've gotten some uplift from the rating agencies, as you've seen. We're pleased with that and we would like very much and it's a priority to maintain that. So I think a 3 times leverage is very good for us, very positive, allows us to keep all of our options open. And I think as we go forward as a smaller company without Concentra, we want to maintain that flexibility. So I would say – that's a long answer to say 3 times is really where we want to be and we want to try to maintain that and then we want to be opportunistic in terms of where we allocate our free cash flow.

Just quick clarifications. On LTAC development, it sounds like there's – at least through 2026, there's one program that you have or project that you have line of sight on. Is that right? 26 additional beds.

Well, there are other opportunities. We've only listed one. We find, as that business is evolving with the threshold levels making that business even tougher, our operators are navigating. We have a very big platform. We are finding that a lot of our new LTAC development projects are bleeding into our partnerships, our existing ones and our new ones. As we continue to perform very well with our partners on inpatient and outpatient rehab, LTAC has become a part of that model, which we like. We will also do some de novos. But it is not a place where we won't spend capital, but as we look across our business segments and on the hospitals, bigger opportunities for capital deployment on rehab. And then also some on outpatient, although that's relatively modest. On the LTAC side, we would like to grow, but we're not looking to have really large capital deployment in that area. So another way of saying is we like the hospital within a hospital model, which is less capital intensive, so we will look for those opportunities. So the LTAC will continue to be a growth segment for us. But with our platform, we can be a little bit more judicious on our capital and find opportunities where we can grow in the LTAC space without a lot of capital and then continue to allocate that primarily right now because of the opportunities on the inpatient rehab side.

Just quick one on the IRF rates, I think in the 2Q call, you talked about 2% for the federal funds base rate, and then the final rule said basically like 3% market basket net of productivity. Can you just square those two for us, at least on the Medicare side? Is the right way to think about sort of like, the base rates is 3%.

Justin, this is Marty. We think it is in that 3% range.

Our next question will be coming from Bill Sutherland of The Benchmark Company.

I had one question on LTAC. Noticing one fewer hospital listed as of the last quarter, was there a removal or something from the portfolio?

Hold on just for a second, Bill. I think we saw a reduction from a year ago.

Maybe I was wrong, I thought you were at 107. Okay, maybe I was wrong, the second quarter isn't – it was already at 106?

Yeah, we're looking right now. Yeah, you're right. We did close one in Ohio.

Just underperforming?

Yeah, it was a consolidation, Bill.

Marty, while I've got you, what are you thinking about as far as additional progress you can make on SWB as a percent of revenue? Is there more wood to chop?

Yeah, we think that there is, Bill. The numbers that we provide for, our targets are really annual. We think we'll probably end this year in that 57% range. As you know, we started off very well in the first quarter in that 54%, 55% range. And so, next year, we think we can see that come down. And there's really two points that are going to drive that. One is the commercial contracts. We continue to have some success on the negotiation of our commercial contracts. If we can obtain what we've done in the past year, be in that mid-range single digit increases, that will certainly help that number come down. The second one is volume increases. Volume increases has a big impact on the ability to drive that number down. And the hope is that, given the CMS mandate, that Medicare Advantage, follow traditional Medicare patient criteria, that we'll see improvements in the pre-authorization admission approval rates of Medicare Advantage. So if that occurs, that SW&B as a percentage of revenue will continue to drop.

Looking at outpatient rehab and the progress you're making steadily here, kind of what are the keys for the next sort of step up? I know that it's a business that you've run in the mid-teens margin area in the past. I'm not sure what's on the planner for progress forward from here.

Bill, one of the major movers for us is our clinical efficiency. Clinical efficiency being the number of patients a therapist can see in a day. And we've really kind of focused over the past year in using technology to help us do that. We've got a very significant release that's occurring at the end of the year, and we think that that will be a game changer. That will be a big help for us. So we anticipate we'll see some nice improvement in the margins come next year.

Is that an internally developed system or…? I'm just curious.

Yes. Yes, it was.

Our next question comes from Joanna Gajuk of Bank of America.

This is Christian Porter on for Joanna. Our question was about outpatient rehab. So margins came in much better than our estimate and we just wanted to know if you could talk about your efforts to improve efficiency. One of your peers saw higher contract labor costs in Q2. And we were wondering if you were seeing any of that and just trends around volume, staffing, and pricing.

There's a couple of questions that you put there. I think what we saw was, the first one I'll focus on is really taking a look at supplemental staffing, the agency staffing. We've seen that decline sequentially, and so that certainly helped the margin. I think we talked with the prior caller, with Bill, on what we're doing on the technology side through our systems to help enhance our clinical efficiency. So, both of those, we think will – one has helped in just recently, we think the technology will certainly help in the future.

And I would now like to turn the call back to management for closing remarks.

Thank you, operator. No closing remarks. We appreciate everybody that was on, your questions, and your condolences for Rocco. So thank you. We look forward to updating you next quarter.

And this concludes today's conference. Thank you for your participation. You may now disconnect.