Select Medical Holdings Corp (SEM) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Select Medical Corporation fourth quarter and year end 2002 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions an comments following the presentation. It is now my pleasure to turn the floor over to your host, Donald Murphy (ph). Sir, you may begin.

Good morning, and thank you for joining us today for Select Medical Corporation’s Investor Conference call to discuss recent corporate developments relevant to yesterday’s fourth quarter 2002 and year end earnings announcement. By now you should have received a press release. If you have not received a press release or are unable to log on to the web cast please call me, Donald Murphy of Noonan Russo Presence Euro RSCG at 212-845-4274 and I will be happy to assist you. This conference call is being recorded. It will also be available through replay starting at 1 p.m. eastern today and running to 1 p.m. Tuesday, February 18th. Please dial 877-519-4471 within the US. Or 973-341-3080 internationally. Pass code to listen to the replay will be 3694025.

Speaking today we have the company’s President and CEO Robert Ortenzio, and Senior Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and year to date highlights and then open the call for questions and answers.

Before we get started we would like to remind you that this conference may contain forward-looking statements regarding future events or future financial performance of the company including without limitation statements regarding operating results in calendar 2003, earnings per share in 2003, growth opportunities and other statements that refer to Select Medical’s plans, prospects, expectations, strategies, intentions and beliefs. These forward looking statements are based on the information available to Select Medical Corporation today and the company assumes no obligation to update these as circumstances change. For additional information please see the cautionary statements included in Select Medical Corporations most recent form 10-Q and other public filings filed with the SEC. At this time I will turn the conference call over to Robert Ortenzio.

Good and welcome to Select Medical Corporation’s earnings call. Today we'll be discussing results for our quarter and year ended December 31, 2002. I'll be giving you some overall financial performance measures for the quarter and year as well as take you through some relevant data points in each of our operating divisions. I'll then turn it over to Marty Jackson, who will go over financial performance in more detail. We'll open the rest of the call for question and answer.

Once again I'm pleased to report that we have exceeded earnings expectations for the eighth straight quarter as a public company, fully diluted earnings per share for the quarter were 25 cents, 1 cent ahead of expectations. For the year, fully diluted earnings per share were 90 cents, a 50% increase over EPS of 60 cents after excluding the effect of one time tax gain, an extraordinary item recorded in 2001.

Net revenue increased 13.4% to $295.4m compared to $260.5m for the same quarter last year. And for the full year, net revenue increased 17.5% to $1.127b from $959m in 2001.

Our earnings before interest, taxes, depreciation,, amortization, and extraordinary items or EBITDA, increased by 12% to $34m for the quarter, versus $30.4m in the same quarter last year. And for the full year EBITDA increased 13.6% to $127.3m versus $112m in 2001.

Income from operations increased 27.2% to $101.4m in 2002 versus $79.7m in 2001.

We also had another strong year in terms of cash flow as our cash flow from operations was $120.8m in 2002. In addition we were able to reduce our day sales outstanding to 73 days compared to 77 days at the end of 2001.

Next I'll take you through some of the key performance measures for each of our operating divisions starting with our specialty hospitals. For the quarter, our hospital net revenue increased by 19.3% to $168.7m compared to $141.4m in the same quarter last year. For hospitals open prior to January 1, 2001, which I will refer to throughout as [same store], net revenue increased 4.9% to 141.8m compared to $135.2m in the same quarter last year. This increase was a result of both improved occupancy and rate.

The remaining $20.7m increased revenue resulted from internal development that commenced operations after January 1, 2001. For the year, hospital net revenues increased by 24.3% to $625.2m. Same store net revenue increased 11.7% to $549.2m, again this increase was the result of both improved occupancy and higher rate. The remaining $64.7m increased revenue resulted from internal development that commenced operations after January 1, 2001.

Our hospital EBITDA increased 30.7% to $21.4 m for the fourth quarter compared to $16.4 m in the same quarter last year. Same store hospital EBITDA increased 9.8% to $19.8m for the quarter. For the year, hospital EBITDA increased 23.2% to $70.9m compared to $57.6m last year, and same store EBITDA increased 17.5% to $73.7m.

