Robert Ortenzio – Executive Chairman and Co-Founder Martin Jackson – Executive Vice President and Chief Financial Officer.

Joanna Gajuk – Bank of America Merrill Lynch.

Good morning and thank you for joining us today for Select Medical Holdings Corporation’s Earnings Conference Call to discuss the Fourth Quarter and Full Year 2016 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 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..

Thanks operator. Good morning everyone. Thanks for joining us for Select Medical’s fourth quarter and full year earnings conference call for 2016. As you’re aware the Company announced updated estimates, net revenue and adjusted EBITDA on January 27 in connection to discussions with our lenders about refinancing Select’s senior credit facilities.

Our results for the quarter and the full year 2016 announced in our earnings press release yesterday were in line with those estimates. We anticipate completing the refinancing in early March, which will include a new seven-year $1.15 billion term loan priced at LIBOR plus $3.50 and a new five-year $450 million revolver price at LIBOR plus $3.25.

The refinancing transaction will reduce our interest expense and extend the maturity on our senior secured debt to 2024. Before I provide some additional specifics on the quarter and full year results, I want to briefly recap some of the accomplishments for the company in 2016.

As you know in mid 2015, we closed on the acquisition of Concentra with our partners Welsh, Carson and Cressey & Co. This was the largest acquisition in Select’s 20-year history. The new management team in Concentra as well as the corporate team at Select did an outstanding job achieving the expected synergies and growing Concentra EBITDA.

Adjusted EBITDA grew to $143 million in 2016 or approximately $90 million 2015. In March 2016, we’ve acquired Physiotherapy Associates, the second largest physical therapy provider in the country. Integration of Physio has gone well and we expect to realize the full amount of synergies expected in 2017.

Also in March 2016, we sold our Contract Therapy business for an attractive valuation resulting in a gain of $33.9 million. We believe both the strategy and timing were right for that sale. In our Specialty Hospital business or LTAC all transitioned to patient criteria.

Although these hospitals are generating less adjusted EBITDA currently, Select started a path different than anyone in the industry and we were successful in our implementation. Our strategy was to accept only the high acuity LTAC compliant patients, and not accept psych-neutral patients.

As of December 31, 2016, 99.1% of our patients met LTAC criteria. To December 2016, we experienced an 8.7% decline in LTACs census, pre-criteria versus post-criteria were about 2.5 patients per hospital per day.

We also completed a hospital swap transaction with Kindred which provided us with LTAC consolidation opportunities in Atlanta and Cleveland where we have significant joint venture partners. While the hospital swap hurt us financially in 2016, we believe these assets will generate future returns for our shareholders.

On the development side, we completed the largest development project in our Company’s history when we opened the 138-bed California Rehab Institute with our partners UCLA and Cedars-Sinai in Los Angeles.

This came on the heels of the opening of our first Cleveland Clinic Rehab Hospital in late 2015, and TriHealth Rehabilitation Hospital in Cincinnati in May 2016.

We also signed a joint venture with Ochsner Health during the year and in November we acquired the 61-bed in Marlton Rehabilitation Hospital which became part of the Kessler Rehabilitation network in New Jersey. Currently we have construction underway on four new inpatient rehab hospitals.

Two are part of the Cleveland Clinic joint venture, one in East Cleveland and one in Akron; a third is new hospital – one hospital – rehab hospital which is part of our SSM St. Louis joint venture; and the fourth in New Orleans with Ochsner Health. Investments in these partnerships and new hospitals provide growth for the future of Select.

The recent acquisition development activity has transformed the Company over the last 18 months. We have gone from a post-acute Company with a 73%, 27% inpatient, outpatient mix of business to a Company that generates 47% of our net revenues from outpatient operations, 41% from LTAC, 12% from inpatient rehab.

As a result, our payor mix has changed and is now 70% non-Medicare and 30% Medicare. I’ll now provide you with some additional details and highlights on both the quarter and year-to-date and then turn it over to Marty Jackson for some additional financial details before opening up for questions.

Net revenue for the fourth quarter was $1.05 billion compared to $1.04 billion in the same quarter last year. Net revenue for the full year increased 14.5% or $4.29 billion compared to $3.74 billion last year. Net revenue in our Specialty Hospitals for the fourth quarter was $560.2 million compared to $593.3 million in the same quarter last year.

