Select Medical Holdings Corp (SEM) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Select Medical Corporation second quarter 2003 earnings conference call. At this time all participants have been placed on a listen-only-mode and the floor will be open for questions following the presentation. It is now my pleasure to hand the call over to your host Mr. Don Murphy. Sir the floor is yours.

Good morning and thank you for joining us today for Select Medical Corporation's Investor Conference Call to discuss recent corporate developments relative to yesterday's second quarter 2003 earnings announcement. By now, you should have received the press release. If for some reason you have not received the press release or unable to log on to the webcast, please call me, Donald Murphy of Euro RSCG Life NRT at (212)-845-4274 and I will be happy to assist you. This conference call is being recorded and will also be available through replay starting at one o'clock PM eastern today and running until one o'clock PM eastern on Tuesday, August the 12th. To access this replay, please dial (877)-519-4471 within the US or (973)-341-3080 internationally. The pass code to listen to the replay will be 3971417. Speaking today we have the company's President and CEO, Bob Ortenzio and the company's Senior Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter 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 the 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 Medicals 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 statements as circumstances change. For additional information please see precautionary statements included in Select Medical's most recent form 10-K or in the public filings filed with the Securities and Exchange Commission. At this time, I will turn the conference call over to Bob Ortenzio, please go ahead Mr. Ortenzio.

Good morning everyone and welcome to Select Medicals Earnings call covering the results of the second quarter 2003. I'll provide some overall financial performance highlights for the quarter, as well as take you through operating performance for each of our divisions. I'm pleased to report that we've exceeded earnings expectations for another quarter with fully diluted earnings per share of $0.37, $0.06 ahead of analyst's consensus. This represents the 48% increase over fully diluted earnings per share of $0.25 in the same quarter last year. Our net revenue for the quarter increased 16.4% to $326.2m compared with $280.3m for the same quarter last year. Our earnings before interest, taxes, depreciation and amortization or EBITDA for the quarter increased 28.9% to $43.3m compared to $33.6m for the same quarter last year. EBITDA is not a measure of financial performance under GAAP, however it's commonly used by analysts and investors in our industry. We also use adjusted EBITDA to monitor performance in our operating division. The adjusted EBITDA adds back minority interest to EBITDA. A reconciliation of net income to EBITDA and adjusted EBITDA is attached to our press release, which can be accessed on our website. Income from operations increased 31.6% to $36.8m for the quarter versus $28m the same quarter last year. We had another very strong quarter for cash flow, as our cash flow from operations was $66.8m for the quarter. This cash generation was in part of result of our continued reduction in day sales outstanding, which declined to 56 days compared to 64 days at March 31st and 73 days at year-end 2002. We ended the quarter with $91.4m of cash on the balance sheet. Next I'll take you through some of the key performance measures for each of our operating divisions. Starting with our specialty hospitals. Our hospital net revenue increased 26.1% for the quarter to a $191.8m compared to $152.1m for the same quarter last year. For hospitals opened prior to January 1, 2002 and operated throughout those periods, which I'll refer to throughout as same store, net revenues increased 17.7% to $177.7m compared to $151.1m in the second quarter last year. This increase was primarily driven by higher rate in the same store hospitals. Remaining $13m of increased revenue resulted from internal developments that commenced operations after January 1, 2002.