Overall EBITDA startup losses incurred in 2002 for hospitals developed in late 2001 and/or 2002 were $8.7m. Occupancy in our hospitals was 69% for the quarter, flat versus same quarter last year and for the year occupancy was 71% up from 68% in 2001. Same store hospital occupancy rates increased 100 basis points to 74% for the quarter and 500 basis points to 75% for the year.

Our hospital non-Medicare patient mix, which is based on the number of patient days decreased by 200 basis points in the fourth quarter to 24% compared to 26% for the same quarter last year. For the year non-Medicare patient mix was 24% versus 25% last year. Medicare represented 63% of our hospital payer mix for 2002, up from 61% in 2001.

Medicaid represented less than 2% and workers comp was 1% with the 34% balance coming from commercial insurance and managed care.

Hospital patient days for the quarter increased 16.1% to 160,406 compared to the same quarter last year. Same store hospital patient days increased 2.4% for the quarter to 135,503 days. For the year patient days increased 19.3% to 619,322 days, while same store days increased 7.5% to 546,904 days in 2002.

Net revenue per patient day was $1,051 for the quarter a 2.7% increase over the same quarter last year. For the year, net revenue per patient day increased 4.2% to $1,009 compared to $968 last year.

On the hospital development front, we opened 4 new hospitals this past quarter bringing our total number of specialty hospitals to 72 operating in 24 states. Openings for the quarter occurred in Milwaukee, Wisconsin, Lexington, Kentucky, Denver, Colorado, and Miami, Florida. This gave us a total of 8 openings in 2002 within our target range of 8-10 new hospitals. We again expect to open 8-10 new hospitals in 2003.

Regarding PPS, we are closely monitoring those hospitals that have accelerated to the national rate and at this time continue to be optimistic about our prospects under PPS. We reiterate our intention to accelerate over 95% of our hospitals to the new national rates.

Moving over to our outpatient rehabilitation division. Our outpatient rehab net revenue increased 6.6% to $121.6m for the quarter compared to $114.1m in the same quarter last year. Of our total outpatient revenue for the quarter, $80.8m was from our US outpatient clinic business, $6.6m from our managed clinics, and $34.2m from our Canadian subsidiary and other outpatient services. For the year outpatient revenues increased 10.1% to $485.1m versus prior year.

For the quarter, outpatient rehab EBITDA declined 5.4% to $18m versus $19m for the same quarter last year. However for the year outpatient EBITDA increased 6.6% to $81.8 m versus $76.1m for the prior year. The EBITDA decline was primarily a result of higher relative salary and benefit costs in our clinic operations.

Visits in our US based outpatient rehab clinics declined 1.2% for the quarter to 924,858 visits. For the year visits increased 1.8%, ending 2002 with over 3.8 million visits. Net revenue per visit in the outpatient rehab clinics was $87 for the quarter, up from $84 in the same quarter last year. For the full year net revenue per visit was $86 up from $82 last year. During 2002 our outpatient rehab division added a net 20 clinics, 14 clinics were added through acquisitions, five managed clinics were added and 49 clinic startups occurred in 2002, all set by the closure or consolidation of 48 existing clinics during the year. As of December 31st 2002, we operated a total of 737 clinics in 32 states, the District of Columbia and 7 Canadian provinces, up from 717 clinics operating in the end of 2001.

I'll now turn it over to Marty Jackson, our Chief Financial Officer, to cover some of our financial highlights in greater detail.

Thank, Bob. Once again we are pleased to report solid financial results for another quarter. Our second full year as a public company.

Operating expenses, which include our cost of service, general and administration cost and bad debt expense increased 13.6% to $261.3m in the 4th quarter versus $230.1m in the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter increased 20 basis points to 88.5% from 88.3% in the same quarter last year. This increase was the result of relative increases in our cost of services in the fourth quarter compared to the prior year.