The decline in net revenue was driven by a decline in Medicare patient days in our long-term acute care hospitals and was offset in part by an increase in our Specialty Hospital net revenue per day. Overall patient days decreased 9.7% and were over 306,000 compared to over 339,000 days in the same quarter last year.

The decrease was in our LTAC hospitals due to now fully implemented transitioned to patient criteria, hospital closures, and the effect of hospitals we exchanged with Kindred. The net impact of reduced days due to hospital closures in the Kindred swap was over 17,000 days.

Overall occupancy in our Specialty Hospitals was 64% in the quarter compared to 72% in the same quarter last year. Average net revenue per patient day increased 4% to $1,651 in the fourth quarter compared to $1,588 in the same quarter last year.

The increase in net revenue per patient day is principally due to an increase in patient acuity at our LTAC now operating under patient criteria. Our overall case mix index increased to 1.26% in the quarter compared to 1.21% in the same quarter last year.

For the full year net revenue in our Specialty Hospitals decreased 2.4% to $2.29 billion compared to $2.35 billion last year. The primary reason for the decline was a decrease in our Medicare patient days. Overall patient days decreased by 8.7% for the year and were 1.26 million days compared to 1.37 million days last year.

Similar to the fourth quarter, the decrease resulted from a decline in occupancy in our LTAC hospitals that have now transitioned to patient criteria as well as hospital closures in the effected hospitals that we exchanged with Kindred. Net impact of reduced days due to hospital closures and the swap was over 58,000 days.

Occupancy was 66%for the year compared to 72% last year. Decline in patient days partially offset the increase in net revenue per patient day, increased 5.2% to $1,651 per day for the year compared to $1,569 per patient day last year.

The increase in net revenue per patient day resulted primarily from an increase in our Medicare revenue per patient day due to increasing acuity in our LTACs operating under patient criteria. Our overall case mix index increased to 1.26% for the year compared to 1.2% last year.

Net revenue in our outpatient rehabilitation segment for the fourth quarter increased 21.1% to $249.7 million compared to $206.2 million in the same quarter last year.

The increase is the result of additional volume from our Physiotherapy clinics which we acquired during the first quarter of this year, as well as the continued growth of our existing clinics. This was partially offset by the sale of our Contract Therapy business which also occurred in the first quarter.

For our own clinics, patient visits increased to over 2 million visits compared 1.3 million visits in the same quarter last year. Our net revenue per visit was $102 for the fourth 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. For the full year, net revenue in outpatient rehabilitation segment increased 22.9% to $995.4 million compared to $810 million year.

The growth we experienced with the Physiotherapy acquisition was partially offset by the sale of our Contract Therapy business. For our own clinics, patient visits increased to 7.8 million visits compared to 5.2 million visits last year. Our net revenue per visit was a $102 million for the year compared to $103 million per visit last year.

Net revenue in our Concentra segment for the fourth quarter was $236.4 million compared to $239.4 million in the same quarter last year. For the fourth quarter, revenue from our medical centers was $205.3 million and the balance of $31.1 million was generated from the onsite clinics, community-based outpatient clinics and other services.

For the centers, patient visits were over 1.73 million and net revenue per visit was $119 in the fourth quarter compared to 1.78 million visits and $115 per visit in the same quarter last year.

For the year, net revenue in our Concentra segment was $1 billion compared to $997 million last year, revenue from the medical centers was $871.8 million for the year and a balance of $128.8 million was generated from the onsite clinics, community-based outpatient clinics and other services.

For the centers, patient visits were over 7.37 million and net revenue per visit was $118 for the year compared to 4.4 million visits and $114 per visit during our ownership last year.

Total adjusted EBITDA for the fourth quarter was $97.7 million compared to $100.8 million in the same quarter last year, with consolidated adjusted EBITDA margin at 9.3% for the fourth quarter compared to 9.7% same quarter last year. For the year, total adjusted EBITDA was $465.8 million.

The consolidated adjusted EBITDA margin at 10.9% compared to $399.2 million of adjusted EBITDA and 10.7% adjusted EBITDA margin last year. Specialty Hospital adjusted EBITDA for the fourth quarter was $63.8 million compared to $86 million in the same quarter last year.

Adjusted EBITDA margin for the Specialty Hospital segment was 11.4% compared to 14.5% in the same quarter last year. The decline in adjusted EBITDA and adjusted EBITDA margin was due in part to losses in newly acquired hospitals.