Our hospital adjusted EBITDA increased 77.7% for the quarter to $30.7m compared to $17.3m in the same quarter last year. Same store hospital adjusted EBITDA increased 70.5% to $30.9m compared to $18.1m in the second quarter last year. Adjusted EBITDA margins improved to 16% for the quarter compared to 11.4% in the same quarter last year. Overall adjusted EBITDA start-up losses incurred in the second quarter for hospitals developed in late 2002 or in their pre-opening period is $2.1m. Same store adjusted EBITDA margins improved to 17.4% for the second quarter versus 12% in the same quarter last year. Overall occupancy in our hospitals was 70% for the quarter, down from 73% in the same quarter last year. Same store occupancy rates however increased 100 basis points to 74% for the quarter. Our hospital patient mix for the quarter which is based on the number patient days was 77% Medicare and 23% non-Medicare versus 76% Medicare and 24% non-Medicare in the same quarter last year. Our hospital net revenue per patient day, where rate improved 15.3% to $1138 per day compared to $987 per day in the same quarter last year. Our hospital payer mix based on the last 12 months ended June 30th was 66% Medicare, 2% Medicaid, and the 32% balance from commercial insurance and managed care. Hospital patient days increased 9.1% for the quarter to 167,945 days compared to 153,942 days in the second quarter last year. Same store hospital patient days increased 2% to 155,995 days for the quarter. We opened four new hospitals this past quarter and expect to open a total of eight to ten new hospitals this year. Hospital openings incurred in Augusta, Georgia, Durham, North Carolina, Knoxville, Tennessee, and Conroe, Texas. As we mentioned during last quarter's conference call, we did elect to close one hospital this past quarter in Reno, Nevada. This was one of the hospitals we had acquired through the intends of a healthcare transaction in 1998, we had decided to exit the market at the end of the hospital lease term, which occurred this past quarter. Regarding PPS, we transitioned 14 of our hospitals to the new perspective payment system during this past quarter and after the hospital closing we now have 49 hospitals operating under the new system. Forty-eight of those hospitals we have elected to accelerate our payments to the national rate. Twenty-four of our hospitals are scheduled to transition to PPS in the third quarter and the remaining two hospitals are in the real tech qualification period.

We continue to expect to accelerate over 95% of our hospitals to the new national rate as they transition to PPS. But the implementation of PPS is revenue neutral to the industry, our low cost-operating model coupled with the high acuity of our patient population causes us to continue to be optimistic about our prospects under PPS. Moving over to our outpatient rehabilitation division, our outpatient rehab net revenue increased 5.9% for the quarter to $132m compared to $124.6m in the same quarter last year. Of our outpatient rehab revenues for the quarter, $89.8m was from our U.S. outpatient rehabilitation clinics, $3.8m from our managed clinics, and $38.4m from our Canadian subsidiary and our other outpatient services. Our outpatient rehab adjusted EBITDA increased 1.4% for the quarter to $23.4m compared to $23.1m in the same quarter last year. Adjusted EBITDA margins declined year-over-year to 17.7% for the second quarter compared to 18.5% in the same quarter last year. However, adjusted EBITDA margins improved sequentially from 15.5% in the first quarter. This adjusted EBITDA decline was primarily the result of the consolidation of a group of clinics that were previously managed. Those clinics experienced margins below those experienced throughout the rest of our operation, which has created decline in our overall outpatient margins. Visits in our U.S. based outpatient rehab clinics increased 2.4% for the quarter to over 1 million visits compared to 995,000 visits in the same quarter last year. Net revenue per visit in these clinics increased to $88 compared to $86 in the same quarter last year. During the second quarter, our outpatient rehab division opened 11 new clinics and closed our consolidated 12 existing clinics. At the end of the quarter, we have a total of 737 clinics operating in 32 states, the District of Columbia and seven Canadian provinces. We continue to expect to open a total of 30 to 40 internally developed clinics this year. We also announced at the end of last quarter, the signing of the definitive agreement to acquire Kessler Rehabilitation Corporation. We expect the acquisition to close some time in the third quarter after receiving all necessary regulatory approvals. Kessler adds a highly respected brand name and entrance into the inpatient rehabilitation market for Select and market that our management team has experienced. It also expands our presence in several outpatient rehabilitation markets where we currently operate. I will now turn it over to Marty Jackson, our CFO, to cover our financial highlights in greater detail.