For the year, operating expenses as a percentage of net revenue increased 40 basis points to 88.7%, versus 88.3% in 2001. Again, this increase was the result of increases in our cost of services. Cost of service as a percentage of net revenue increased 60 basis point in the fourth quarter to 81.8% compared to 81.2% in the same quarter last year. This increase was primarily relate to increased cost in our outpatient rehabilitation division offset by cost improvements in our inpatient operations. Our outpatient division experienced higher relative salaries and benefit experience this past quarter compared to the same quarter last year.

For the full year, cost of services as a percentage of net revenue was up 90 basis points to 81.9%. Again, this increase was primarily related to higher relative salary and benefit expansion in our outpatient rehabilitation segment. Our G& A expense as a percent of net revenue decreased basis points for the fourth quarter to 3.4%. And 20 basis points for the full year to 3.5% compared to 3.7% in both the fourth quarter and the full year of 2001. Actual G&A expense for the fourth quarter increase 4.1% to $10.1m versus $9.17m in the same quarter last year.

Bad debt expense as a percentage of net operating revenue, decreased 20 basis points for the fourth quarter and 40 basis points for the full year to 3.3% for both respective periods compared to 3.5% in the fourth quarter and 3.7% for the full year 2001.

While total EBITDA increased 12% for the quarter, EBITDA margins declined 20 basis points to 11.5%, compared to 11.7% for the same quarter last year. The decline was driven by lower margins in our outpatient rehabilitation business offset by margin improvements in our inpatient operations.

For our hospitals overall EBITDA margins increased 110 basis points to 12.7% for the quarter, compared to 11.6% in the same quarter last year. Same store margins also improved 60 basis points to 14% for the quarter, compared to 13.4% in the same quarter last year. EBITDA startup losses for our newly developed hospitals and those in their pre-opening phase amount to $2.2m during the fourth quarter.

For our outpatient rehabilitation business, EBITDA margins declined 190 basis points for the quarter. As previously mentioned, this decline was primarily driven by higher relative salaries and benefits expense versus the comparable quarter last year. The incremental expense was primarily the result of staffing increases related to expected volume growth in the clinic business. The expected volume growth did not materialize, which resulted in higher relative cost in that period.

For the year, total EBITDA increased 13.6%, however, EBITDA margins declined 40 basis points to 11.3%, compared to 11.7% in 2001. Again, this decline was primarily driven by declines in our outpatient rehabilitation segment primarily in the fourth quarter.

For our hospitals, overall EBITDA margins decreased 10 basis points to 11.3% for the year compared to 11.4% in 2001. Same store margins, however, improved 60 basis points to 13.4% for 2002, compared to 12.8% in 2001.

EBITDA startup losses throughout 2002 for our hospitals during their pre-opening and startup periods amounted to $8.7m compared to $6.9m in 2001. For our outpatient rehabilitation business, EBITDA margins declined 60 basis points for the year, again this decline was primarily driven by the decreased margins in the fourth quarter.

Depreciation and amortization declined 15.9% to $7.1m for the quarter, compared to $8.5m in the same quarter last year. This decline resulted primarily from amortization reduction from the adoption of FAS 142, which decreased amortization expense by approximately $2m for the quarter, offset by increases and depreciation on fixed asset additions related to our new development. For the year, depreciation and amortization expense decreased 20% to $25.8m, again primarily related to the adoption of FAS 142 and subsequent amortization reduction.

Net interest expense decreased by $500,000 to $6.5m for the quarter compared to $7m for the same quarter last year. For the year, net interest expense declined by $2.6m to $26.6m for 2002. This decline in interest expense is a result of lower debt levels outstanding during the periods as well as reduced overall interest rates in 2002 compared to the last year.

The effective interest rate on our credit facility debt as of December 31, 2002, was 7.4%, compared to 7.6% at the end of last year. Tax expense was $7.8m for the quarter, representing an effective tax rate of 39.3%. For the year, our tax expense was $28.6m representing an effective tax rate of 39.25%.

Net income was $12.1m for the quarter and $44.2m for the year, with diluted earnings per share of 25 cents in the fourth quarter and 90 cents for the year.

We ended the year with $260.2m of debt outstanding and total leverage or total debt to EBITDA of 2 times. This represents a net reduction of $28.2m in debt during 2002, an improvement in leverage from 2.6 times at the end of 2001.