Hospital closures and the effect of hospitals we exchanged with Kindred contributed $10.2 million of a decline this quarter compared to the same quarter last year. For the year, Specialty Hospital adjusted EBITDA was $281.5 million compared to $327.6 million last year. Adjusted EBITDA margin was 12.3% this year compared to 14% last year.

The primary reasons for the decline in Specialty Hospital adjusted EBITDA and margin were losses in start-up hospitals, losses in newly acquired hospitals as well as hospital closures. Specialty Hospital start-up losses were $21.8 million compared to$16.8 million of start-up losses last year.

Over half of the start-up losses in 2016 related to California Rehab Institute and the timing of its opening. Hospital closures and the effect of the hospitals we exchanged contributed $24 million of a decline this year compared to last year.

Outpatient rehab adjusted EBITDA for the fourth quarter increased 30.8% to $30.8 million compared to $23.6 million in the same quarter last year. The increase primarily resulted from our newly acquired clinics. Adjusted EBITDA margin for the outpatient segment was 12.3% in the fourth quarter compared to11.4% in the same quarter last year.

The increase in adjusted EBITDA margin was primarily the result of the sale of our Contract Therapy business which historically had lowered adjusted EBITDA margins than our outpatient business. For the year, our outpatient rehab adjusted EBITDA increased 32.2% to $129.8 million compared to $98.2 million last year.

Again the increase is primarily due to our newly acquired clinics. Adjusted EBITDA margin for the year was 13% compared to 12.1% last year. Again, the increase in adjusted EBITDA margin was primarily the result of the sale of our Contract Therapy business which historically had lowered adjusted EBITDA margins than the outpatient clinics.

Concentra adjusted EBITDA for the fourth quarter was $24.9 million compared to $11.5 million in the same quarter last year. Adjusted EBITDA margin was 10.5% compared to 4.8% in the same quarter last year. The increase in adjusted EBITDA and adjusted EBITDA margin was primarily related to cost reduction initiatives.

For the year, Concentra adjusted EBITDA was a $143 million compared to $90 million last year. Adjusted EBITDA margin was 14.3% compared to 9% for the combined year 2015. The increase in adjusted EBITDA and adjusted EBITDA margin was related to cost reductions achieved during the year.

Earnings per fully diluted share were $0.15 in the fourth quarter of this year compared to $0.22 same quarter last year. Earnings per fully diluted share for the full year, $0.87 compared to $0.99 last year. During the year we had per-tax non-operating gains of $42.7 million and losses on early retirement of debt of $11.6 million.

Excluding the non-operating gain losses on early retirement and debt and related tax effects, adjusted income per fully diluted share would have been 61% this year. Last year we had a pre-tax non-operating gain of $29.6 million. Excluding the gain and related tax effects, adjusted income per share would have been $0.85 last year.

I also wanted to note that the LTAC industry was successful in getting extension to relief on the 25% rule. The 21st century Cures Act was signed into law on December 13, and included a one-year extension to relief under the rule, maintaining admission levels in general at 50% through September 2017.

We continue to hope for permanent solution relief from this rule. Earlier this week we announced the addition of Dr. Harold Paz to our Board of Directors, Dr. Paz joins Select with 25 years of experience in the healthcare insurance industry.

He currently serves as Executive Vice President and Chief Medical Officer of Aetna, and will be a big asset to the Select Board. I will now turn it over to Martin Jackson to cover a few additional financial highlights to the quarter and year, before we turn it over for questions..

Thanks Bob. Good morning everyone. For the fourth quarter, our operating expenses which include our cost of services, general, administrative expenses and bad debt expense was $953.1 million. This compares to $942.6 million in the same quarter last year.

As a percentage of net revenue, operating expenses for the fourth quarter were 91.1% compared to 90.7% in the same quarter last year. For the year our operating expenses were $3.84 billion, this compares to$3.36 billion last year. As a percentage of our net revenue, operating expenses for the year were 89.6% compared to 89.9% last year.

The decrease in our operating expenses as a percentage of net revenue is attributable to a 30 basis point decrease in cost of services compared to last year. Cost of services increased to $909.9 million for the fourth quarter. This compares to $902.3 million in the same quarter last year.

As a percent of net revenue, cost of service increased 20 basis points to 87% in the fourth quarter. This compares to 86.8% in the same quarter last year. The increase is primarily due to the higher relative costs in our Specialty Hospitals. For the year, cost of services increased to $3.66 billion, this compares to $3.21 billion last year.