Thanks Bob. Once again we are pleased to report solid financial results for another quarter. Operating expenses, which include our cost of service, general and administrative costs, and bad debt expense increased 14.7% to $282.2m from the second quarter, compared to $246.1m from the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter decreased 130 basis points to 86.5% compared to 87.8% for the same quarter last year. Of our operating expenses, rent expense was $22.5m compared to $21.4m in the same quarter last year. Cost of services as a percent of net revenue contributed to the decrease in operating expenses as it dropped 220 basis points to 79.2% for the first quarter, compared to 81.4% for the same quarter last year. Year-to-date, cost of services as a percent of net revenue has declined 160 basis points to 79.9%. G&A, as a percent of net revenue increased 30 basis points to 3.6% for the second quarter, compared to 3.3% for the same quarter last year. Year-to-date, G&A as a percent of net revenue has declined 10 basis points to 3.3%. Bad debt as a percent of net revenue increased 70 basis points to 3.8% for the second quarter compared to 3.1% for the same quarter last year. Year-to-date, bad debt as a percent of net revenue has increased 40 basis points to 3.8%. While total EBITDA increased 28.9% for the quarter, EBITDA margins improved 130 basis points for the quarter to 13.3% compared to 12% in the same quarter last year. The improvement was driven by significant margin expansion in our inpatient operations, offset by margin contractions in our outpatient rehabilitation business. Overall, hospital adjusted EBITDA margins increased 460 basis points for the quarter to 16%, while the same store margins improved 540 basis points to 17.4% for the second quarter. Outpatient rehab adjusted EBITDA margins, however decreased 80 basis points to 17.7% for the second quarter. As Bob had previous mentioned, the decline in outpatient margins was primarily the result of the consolidation of a group of clinics previously under a management arrangement and the fact that those clinics have lower margins from the rest of our operations. Depreciation and amortization increased 16.4% to $7.2m for the second quarter, compared to $6.2m for the same quarter last year.

This increase was primarily related to increased appreciation on fixed asset additions related to new hospital development and expansion. Net interest expense decreased by $1.2m to $5.5m for the second quarter, compared to $6.7m for the same quarter last year. This decline in interest expense is a result of lower debt levels outstanding during the quarter as well as a reduced overall interest rate compared with the same quarter last year. The effective interest rates on our credit facility debt during the quarter was 5% compared to 7.6% for the second quarter last year. This reduction was primarily the result of our interest rates swap maturing at the end of the first quarter as well as the reduction in our leverage, which resulted in a lower borrowing spread. Tax expense was $12m for the second quarter representing an effective tax rate of 39.25%. Net income increased 47.9% for the second quarter to $18.6m, compared to $12.6m in the same quarter last year. EPS increased 48% to $0.37 for fully diluted share for the quarter, versus $0.25 in the same quarter last year. We ended the quarter with $223.9m of debt outstanding and total leverage or total debt to trailing 12 months EBITDA of 1.6 times. This compares favorably to our total leverage at year-end 2002 of 2.1 times, and 2.3 times at the end of the second quarter of last year. Total debt less cash or net debt was $132.6m at the end of the quarter, and net debt to trailing 12 months EBITDA was down to 0.9 times. Debt to total capitalization was down to 41% at the end of the quarter, compared to 48% at year-end and 51% at the end of the second quarter last year. Again we had a solid quarter of cash flow from operations with operating activities generating $66.8m of cash for the quarter. Contributing to the quarter's solid cash flow was improved operating performance, a reduction in daily sales outstanding to 56 days, compared to 64 days at the end of the last quarter and 76 days at the end of the second quarter last year. And also a significant increase in our due to third party liabilities, which primarily resulted from the early payment of our biweekly periodic interim payment from Medicare for our hospitals of approximately $60m. Offsetting these increases was the payment of over $22m in cash taxes during the quarter.