Net debt to total EBITDA at the end of 2002 is 1.6 times. Debt to total capitalization was down to 48% at the end of 2002, compared to 55% at the end of 2001. Net debt to total capitalization was 37% at December 31, 2002.

We generated $18.1m of cash flow from operations this past quarter, and $120.8m for the year. This compares to cash generation of $10.3m in the fourth quarter last year, and $95.8m for all of 2001. The increase for the year was a result of improving operating performance and increasing our crude expenses and income taxes payable. We were also able to reduce day sales outstanding from 77 days at the end of 2001, to 73 days for year end 2002.

Investing activities used $16.9m this past quarter, including $4.4m for purchases of capital and $2.2m for acquisition related payments. For the year, capital purchases used $43.2m of cash, and acquisition related payments used $9.9m. Financing activities used $5.1m of cash this past quarter, with $7.3m in net debt payments, offset by increases in our bank overdrafts at $2.6m. Financing activities for the year used $21.4m, including net reductions in debt of $28.8m, offset by proceeds from stock issuance and increases in our bank overdrafts.

We ended this year with $56.1m of cash on the balance sheet, up from $10.7m at the end of last year.

Also, as we noted in our press release, the guidance we provided to investors on October 29th for the quarters and for the full year 2003 remain unchanged.

With that I'd like to turn it back over to Bob for some final summary comments.

Thank you, Marty. Let me say that while we experienced some margin compression on our outpatient operations this quarter, we still believe we posted some very strong results both in Q4 and this past year. We exceeded our revenue guidance and expectations, hit our EBITDA expectations, and again exceeded earnings estimates this past quarter and throughout 2002.

We had a very strong year for cash flow and continue to realize improvements in day sales outstanding. And finally, we continued to experience same store hospital margin expansion, which we believe PPS will continue to be a contributor.

As Marty mentioned, we are reiterating our previously provided financial objectives for the forth coming year, and believe we are well positioned for a successful 2003.

The remainder of our time is allotted for your questions and we would like to open up the call at this time.

Thank you, gentlemen. The floor is now open for questions. If you do have a question, you may press the numbers 1 followed by 4 on your touch-tone telephone at this time. If at any point your question is answered you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do request while posing your question to pick up your hand set. Once again, ladies and gentlemen, that's 1 followed by 4 to ask a question.

Our first question is coming from Lori Price from JP Morgan.

I have a couple of questions actually. The first is, I know it's still early in terms of your experience with LTAC PPS in that division. But based on the acuity of patient mix that you have seen so far in Medicare and relative to the payment categories under the new DRG payment system, can you give us a sense of what type of change in profitability you're seeing in the 13 hospitals that have moved on?

Thank you, Lori. Let me respond by giving you a sense of the conversion schedule. As you know, we did convert a 13 hospitals in Q4, but I have to point out that only one of those was October, 8 were in November and 4 were in December, which made the 14th for the quarter. We have not and you should not expect to be getting definitive indications on relative dollars as a result of PPS. But what I can point to is that we think that we are seeing margin expansion in the hospitals in part because of the hospitals that are transitioning and accelerating to PPS.

Our QE levels at the hospitals and our cost structures at the hospitals I think will contribute to us having a favorable experience with PPS and we are encouraged by the results that we have seen so far. For the rest of the year, we'll see 23 hospitals convert to PPS in Q1, 13 in Q2 and 23 in Q3, so by the end of Q3 all of our hospitals that will accelerate onto the PPS will be completed.

Okay. The other question I had in the outpatient division, I know that you had said that your EBITDA was down because of high relative salary and staffing costs particularly related to staffing increases associated with volume expectations that didn't materialize. Can you give us a sense as to what happened, why you think the volume increases did not materialize?

There are a couple of things that are going on in the outpatient area. And let me break those down into what I'll call 2 components. One are those that I think can be relatively described as 1 times and those that can be described as normal course of business.

For the quarter, and I know that this is typically not meaningful, but this year it was, we had some weather related reductions in visits, particularly in the North Carolina market, we had 4 or 5 days where there was literally no electricity at many of our clinics because of ice storms where we lost considerable visits and we also loss some in the northeast relative to prior winters which have been relatively mild.