As a percent of net revenue cost of services decreased 30 basis points to 85.5%, this compares to 85.8% last year. The decrease in cost of services as a percent of net revenue was the result of cost reductions achieved by Concentra which were partially offset by an increase in Specialty Hospital cost of services as a percentage of revenue.

G&A expense was $25.7 million in the fourth quarter, which is as a percent of net revenue was 2.5% compared to $24.1 million or 2.3% of net revenue for the same quarter last year. For the year, G&A expense was $106.9 million. This compares to $92.1 million last year, which as a percent of net revenue, it was 2.5% both for this year and last year.

Our G&A function includes our shared service activities which have expanded as a result of the acquisitions we had completed over the past 18 months. Bad debt as a percent of net revenue was 1.7% in the fourth quarter, this compares to 1.6% in the same quarter last year. Bad debt as a percentage of revenue was 1.6% both this year and last.

As Bob mentioned, total adjusted EBITDA was $97.7 million and adjusted EBITDA margin was 9.3% for the fourth quarter. This compares to adjusted EBITDA of $100.8 million and an adjusted EBITDA margin of 9.7% in the same quarter last year.

For the year, total adjusted EBITDA was $465.8 million and adjusted EBITDA margin of 10.9%, this compares to the adjusted EBITDA of $399.2 million and adjusted EBITDA margin of 10.7% last year. Depreciation and amortization expense was $37.4 million in the fourth quarter, this compares to $34.3 million in the same quarter last year.

The increase resulted primarily from the acquisition of Physiotherapy. For the year, depreciation and amortization expense was $145.3 million this compares to $105 million last year. The increase resulted primarily from the acquisitions of both Concentra and Physiotherapy.

We generated $5.5 million in equity and earnings of unconsolidated subsidiaries during the fourth quarter; this compares to $4 million in the same quarter last year. During the year we generated $19.9 million of equity in earnings compared to $16.8 million last year.

The increase was driven by improved performance and existing investments where we hold a minority position. During the year we had pre-tax non-operating gains of $42.7 million primarily related to the sale of our Contract Therapy business in the Kindred swap, we had pre-tax losses on early retirement of debt of $11.6 million during the year.

Last year we had a pre-tax non-operating gain of $29.6 million related to the sale of NaviHealth investment. Interest expense was $42.4 million in the fourth quarter, this compares to $33.1 million in the same quarter last year. For the year, interest expense was $170.1 million compared to $112.8 million last year.

The increase in interest expense for the full year is primarily the result of additional borrowings related to financing of the Concentra acquisition in June of 2015 and the Physiotherapy acquisition in March of 2016, as well as an increase in interest rates related to amendments of Select’s credit facilities in the fourth quarter of 2015 and first quarter of 2016.

The company recorded income tax expense of $3.9 million in the fourth quarter, effective tax rate for the quarter was 15.9%. For the year, we recorded income tax expense of $55.5 million and the effective tax rate was 30.7%.

Net income attributable to Select Medical Holdings was $20.2 million in the fourth quarter and fully diluted earnings per share of $0.15. For the full year, net income attributable to Select Medical Holdings was $115.4 million and fully diluted earnings per share were $0.87.

At the end of the year, we had $2.7 billion of debt outstanding and $99 million of cash on the balance sheet, which included $22.6 million of cash at Select and $76.4 million of cash in Concentra.

Our debt balance at the end of the year included $1.15 billion in Select term loans, $220 million in Select revolving loans, $710 million in Select, 6.38% senior notes, $642.2 million in Concentra term loans and $48.9 million in unamortized discounts premiums and debt issuance cost that reduce the overall balance sheet debt liability.

We also had $27.9 million consisting about the borrowings and notes payable. Operating activities provided $65.8 million of cash flow in the fourth quarter; and $346.6 million for the year. Our Day Sales Outstanding or DSO was 51 days as of December 31, 2016, this compares to 52 days at September 30, 2016 and 53 days at December 31, 2015.

Investing activities used $91.3 million of cash during the fourth quarter. The use of cash resulted from $58 million of acquisition related payments, $43.4 million of purchases of PP&E, $1.6 million of investment in businesses, which were offset in part by $11.6 million in net proceeds from sales of assets and equity investments during the quarter.