Investing activities used $8.9m of cash in the second quarter, including $8.2m for purchases of capital equipment and $3.1m for acquisition related payments, offset by proceeds from asset disposes of $2.5m. Financing activities used $5.4m of cash in the second quarter, which included $1m in debt reduction payments, a $1.3m reduction in our bank overdrafts, $600,000 distribution to minority partners, offset by proceeds from stock issuance of $600,000 for the quarter. As we noted in our press release, we have revised the financial objectives for the remaining quarters of 2003. Let me point out that we have not included in the financial objectives revised estimates of EBITDA due to the SEC's restrictions on the use of non-GAAP financial measures. However we have indicated we expect the overall year-over-year EBITDA margin growth in the third and fourth quarters of 2003 to be consistent with the year-over-year EBITDA margin growth we experienced in the first and second quarters of approximately 130 basis points. For the third quarter 2003, we expect net revenue in the range of $320m to $330m and fully diluted earnings per share of $0.28 to $0.29 representing an increase in the fully diluted EPS of 47% to 53% versus third quarter of last year. For the fourth quarter, we have included expected results from the acquisition of Kessler Rehabilitation and expect net revenues in the range of $380m to $390m in fully diluted earnings per share of $0.36 to $0.37. This represents a 44% to 48% increase in the fully diluted EPS versus the fourth quarter of last year. With the positive performance to expectations in the first half of 2003 and a revised objective for the third and fourth quarter, we now expect full year 2003 net revenues of $1.34b to $1.36b and a fully diluted EPS in the $1.30 to $1.32 range. With that I would like to turn it back over to Bob for some final summary comments

Marty. Let me say overall that we are pleased with the results for our second quarter and for the first half of 2003. While we experienced some margin compression on our outpatient operations versus prior year, we again posted improvement sequentially versus the first quarter in that business segment. Our same store hospitals continue to experience margin expansion, which as I mentioned we attribute in part to PPS. I am excited about the opportunity proposed acquisition of Kessler Rehabilitation office to select. The rest of the time has been allocated for questions. So I would like to open the call at this time.

Thank you. This floor is now open for questions. If you do have a question please press the number one followed by four on your touchtone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, please pick up your handset to provide optimum sound quality. Once again if you do have a question, please press the number one, followed by four on your touchtone phone at this time. Please hold one moment, while I poll for questions. Thank you. Your first question is coming from A. J. Rice of Merrill Lynch; please go ahead with your question.

Thanks. Hello everybody. I guess on the same store margin first off in the LTACH business you ran about 17.4% in Q2. That is sort of getting towards the range where you had as your long-term goal, I guess when the company came public a few years back, obviously, PPS has worked out favorably and maybe there is other dynamics as well. What is your thinking in terms of where the margin might go in the LTACH business long-term now is there any update on that?

A. J. we've not updated the data, other than what we've said. I think that what we've said is that we think at the margins in the LTACH business, it can probably begin to approach what the margins are in the other acute segments of the business, so in the range of what you see from general acute care hospitals, which I understand is a wide range but toward the middle range of that is something that we could certainly think is achievable.

Okay. So, today through Q2 you still have some solace (ph) to go on, so the 17.4, [Inaudible] to PPS so the 17.4% margin would potentially have some further upside, you would think?

Yeah, we think that's correct A. J.

Okay. You said that you started - you've obviously in the fourth quarter started to factor in some of the impact of Kessler into the mix. Can you just comment on some of the key assumptions with respect to Kessler and what you think you can do with that property long-term? And then a technical question might relate to the 75% rule, it's getting a lot of buzz in inpatient, rehab circle show you've thought about that when you lay out your guidance for Kessler?

Let me take the second question first A. J., which is a 75% rule up for those who may not be familiar, there has been some buzz in the inpatient rehab industry over the general industry's non-compliance with the 75% rule which is been around as long as the rehab hospitals have been in existence, which basically says that 75% of your patients have to come from 10 diagnostic categories. Generally speaking, pursuant to a study done by the RAN(ph) Corporation for CMS, very few of the rehab hospitals in the US actually technically comply with the strict reading of 75% rule. I think it was like 14%, so CMS has taken a lot of input from the industry and there is an expectation that the 75% rule will be modified. I think that Kessler we believe is in a pretty good position. We think that based on the discussions that the modifications in the 75% rule will be coming out of CMS, would generally bring Kessler into compliance with the revised rule. If they need to modify, we think Kessler has a great advantage because they are in a highly regulated state, of--through certificate of need and they have such a dominant market share, that if they need to do some modification of their patient profile in order to come into compliance with the revised 75% rule, we think they will be in a very good position to do that. In terms of our guidance for those included in the fourth quarter, I am going to let Marty comment on that.

A.J., when we - we announced the acquisition of Kessler, we said it would be slightly accretive.