The other thing that I think was a contributor to the reduction in visits was I don't think we anticipated with the Christmas and New Years holiday being on a Wednesday the number of visits that we would lose. Those two weeks of Christmas and New Years with the holiday falling on a Wednesday literally became weeks off and we tracked really significant losses of visits during those two weeks. So those would be two that I think what I would characterize as somewhat extraordinary.

On the ordinary course, we did continue to have some termination of unprofitable contracts, which would reduce our visits and also correspondingly have the effect of increasing our revenue per visit which we did see, which I think continues to be a strong and high point of the outpatient business which is a continued expansion of the revenue per visit. And then we continued to see as many providers in the outpatient area do, seeing physicians taking sometimes therapy in-house and you typically see that in most quarters some level of bad activity but typically we're able to pick that up and reduce those visits from other sources.

So the quarter had some unique things going through it that resulted in the reduction in visits and frankly, we had higher relative costs in anticipation of higher visit volume and when that did not occur we had the impact from the higher cost.

Just so I understand, wage rate changes or sudden increases in wage rates didn't contribute to this kind of EBITDA softness?

No, it was not wage rates at all.

Thank you.

It's really more additional FTEs than increases in overall wages.

Thank you.

Our next question is coming from AJ Rice (ph) of Merrill Lynch

Maybe a question on the LTAC side of the business. Your same store revenue growth I think you said was 4.9%. That's probably a little bit of a moderation versus trends earlier in the year but on the other hand the EBITDA growth accelerated.

Can you maybe expand on why that's occurring. Is there some dynamic that with PPS that doesn't boost revenues as much as it boosts profitability? Or is there some other cost initiative that's under way that's causing that?

Let me take a shot at that, AJ. The slow in growth rate you refer to the 4.9% in Q4 versus 11.7% year to date, that's the growth rate occurs for a couple of reasons, in part because of the way we look at same store. Some hospitals in the same store grouping are maturing faster, earlier in the year due to the timing of their opening. Essentially there was more room for growth with occupancies in the 68% range for the first three-quarters of 2001, and then 73% in Q4 of '01, escalating to 74% in Q4 of ’02 and 75% for the year.

So the rate of growth was more tempered in Q4 versus the prior year. But the rate continued to increase throughout all the periods.

Okay.

I don't know if that answers part of the question. I think the other part of your question had to do --

There's a fairly significant acceleration in the profitability, it looks like, if I’m reading that right. What drives that if it's not revenue driven?

It's going to be your more mature hospitals, which are moving into more of the sweet spots of the profitability and we did see an increase in rate at the hospitals and I think you can also assume from that that we have even increases in our commercial rate although we don't break that out separately.

So really you would not attribute the increase of profitability very much to PPS at this juncture?

Would I say when you have 72 hospitals operating some mature, some very immature and you only have 13 that converted of which the balance of those 12 happened in the latter part of the quarter, you really couldn't say that is going to be a meaningful part of the increased profitability. Although I have stated and will state that we do see in those hospitals that have converted generally better performance than their pre-PPS performance.

Okay. On the outpatient side, just following up from the earlier discussion, is there any change -- I mean, you're showing improving rates. How would you characterize the environment from a competitive standpoint. Obviously some of the bigger players have some issues there, And also managed care contracting type of environment, is there any significant change in either direction in terms of what you're seeing from the contracting?

On your first point, in terms of the competitive environment I cannot see that we have seen a change nationally. You are going to see different, as we have in previous years you see differences in competition really more regionally and almost locally than what you would see nationally, so we have not seen any changes that would be anywhere near described as material in the competitive environment.

In terms of manage care, I'll comment and I'll let Marty follow up. I think we continued to be encouraged by the success that we have had in negotiating more and better profitable contracts which is evidenced by the increasing revenue per visit that you see from the outpatient overall, particularly when you compare Q4 this year of Q4 of last year. So I think we continue to feel pretty good about the commercial payer environment for the outpatient.

We continue to see rate increases north of CPI on the commercial side and although that's not the same type of rate that the insurance companies are getting it's still helping us increase that net revenue per visit.

