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Good morning, and thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the second quarter 2025 results and the company's business outlook. Presenting today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; the company's Executive Vice President and Chief Financial Officer; Michael Malatesta. Also on the conference line is 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 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.

Thank you, operator. Good morning, everyone. Welcome to Select Medical's Earnings Call for the Second Quarter of 2025. I'd like to begin today's call by sharing that U.S. News & World Report recently released its list of the nation's best rehabilitation hospitals. And I'm pleased to report that 8 of our hospitals, which operate across 15 locations, were recognized among the country's best. Kessler Institute for Rehabilitation at #4 was once again ranked as one of the top 5 rehab hospitals in the nation, earning a spot on the list for the 33rd consecutive year. Our other rank hospitals include Baylor Scott & White Institute for Rehabilitation, Dallas at #8; Cleveland Clinic Rehab Hospital at #20; California Rehab Institute at #24; Banner Rehabilitation Hospital at $26; and OhioHealth Rehabilitation Hospital at #31. This year also marked the first recognition for Baylor Scott & White Institute for Rehabilitation hospitals at Frisco at #36 and Penn State Health Rehabilitation Hospital at #47. These rankings underscore the strength and consistency of our services and reflect our ongoing commitment to delivering high-quality care to patients and the communities we serve. I'm also pleased to report that we have continued success in executing our development strategy this past quarter. In our rehab division, we recently opened our second hospital with UPMC in Central Pennsylvania, adding a 12-bed acute rehab unit in Tallahassee, Florida and expanding our acute rehab hospital in Pensacola, Florida with 8 additional beds. In addition, we launched a 12-bed neuro transitional care unit with SSM Health in Missouri. Within our outpatient rehab division, we continue to expand our footprint and grew our clinic count by 8 this past quarter. Looking ahead, we remain focused on advancing our development pipeline and growing our presence in key markets, particularly within the inpatient rehab division, where we continue to see growing demand for our services. We expect to add 382 rehab beds, of which 294 will be consolidating and 88 non-consolidating and 30 critical illness beds between now and the end of the first half of 2027. This expansion will be achieved through a combination of new openings and bed additions in markets with strong volume and occupancy rates. In Q3, we plan to open a 45-bed hospital in Temple, Texas and add a 30-bed critical illness recovery hospital in Memphis, Tennessee. Later this year, we plan to open our fourth Cleveland Clinic Rehab Hospital as well as a 32-bed acute rehab unit in Orlando, Florida, and complete a 10-bed expansion in one other of our existing rehab hospitals. We anticipate opening an additional 3 rehab hospitals during 2026, including our fourth in partnership with Banner Health in Tucson, Arizona, 58 beds, and a new freestanding 63-bed rehab hospital in Ozark, Missouri with Cox Health Systems and a 60-bed rehab hospital branded as AtlantiCare Rehabilitation Hospital in New Jersey. We also intend to add another acute rehab unit and 2 neuro transitional units in 2026. And in 2027, we plan to open a 76-bed facility in Jersey City, which will operate under the Kessler brand and expand one of our existing hospitals. We expect to continue to fill our pipeline with additional growth opportunities as our inpatient rehab pipeline remains very strong with many opportunities currently under evaluation. In parallel with our growth initiatives, we remain committed to delivering value to our shareholders. This quarter, we repurchased over 5.7 million shares of our stock at an average price per share of $14.86 under our Board authorized stock repurchase program for a total purchase price of $85.1 million. In addition, our Board of Directors have also declared a cash dividend of $0.0625 per share and is payable on August 28, 2025, to stockholders of record as of close of business on August 13, 2025. Looking forward, we will continue to evaluate the most effective uses of capital to support strong operational performance and shareholder value, including strategic investments for growth, debt reduction, additional share repurchases and cash dividends. Turning to our second quarter financial results. On a consolidated basis, our revenue grew nearly 5% to $1.3 billion, and our adjusted EBITDA increased to $125.4 million from $124.7 million in the prior year. Earnings per common share from continuing operations rose 88% to $0.32 from $0.17 per share in the same quarter prior year. I'd now like to highlight key financial results by segment, starting with our inpatient rehab hospital division, which delivered another exceptional quarter. Revenue rose 17% year-over-year to $313.8 million, with adjusted EBITDA increasing nearly 15% to $71 million, and our adjusted EBITDA margin declining slightly to 22.6% from 23.1% in the prior year. Our occupancy rate was lower than prior year at 82% and is reflective of the early-stage operations of our new hospitals. Our same- store occupancy rate remained stable at 86%. In April, CMS issued their proposed rule and if adopted, would see an increase of 2.4% in the standard federal payment rate. We expect the final rule to be posted in early August. In our outpatient rehabilitation division, revenue increased 3.8%, which was driven by a corresponding 3.8% in patient volume when compared to prior year. Our net revenue per visit remained stable at $100. And while we continue to see improvements in our commercial managed care rates, these improvements are offset by a 3.2% reduction in Medicare physician fee schedule rates. Reduction in Medicare rate caused a $3 million decrease in our revenue during the quarter and adjusted EBITDA increased 6.1% year- over-year with division's adjusted EBITDA margin increasing to 9.3% from 9.1%. Before speaking to the performance of the critical illness recovery hospital division, I wanted to address the headwinds we are continuing to face with LTAC reimbursement system. The goals of the 2013 LTAC criteria policy, which we supported, focused on carrying for high-acuity patients, those with a minimum 3-day ICU stay with lower acuity patients being treated in lower cost setting. Since the enactment of the criteria, the LTAC industry has seen a 56% reduction in Medicare spend. The enactment of criteria and additional regulatory changes has resulted in the closure of over 100 LTAC hospitals, which represents a 24% closure rate. The high-cost outlier threshold targets established more than 20 years ago at 8%, preceded the implementation of LTAC criteria and was developed using a significantly different and less acute patient population than the industry is caring for today. This has resulted in a significant reduction in reimbursement for the higher acuity patients and the high-cost outlier status has been further magnified by the 20% transmittal. We are committed to engaging in dialogue with regulators regarding potential short- and long-term policy reforms. We're hopeful these discussions will lead to positive changes that will enable us to continue to provide excellent care to high-acuity patients with complex medical needs. Moving on to the financial results for the critical illness recovery hospitals division. Revenue was $601.1 million this quarter, which is a decline of 1% from the same quarter last year. The decrease continues to reflect the impact of the increase in high-cost outlier threshold and the implementation of the 20% transmittal rule. Patient volumes remained relatively stable year-over-year, with our occupancy rate improved to 69% from 67% in the prior year. Our salary, wage and benefits to revenue ratio rose slightly to 58% and our adjusted EBITDA declined 22% year-over-year, which was primarily due to the regulatory changes I mentioned earlier. Our adjusted EBITDA margin was 9.4% for the quarter compared to 11.9% in the prior year. Yesterday afternoon, CMS issued the final LTAC rules for fiscal year 2026. These rules, which become effective October 1, include an increase in the standard federal rate of 2.9%, which is higher than the 2.7%, which was within the proposed rule in April. The high- cost outlier threshold increased by [ $1,188 from $77,048 to $78,936 ], which is less than the $14,199 increase in the proposed rule. The MS-LTAC-DRG relative weight and expect the length of stays were also updated in the final rule. This concludes my remarks, and I'll now turn it over to Mike Malatesta for some additional financial details before we open the call up for questions.