Right.

And if you take a look at how we are going to account for Kessler moving forward, that would go into our specialty hospital line. The reason we believe that - the reason we know it's accretive is if you take a look at Kessler's financials, our - our financials combine that with the debt that we are financing it at; it's accretive right out of the shoot.

Okay. So, the new guidance, does it really assume significant improvement in the existing performance it just sort of layers it in at the current sort of run rate, is that -?

Yes, there has been no built-in synergy to the numbers that we put together.

Okay. I'm going to ask one final question, then I'll let others do it. Obviously, you are generating a lot of cash and opportunities like Kessler have come along. But, one thing that, some companies are looking at that - are in sort of your position generating the excess cash flow, which you generate is instituting a dividend, any thoughts about that or any comments along those lines about considering something like that?

I think Select like most companies are having a discussion at the Board level and we certainly are - we certainly haven't made any definitive decisions on that, but certainly with the changes in the tax laws and with Selecta's strong balance sheet position, that's certainly a dialogue we are having and we will probably continue to have.

Okay. Thanks a lot.

Thanks A.J.

Thanks A.J.

Thank you, your next question is coming from Kemp Dolliver of SG Cowen. Please go ahead with your question.

Hi, thanks and good morning. Bob, I apologize if I missed some of this when you were talking about the inpatient division, but you had, I think, roughly 9% growth in patient days. What was the growth in admissions? What's the length of stay and what should we expect regarding I guess the interplay between length of stay and admissions growth under the PPS? Thanks.

Let's see if we can pull those exact numbers. I think that we're looking at length of stay as being pretty stable.

Yes, actually the length of stay is down two days to 27 days Kemp. You are right with regards to the increase, there was 9.1% increase in the number of patient days, and admissions actually went up 21.9%, and that's versus Q2 of 02.

Okay. And I assume most of your lengths of stay declines in the same store hospitals?

Actually, the length of - average length of stay in the same store was 28 days. So, it's really coming from the newer hospitals.

Okay. Great. And what percentage of your Medicare revenue in the inpatient business is still coming through TEFRA versus the PPS system?

You mean as a total revenue number. That's not something we provide, what we do provide is the number of hospitals that are on PPS, Kemp.

Okay. There was a number I had seen in the 10-K for the first quarter and I think, it was in the 40% ballpark in the first quarter so, I guess I will wait for the Q.

Yes, you have to wait for the Q to come up.

Okay. If I can shift gears over to the outpatient business, you had some sequential margin improvement, which I guess given the volume backdrop this quarter versus last is entirely surprising, but I guess the extent that you are integrating an acquisition here that you did last quarter. Could you talk about the effect of, I guess better volume trends versus the integration benefits?

Yes. If you take a look at the - if you were to remove the - the managed entity that we've taken on, it's a 100% owned today, if you were to move that out of the mix, you would have seen the margins in the same neighborhood as they were in Q2 of 02. So obviously the margins on that -- that managed business are substantially lower than the rest of our business.

And the -- what changes are you making there, is it mainly staffing levels to improve the profitability or are some of these just going to disappear?

No, I think -- I think we're making change at the staffing level, I think we're taking a look at, you know, we've made some modifications from an administrative perspective. So, I think you can expect to see those margins start to improve.

Okay. Then, just two -- one question actually relative to some comments made by HealthSouth. They had talked about some significant declines expected in their outpatient volumes and indicating that they were getting hit by everybody including national competitors, of which I would include you all. I know you don't have tremendous geographic overlap, but could you talk about any real benefits you're seeing from HealthSouth's problems?

Hi, yeah Kemp, I wouldn't characterize the problems that HealthSouth directly or significantly [Inaudible] to the benefit of select outpatients at this time, mainly because as you pointed out, the geographic overlap is not necessarily that great and while we can say that we've seen some additional resumes from HealthSouth and maybe some payer negotiations that may have been resolved with HealthSouth problems, I would characterize those events as more anecdotal than significant to our overall business at this time on the outpatient side.

Okay, thanks a lot.

Sure, Kemp.