Okay. Thank you.

Our next question is coming from Kemp Dolliver of SG Cowen.

Just some housekeeping questions. Do you have the inpatient admissions for the quarter?

We’ll pull those out for you.

Has there been any change in the length of stay. Is it still about 30 days?

29 the quarter, 30 for the year. So pretty stable.

Okay. And I assume the number of managed clinics is held steady? at 54?

It's up to 58.

Okay. Thank you. I think there's been at least one recent transaction in the outpatient business - Beverly sold to a private company recently. What are you seeing in general in the transaction environment both with inpatient and outpatient opportunities?

Well, let me talk about the inpatient first. The transaction of the inpatient have -- there's thought been a lot of volume and in fact I haven't seen -- I think there's stuff out in the market that people are looking at, particularly at some of the nursing home companies come out of bankruptcy and they have maybe a few hospitals that are imbedded in those companies. So we don't see a lot on the inpatient side of the business. On the outpatient I think, you see what we see, the Beverly transaction was one of the more material ones I think in the last 12 months. Beyond that, we typically see, much smaller transactions in some of the markets with regional providers.

Okay.

We do have that number that you were w were looking for, number of admissions 5,573 for the quarter.

One last question on PPS. Any thoughts recalling as we see the transition unfold, what you expect will happen with items such as length of stay, would it be more appropriate to track discharges, et cetera, to see what is actually going on in the business and how it benefits you?

Well, you know, what I have said, Ken, to many investors who have asked since we are not disclosing separately the relative impact of PPS is really to keep an eye on the margins. I'm not sure that you're going to see a big change on the LTAC provider side in length of stay. As you probably know, you have to maintain a greater than 25 day average length of stay for your Medicare population in order to keep your designation as an LTAC. You can certainly look at discharges but I'm not sure that that's going to be a highly relevant indicator of how well hospitals are doing because the really the two moving parts that are the most important are what is the acuity of the patients, so in other words, what is the DRGs that the hospital is seeing and what are their overall costs? I think for those I would still suggest the best way to look is probably EBITDA margins.

That's super. Thank you.

Our next question is coming from Joel Ray of Wachovia Securities.

Good morning and congratulations, guys. I was wondering if you could comment on a couple of things. One, you are generating a lot of free cash flow and what are your thoughts as far as uses for that, especially with borrowing costing not being too bad.

Secondly, I know that there is some pressure and some studies being done by CMS for the inpatient rehab business. Do you sense that that will change the demand for hospitals to offer that and maybe create an opportunity for you to be opening new LTACs, that is some pressure could build on hospitals and they may not want to be as involved as much in that business. Are you seeing any change in your pipeline on the LTAC side?

To your first question in terms of our free cash, as you know, as we have said, we are always assessing and evaluating acquisitions, but having said that, the company has not made a significant acquisition since 1999. I would think that what you could anticipate is the use of our free cash flow would really be for delevering and paying down bank debt.

In terms of the pressure from CMS and their looking at the inpatient rehab, I'm not really too aware of exactly what's going on in that area but I can comment on our pipeline. You do see increasing occupancies at general acute care hospitals so what I have said is in the past is what we have seen is in many of the locations where we are establishing new LTACs, we are not going into what was previously empty space, but rather going into space that the hospital is vacating in order to make room for our hospital within a hospital. And we do see some acute care hospitals that are closing their acute rehab. We actually see more acute care hospitals closing skilled nursing units inside their hospitals than the rehab, but I think both are going on and those would be areas which would create some opportunities for us.

I continue to be fairly pleased with our pipeline. Our challenges I think is not finding a good opportunity for LTACs with willing hospitals but rather the time frame of getting into the space, getting it renovated and then finally getting the local and state licensures completed on a timely basis given the compression of many states budgets. Hopefully that addressed your question

It did. Thank you.

Our next question is coming from Charles Lynch of CIBC World Markets.

Thank you. Two questions, first a follow-up to that commentary Bob. Can you talk about what the competitive landscape looks like with other operators and developers of hospital and hospital LTACs?