Thank you, Bob, and good morning, everyone. At the end of the quarter, we had $1.9 billion of debt outstanding and $52.3 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.04 billion in term loans, $250 million in revolving loans, $550 million in 6.25% senior notes due 2032 and $33 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 3.57. As of June 30, we had $319.1 million of availability on our revolving loans. The interest rate on our term loan is SOFR plus 200 basis points and matures on December 3, 2031. Interest expense was $30 million in the second quarter compared to $28 million in the same quarter prior year. For the second quarter, operating activities generated $110.3 million of cash flow. Our days sales outstanding, or DSO, for continuing operations was 62 days at June 30, 2025, compared to 60 days at June 30, 2024, and 58 days at December 31, 2024. Investing activities used $64.7 million of cash in the second quarter for purchases of property and equipment. Financing activities used $46.5 million of cash in the second quarter, which includes the $85.1 million of shares repurchased under our stock repurchase program, $7.9 million in dividends paid on our common stock, $12 million in net distributions and purchases of noncontrolling interests and a $2.6 million payment on our term loan. This was offset by $70 million in net borrowings on our revolving line of credit. We are reaffirming our business outlook for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion, adjusted EBITDA to be in the range of $510 million to $530 million and adjusted earnings per common share to be in the range of $1.09 to $1.19. We are narrowing our expectation of capital expenditures, which we now project to be in the range of $180 million to $200 million. This concludes our prepared remarks. And at this time, we would like to turn it back to the operator to open up the call for questions.

[Operator Instructions] Our first question coming from the line of Ann Hynes with Mizuho.

I just want to talk about how the EBITDA per segment came in line versus your internal expectations. And specifically with the critical illness, I guess I expected an improvement in the year-over-year decline in EBITDA. Did that come in line or worse than your expectations? And also with guidance, can you talk about -- I know you reiterated your adjusted EBITDA guidance, but maybe any changes within that guidance would be great.

Ann, critical illness came in for our internal expectations, slightly lower. But then again, we continue to see inpatient rehab exceed our expectations. And then going forward, that's kind of built into our guidance. So overall, we're comfortable with our reaffirmed guidance.