Thank you, your next question is coming from Joel Ray of Wachovia Securities. Please go ahead with your question.

Okay, good morning folks and congratulations. A couple of questions for you. I know that at this point, about two-thirds to 70% of your facilities on the OPEC(ph) side have transitioned over at least at the end of the quarter, you mentioned 49. Do you have a ballpark estimate as far as what proportion of the hospital is actually able to do buildings under PPS because with the long length of stay, if you were to do a transition lead in the quarter, obviously you didn't even get to bill?

Yeah, I think you're right there Joel. If you take a look at the -- if you take a look at the last month, for the most part, you're not going to get any billings out in that particular month even though you did accelerate to PPS.

Do you have a feel for what number of facilities actually transitioned in that last month?

We have -- we had five hospitals that transitioned to PPS in June.

Okay, so obviously that creates upside as we go forward. As far as the Kessler deal goes, do you have a -- see, I know you're saying it will close in the third quarter, do you have a feel for where we are kind of in the whole transaction the status of the bond deal, the -- moving ahead and getting this closed and what, if any, things you're going to focus on when you do get that deal finalized?

Let me first address the bond deal. As you know, we're in the market right now and we've been advised by counsel, we can't talk about it.

Okay.

So that's number one. With regards to the closing date on Kessler, it's our expectation it will be some time in August.

Okay.

As Bob indicated, we're -- really the focus here is getting regulatory approvals first both from Hart Scott (ph) as well as the State of New Jersey on the hospital licenses.

As far as aspects of the business that you want to try to focus on once you fold it in. As an example, their outpatient rehab clinics are known for being not as profitable or as strong as your facilities, vis-à-vis revenue generation. Is there anything that you're thinking about there, I'm not sure what synergies are available, etc, that you might think about?

Well, Joel, it's Bob -- you know, we're obviously thinking about all the elements of Kessler. The rehab hospitals themselves in North Jersey enjoy a tremendous brand name and operate very well as though their, we think, their outpatient, which are in the North Jersey market. They have a lot of outpatient locations down the eastern seaboard in 10 other states, which happen to overlap nicely with where we have outpatient locations. So that will certainly be an area, but I wouldn't characterize one area as opposed another as being more important. Most of the- of Kessler's revenues due are derived from their inpatient facilities and less so from their outpatient which would be second and then they have some ancillary business that generate some revenue as well. You know, we really haven't had a chance to do a lot in-depth work other than our due diligence prior to signing a definitive agreement. But we hope to be able to do that, to some extent perhaps a little bit before closing, but then in a much more focused way post-closing, which should be in the early part of the quarter.

Okay great. And finally I note an unrelated issue. Your share count was up over a million shares in the quarter. Maybe you could go into a little explanation on that.

Yeah, Joel, as I am sure you are aware, that has to do with the treasury method of calculating fully diluted shares. And obviously as the stock price goes up we are going to continue see the fully diluted share count continue to rise.

Thanks very much. Congratulations again.

Thank you Joel.

Thank you. Your next question is coming from Frank Morgan of Jefferies & Company. Please go ahead with your question.

Good Morning.

Good Morning Frank.

First I was--while we're on the subject of the LTACH business and I know Kemp kind of touched this. But could we get the same store revenue per patient day and the same store admission number. I know you mentioned that the-what the same store average length of stay was.

Yeah. Same store admissions was five for Q2 of '03-was 5,597 a growth of a, on a Q2 over 2002, 12.5%. And we don't break that up on a revenue basis.

Ok and with regard to, hopping over to Kessler now. Obviously looked through some of the offering documents here but, can you give us any kind of statistical details about Kessler like how many patients days or discharges they are doing on their inpatient rehab business? What is the current length of stay and maybe what is their current volume of outpatient visits for the outpatient portion of the business.

Frank, that's a great question. We will be able to provide that one once we own it.

Okay, obviously so if you rolled the numbers in and you are saying once again, you are not assigning any kind of significant synergies with Kessler closing, but it will be in there for the fourth quarter.

Yes. Let me modify your statement. There are no changes. I mean, all we have taken was A+B. Kessler's financial statements, our financial statements, add those together and those are the numbers you see.