And secondly just on the handful of hospitals that have begun the transition to PPS how their experience has been in reporting patient data internally and out to CMS and on the flip side what kind of commentary you're getting about CMS making its own transition to a PPS payment structure?

In terms of the competitive landscape, I guess I would characterize it like this. We hear a lot more about the competition than we actually see it in the market because we get some feedback from public companies, nursing home companies, other companies that have said that they plan on entering the LTAC space and they may well be doing that. I just cannot report that we have seen them in the local markets where we are negotiating or competing for space in acute care hospitals.

There are a number of other providers out there, namely private companies, a couple that are doing deals and we do see them in the market. So that aspect of the competitive environment has not changed so the same, we tend to see the same two or three companies doing it, most of those are smaller private venture back companies although from time to time we do see Kindred, who is the other big provider in the market as well.

As far as the transition of other companies to the PPS, I really don't have any intelligence on that, because I think many of the companies have perhaps single Medicare cost reporting years that are later in the year, so unlike Select Medical, which has hospitals that have the opportunity to convert literally every quarter, there are some companies that have say all their Medicare cost reporting years are in one single month and maybe later in the year. And so we really don't have a lot of intelligence on that other than hearing probably the same things that all of you hear from other companies that may be reporting companies.

In terms of how CMS is doing with the transition to PPS. I don't think we have a lot of history on that yet. I think it's going to depend on who your fiscal intermediary is. We have all our hospitals are with a single fiscal intermediary, which we think is a pretty able group and we think that they are ready and will process and facilitate the transition as smoothly as possible.

Do you have a bed count for the hospital division for year end?

Yes. Charlie, total number of beds 2594.

Great.

That's total number. Total licensed beds. Was your question how many of the beds have transitioned?

No, no that was the question. That was the number I was looking for.

Our next question is coming from David Common (ph) of JP Morgan

Thanks very much. You’ve answered most of my questions. One item left. You’re obviously sitting on some nice cash balances. Could you just refresh me on the timing that you will have an opportunity to take that and apply to it debt? And also the negative carry that will terminated by that sometime soon I think.

David at this point in time we can pay down the term debt at the bank level. Right now. And as we reported today, our average cost was 7.6% on that term debt and we're currently receiving about 2% I think in the marketplace.

Okay. So you're going to -- it sounds like you're likely to make that debt reduction and reduce the cash balances significantly sometime soon?

I think you can assume that

Okay. Thank you.

Our next question is coming from Peter Volkner (ph) of Alpine Capital.

Question on the balance sheet. Could you tell me what the [due to] third party payers was at the end of the year?

The due to, due from is actually as you recall on the LTAC side, we were getting reimbursed based off of costs. We actually go through a cost report. The due to, due from reflects a settlement of that cost report. That is the amount of dollars due to a third party.

So does that mean that it's zero down at this point?

No, it does not. If you take a look at December 31, we were showing $26m that needs to be paid back to the fiscal intermediary over the next year.

Okay. $26 million. And that’s December 31st of ‘02

That’s correct.

And you're talking about Medicare only.

It would be Medicare and Medicaid.

Weren't there some nongovernmental third party payers also included? Because I believe it was 35 at the end of Q3?

Yes, we have paid back

So you paid back about 10 of that

That's correct.

Our next question is coming from Michael Weisberg (ph) of ING Asset Management.

Could you maybe talk a little bit about the outpatient business in terms of what you think is going to happen in terms of visits and maybe your margins? Do you think in what's obviously a tough operating environment for outpatient there's an opportunity to improve margins? And maybe talk to us about what your expectation is for same facility visits and same facility revenues as we go forward?

Michael, I can talk to you about the kind of the current environment or the quarter. I have difficulty trying to tell you what we think we're going to see in the near term. We obviously see we continue to have opportunities to expand margins, particularly in an environment where our revenue per visit continues to expand. Now, if you ask me do I think if there's a lot of room past the $87 per visit, I would think that maybe you could see some modest increases but probably not dramatic.