All right. Okay. And then with inpatient rehab, I know there's a few states that might lift the inpatient rehab CON, hopefully, over the next year North Carolina being a big one. What is your strategy going forward in those states that will have a more favorable CON environment for inpatient rehab?

Yes. As you point out, there are a few number of states that continue to have CON law. You recall that a year or so ago, Florida sunsetted theirs, which was really a big one, and you saw more growth. And we would expect the same thing to happen in North Carolina or other states that may remove their CON requirements. For us, it really won't change our strategy. We would spend more time in North Carolina, but we would continue to stay true to our joint venture strategy. So while if you see a sunset, for example, in North Carolina, you wouldn't expect us to see us go in, tie up, land and immediately start construction. We would probably follow our model of engaging with some of the major systems in that state that would be interested in growing their post-acute network with rehab potentially critical illness and outpatient.

Our next question coming from the line of Justin Bowers with Deutsche Bank.

So an outpatient rehab making some progress there, EBITDA up 6% year-over-year. Can you talk about how you expect that business to evolve throughout the rest of the year? And then in the midterm, where you think EBITDA margins can settle for that business?

Justin, we continue to expect outpatient to improve. And I think as we communicated before, that improvement will continue throughout the year. And our initiative with scheduling really should take off towards the end of the year and the early part of next year. And we should start exceeding that or approach that 10% EBITDA margin because right now, we're slightly below. I think a slight improvement from 9.1% to 9.3% this last quarter, but we should continue to see improvement.

Justin, it's Bob. I continue to be very bullish on the prospects for our outpatient division on a go-forward basis. We have been working on implementing some really good system upgrades in that platform. And with a platform that spans as many states as we're in with 2,000-plus clinics, the incremental improvement that we can put over that platform through systems efficiencies can really drive performance, margin and EBITDA growth. So I'm pretty bullish about our prospects there on a go-forward for the balance of this year and particularly into through 2026, even with the Medicare headwinds that we're seeing on the Medicare fee schedule.

Understood. And then with the outlier threshold, can you help us understand the impact there in 2Q or maybe throughout the year? And then what some of those policy initiatives are that you think could maybe impact the CMS' approach to this longer term?

Yes. Well, I'll speak to the policy initiatives. As you know, the final rule for LTACs just came out yesterday and we saw an improvement -- a slight improvement, an improvement nonetheless on the rate, and we saw a pretty significant improvement on the high-cost outlier threshold, which was telegraphed under the last administration to go to over $90,000. And in the final rule here, it's in the $70,000. So I'm encouraged by the willingness of the current CMS administration to be open to the feedback of providers and with us specifically, and we have submitted a number of comment letters and have worked to engage with CMS. And the only thing that I can say is I have found them much more open and transparent to discussion than I had found through the Biden CMS. So they're open to dialogue. That's I mean -- and that's -- for us, that's the best that we can hope for. I mean success in our policy initiatives is not guaranteed, never has been. But I'm encouraged by the fact that there is an easier path to dialogue.

And Justin, the impact on the quarter, it was around 60% of the impact it was in Q1. So as we expected, we're still going to face these headwinds throughout the year, but it wouldn't be as significant as it was in Q1 when we have higher volume and higher acuity.

Our next question coming from the line of Ben Hendrix with RBC Capital Markets.

Just to touch a little more on that last point there. If we could just get your take on kind of how we should think about seasonality with LTAC margins knowing that we did enter a lower acuity quarter, and we saw a sequential decrease in margin? And now that we've got kind of a more stable high-cost outlier backdrop going forward, any way that we should just generally think about margin seasonality going forward under the current rule?

Well, I don't think there's a change in when we say margin seasonality, I mean Q1 is always going to be our strongest quarter, and the great is, last year, I think in 2024, we're around 17% margin. We finished this year at over 13%. Q2, we started seeing weakening as the quarter progresses. Then in Q3, that's normally our most challenging quarter, and we started seeing census grow through the back end of that quarter. And in Q4, we started seeing a ramp back up during the colder months. So while we're going to have margin suppression from 2024, the seasonality aspect is relatively the same.

Great. And then can you remind us how much startup cost do you have included in the guidance for the IRF segment through the back of the year?

It's probably slightly around or a little less than $10 million for the back of the year. I think year-over-year for Select Specialty Hospitals, we're pretty consistent from '25 through '24 around our per annum basis, that $20 million level.

Our next question coming from the line of Joanna Gajuk from Bank of America.

This is Joaquin Eduardo on for Joanna. So with Q1, you flagged the 20% rule impact. The rule was issued as a surprise to the industry and there was some traction in Congress to pull back. What's been the progress on this? And what should we expect moving forward?