Investing activities used $554.3 million of cash during the year. The use of cash resulted from $472.2 million of acquisition related payments, $161.6 million in purchases of PP&E, $4.7 million of investment in businesses, which were offset in part by $84.2 million of net proceeds from sales of assets and equity investments during the year.

Financing activities provided $56.3 million of cash in the fourth quarter.

The provision of cash resulted from $45 million in net borrowings on the Select’s revolving credit facility and $19.2 million in proceeds from bank overdrafts offset in part by $5.2 million in debt payments and $1.9 million from non-controlling interest purchases and distributions. Financing activities provided $292.3 million of cash for the year.

The provision of cash resulted primarily from $795.3 million of net proceeds from term loans related to the financing of the Physio acquisition and refinancing of term loans at both Select and Concentra. Offset in part by $438 million in term loan repayments and $80 million of net repayments of revolving credit facilities.

In addition, $11.9 million was provided from the issuance of non-controlling interests, and $10.7 million of net proceeds from bank overdrafts. As Bob mentioned, Select is in the process of refinancing at senior credit facilities, and we expect to complete the transaction early next month.

The proposed financing remains subject to certain closing conditions and the effect of the refinancing are not included in our current financial guidance for calendar year 2017, which I will reaffirm for you now.

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 and fully diluted earnings per share expected to be in the range of $0.73 and $0.91. This concludes our prepared marks.

And at this point in time, I’d like to turn it back over to the operator to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from Kevin Fischbeck from Bank of America Merrill Lynch. Your line is open..

Good morning. This is actually Joanna Gajuk filling in for Kevin today. Thanks so much for taking the question here. So first on guidance, the adjusted EBITDA margin guidance assumes about 150 basis points improvement in margin year-over-year.

Can you talk about the drivers for that improvement? Is there any segment that is worth highlighting, in terms of the margin improvement that’s assumed in the guidance here?.

Sure, Joanna. Let us give you a bridge to get you to both the improvement in the margin as well as the increase in total overall EBITDA. So you take a look at where we ended up for 2016, we ended up at close to $466 million.

And if you take a look at our business segments – you take a look at on the Specialty Hospital side, first take a look at in patient rehab. Inpatient rehab, we had about $22 million worth of start up losses associated with the three projects that Bob talked about which were CRI, TriHealth and Cleveland Clinic.

We anticipated that those will generate somewhere in the neighborhood of $15 million to $18 million worth of EBITDA. That in and of itself is a $40 million swing, plus the overall business we anticipate on the inpatient rehab side to be about another $5 million. So all told for the inpatient rehab facilities would be about $45 million.

On the outpatient rehab side, we acquired Physio in March of 2016. So if you annualized that plus add back the synergies – the $20 million of synergies that we expect to get from that, plus the growth from our legacy business, that’s about another $25 million. And then on Concentra, Concentra had a fabulous year in 2016.

So we anticipate the growth on the same-store basis will be pretty modest probably in that $5 million range. So adding all those up you’re going to come up with about $75 million which will get you to in that $540 million to $545 million range.

And then the balance of the year or the balance of 2017 will really be a function of the volume increases that we see on the LTAC business and that’s really where that’s coming..

That’s very helpful.

And then in terms of going forward, I don’t want to ask you to talk about 2018 guidance necessarily, but should we think about, then 2017 as being a normalized margin because of all these reasons that are helping 2017? Or you think there’s more opportunity in some of the segments, in terms of margins going forward?.

No, I think certainly we have a lot going on in 2016. I think the improvement – the margins in 2017 will be more attuned to our business moving forward. And I think the other thing to point out is the CRI development that we did, it is a very unique development, it’s a very large project, as Bob had mentioned in the opening of the call.

And we don’t anticipate seeing those types of projects very often from that perspective and that had a very detrimental impact on the margins in 2016..

Great. Thank you.

And if I squeeze the last one here, clarification, maybe I didn’t catch it, but did you talk about the impact in the quarter from the swap? I know that in Q3 it was about $6.5 million, but was there something of that magnitude, or bigger in this quarter?.

It’s not – it was about $4 million for the quarter..

Great, thank you so much. I go back to the queue. Thanks..

Sure..

Thank you. And at this time, I’m showing no further questions. I would like to turn the call back to Mr. Ortenzio for any closing remarks..

No closing remarks. Thank you everyone for joining us..

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, you may now disconnect. Everyone have a great day..