In terms of the visits, because with 740 outpatient clinics throughout as many states as we operate it is difficult for me to make projections on exactly what the visits are going to be. The guidance that we have given for the full year, we assumed a 5% increase in visits. My hope and my expectations, the guidance which we gave at the end of the third quarter last year, it's hard for me to say that it's going to be exact on a go forward for the balance of this year but we think we can be close to that. So I don't think that we see anything in this operating environment that suggests that we would want to go out and change our guidance that we have given, or even back off from the assumptions.

But having said that there are thinks going on in our local markets and there's things within our control that we have to work on and sometimes there are things not in our control, the things that I stated earlier.

5%, which has been your forecast, 5% increase in visits would be about flat on a per unit basis, right? Because your units usually go up 3, 4, 5% a year. And first, is that right, Bob?

And second, given the pressures you've had in terms of salary costs, which are understandable, and I know you have taken some efforts in dealing with your health care costs, is it reasonable to expect your margins, EBITDA margins, in that sector to sort of stay where they are in the fourth or is there room for them to get better or maybe you could help us with that?

I think that there's room for the margins to get better. We look at the salary and the health care because obviously insurance is out there, I don't want to give you the impression that we saw a lot of salary increase in Q4 that was in part responsible for the compression of the margins. I think the message I want to give you is we increased our headcount in Q4 over the comparative period last year in anticipation of some volumes that did not happen

I see

In part because of some one times and in part because of some general phenomenon course of business in local markets. So the answer to your question is question is yes. I do believe there's opportunity for margin expansion, I believe there's opportunity for us to hit our volume visit increases for the year that we have projected, but we will certainly update as we go along. But at this point there's no reason why I see that we would readjust the guidance that we have given.

You're up to about 75% occupancy in your LTACs. I know 100% is impractical because of issues about 2 people in a room, et cetera. For more mature standards, say 2, 3, 4 years old, what's practical occupancy do you think in terms of capacity? And relating to that, what do you think we should look at in terms of same hospital revenues going forward?

Well, let me address your first question, which is what is reasonable in terms of the hospital occupancies? We do have hospitals that enjoy occupancies in the 80%. Now, we have some hospitals that have a majority of private rooms and we have some hospitals with semi private rooms so that will impact the maximum occupancy that those hospitals can achieve. But we do think there is opportunity for increased occupancy.

I would also mention that in a number of our hospitals over the last portion of last year we were able to make plan to expand their bed compliment. So we had a number of hospitals that this we're that was a more mature that will actually be a beneficiary of having more licensed beds come on, so that will help their occupancy. Your second part of your question was --

What's reasonable because -- the rate of increases in same hospital revenues have been going down to a more normal level, what should we look for going forward in terms of same hospital revenues?

Same hospital revenue

In the LTACs business for units that have been around for 2 or 3 years.

What kind of growth can they experience?

Yes

I think what you have to look at, the biggest driver of growth not to minimize the others, but the biggest driver of growth in hospitals that have been around and that are mature is going to be the changes that they experience in the conversion of PPS. And I think that that phenomenon will dwarf of all other elements and moving parts in the hospitals results of operations and their profitability. So I could talk to you about commercial rate, I could talk to you about occupancy, I could even talk to you about cost but the reality is that as all those hospitals convert they will have an opportunity to make a margin, or not, on the Medicare patient, which is 64% of their business. So that is the element.

The rest I don't think you would look at, the other elements if I started to tick off them and what they would be in terms of 2 or 3% of occupancy improvements or even changes in mix or rate, is just not going to move the needle as much as the PPS phenomenon, which is frankly the biggest thing to happen to the LTAC industry since its inception over 20 years ago.

Our next question is coming from Todd Cousier (ph) of Bear Stearns.

At this point, the only thing I have left is, I was just wondering what rent expense was for the fourth quarter.

Rent expense for the fourth quarter $22.3m.

Thank you very much.

Unfortunately we have run out of time for questions today. Our last question today will be coming from Josh Fisher (ph) of Pequot Capital.

I'm all set, thank you.

At this time I'd like to turn the floor back to our speakers for any closing comments we might have

We don't have any closing comments but I want to thank you all for your participation and your questions and we'll look forward to addressing our progress at our next conference call.