I'm not sure that I could agree that there was traction in Congress to pull back on the 20% transmittal, if that's what your question was. I mean that -- the first part of your comment was, yes, the 20% transmittal came from what they call a sub-regulatory -- and this was back in the last administration, kind of the outgoing CMS that was not put through formal rulemaking and it came through what they call a transmittal. So that was a surprise and a disappointment to many of us in the industry because it doesn't give you any opportunity to comment. Normally, it would be very difficult for the Congress to fix that. And there really has not at least to this date, been much of a vehicle even though you had the reconciliation, that was what they call a pretty clean bill. So I think on that, working with CMS is probably going to be the only path that we have on that. But that's now been in place for close to 6 months. So while we can always hopeful, hope is not a strategy. So we are where we are right now. And we've baked that transmittal impact into our guidance, and we'll continue to look at all avenues to try to affect policy. But I just want to point out that the 20% transmittal is just part of a bigger high-cost outlier challenge that the industry is facing, as I made in my comments, which is as the number of cases in the LTAC industry have overall gone down and those cases tend to have much higher CMI case mix index and higher measure of acuity, the 8% outlier pool is going to continue to be a challenging element of the reimbursement system. I hope that answers your question without getting too far in the weeds.

No, yes, definitely. And then kind of changing it up though, on the final LTAC reg, you only called for the 2% increase in the outlier threshold. So it should be easier to manage than the 30% increase in full year '25. So are we assuming better margins in the critical illness business in 4Q '25?

Well, the reduction from the proposed $91,000 to $70,000 was certainly welcome, but I'm not sure I could agree with the characterization that it will make it easier in 2025, 2026. That's still a challenging number on the fixed loss threshold. So...

And we didn't bake into our guidance the proposed rule nor do we ever provide -- bake into our guidance proposed rules. So while we're very happy that it's not as punitive as the proposed rule, it still represent a modest increase over where our current threshold limit is.

Our next question coming from the line of A.J. Rice with USB.

Just to make sure I understand sort of the dynamics in the critical access hospital LTAC business. So some of the less intense patients are dropping off and not get referred to LTACs. It sounds like maybe there's some contraction of the people that are providing the business. Can you just talk about -- I know there's a lot of focus on the outlier changes, et cetera, and how that's affected the dynamics. But if you strip all that back, is the supply -- what is happening with the overall supply-demand picture in that business? Is there a meaningful reduction in capacity? Is there a steady flow of patients, at least the kind that you won, has that even picked up? Maybe you're one of the few outlets is hanging in there. Any thoughts on that?

Well, let me take a shot at that, A.J. You tell me if I'm being responsive to your question. The supply-demand dynamics for the critical illness recovery hospitals is very strong, and we think it will be even stronger. And that's driven by demographics. It's fueled by advances in medical technology. It's fueled by the need to decompress ICUs that are becoming increasingly crowded, particularly during those months where you see a lot of respiratory cases. So we are not short of demand -- patient demand for our services. We, of course, struggle with the same things everybody else struggles with, which, as more and more patients -- Medicare patients go to Medicare Advantage, we still face what we consider being inappropriate denials or preauthorization that delay or prevent admissions, but that is not a new problem, and that is a problem that we manage. We still have over 24%, 25% of our patient population in our critical illness recovery hospitals are Medicare Advantage and 30% probably Medicare fee-for-service. So that -- we see that demand going forward unabated. It's really -- our challenge has been the structure of the reimbursement system that for a company like ours that has one of the highest case mix indexes, we tend to see the higher acuity patients that are more likely to go through the fixed loss and end up in high-cost outlier status. So if that's responsive. If not, please ask a follow-up question.

No, that's sort of what I was looking for. Just generally speaking, again, we're talking about some of the top level revenue-driven things. What's happening with some of your expenses, I know mainly labor, I guess, but across the different business lines, a number of providers are showing improvement there margin-wise. But what's your trend across your major business lines?

A.J., our trend is at least on an employee rate perspective, we continue to see improvement. So I think during -- coming out of COVID or in the heart of COVID, in our inpatient division for full-time employees, we're experiencing 5% per annum increases. That's migrated down to 3% and now even a little bit below 3%. So from that aspect, it's improving. I don't think we have the headwinds or the challenges we had with agency and those elevated costs that we had in 2022 and part of 2023. We did have some slight deterioration in our critical illness, labor margin this quarter year-over-year, but that was a function of really the pressures that we have on revenue with the HCO threshold. So that's where you saw that modest tick up of 1%.

I'm showing no further questions in queue. I will now turn the call back over to Mr. Ortenzio for any closing remarks.

Great. Thank you, operator. Thanks, everybody, for joining us for the call. We look forward to updating you next quarter.