With regard to data clearly you are raising for the bar here for the balance of this year, but any comments about '04 outlook or '04 expectations?

No, '04 expectations or guidance will be coming out as we usually do at the third quarter earnings call.

Okay. All right, thank you.

Great Frank, thanks.

Thank you. Your next question is coming from Matt Ripperger of JP Morgan. Please go ahead with your question.

Hi, thanks very much. Just a couple of questions here. First of all, can you comment on wage trends both on the nurse side and the therapist side? Kind of, what you are seeing year-over-year in terms of the trend, and are you seeing any improvement on that?

On the hospital side of the business, where your really scarce resource continues to be nurses and pharmacists and what we have seen is about 5-8% increases in '03 and that is stable with the increases that we saw in '02. I think that would be the area where you are seeing the most action. Other than that the staffing increases are probably in the 3% range other than those two areas.

And on the therapist side?

On the therapist side, it depends on the geographic location, where you are. You know, in some areas we are seeing, you know, increases in the 5% to 6% to 7% range, in other areas it is about 3%.

Okay, great. The second question I had is with the implementation of PPS have seen any change in discharge patterns or patient acuity mix at your hospitals?

No, we haven't.

Okay. And then the third question is, I saw in the EBITDA breakout you had a sequential increase in "other", and I just wanted to see if you could help explain what contributed to that, whether that was just corporate or some other cause?

Yes, that was corporate.

So, the 10m in the quarter is a good run rate to use going forward?

I think that is probably a little high. We had some events occur that caused that to increase that you will probably not see occurring again.

Okay. And then the last question I had is, realizing you are not going to give '04 guidance, is 8 to 10 new developments or denovos (ph) a good number to use on an annual basis going forward?

Yes, it is.

And will those be strictly confined to hospital within a hospital models or is there some market where you would be more interested in doing a stand alone facility?

We will certainly look at opportunities to do free standing where they come, in certain markets. That will be really opportunistic. So while, our primary focus is hospital within a hospital. In markets where we have a good opportunity to do a free standing we certainly will.

Great. Thanks very much.

Thanks Matt.

Thank you. Your next question is coming from Charles Lynch of CIBC World Markets. Please go ahead with your question.

Hi. Good morning. Just quickly I wanted to touch on the topic of length of stay. Bob or Marty, I think you mentioned that on a same store basis the hospital length of stay was 28 days, is that right?

That is correct.

Is that pretty much unchanged from prior?

Yes. The prior quarter we were 29, Charlie.

Okay. Can you talk a little about, you know, how that level relates to some of the qualification requirement, that 25-day minimum length of stay for Medicare, DOD exemption, and just kind of - it is obviously not easy to manage length of stay, but just to the extent that that is drifting down a little bit, can you just kind of touch on that?

I wouldn't read into a one-day length of stay change as being material or necessarily a trend. Our patient population has not really changed that much in terms of acuity. We have been pretty stable over prior quarters in terms of that length of stay. And yes, you are correct that a condition of participation as an LTACH is that you maintain a overall length of stay greater than 25 days, and I think we are able to do that with a fair degree of comfort given the acuity of patients that we see in our patient profile.

Okay. That is what I wanted to hear. Thanks.

Thanks Charles.

Thank you. Your next question is Alec Bircher (ph) coming from Thomas Weisel Partners. Please go ahead with your question.

Thank you and good morning. It would appear that you are benefiting from some pretty strong, but fundamental trends and the PPS migration on the LTACH revenue growth. I am curious, is most of the-- any growth you see there from PPS is that because of your higher acuity rate, now receiving higher reimbursement levels to those patients?

If you look at the new PPS system that was put in place in October of 2002 by CMS, the new system favors those providers that have higher acuity because your DRGs for the higher acuity patients get obviously higher reimbursement, it is proportionally higher reimbursement. The system also favors those providers that have below industry average cost. So if you look at the combination of both of those features in the select hospitals, which frankly has been the case since their inception. This isn't anything that has - changed in the profile of our hospitals since PPS. We have historically had higher acuity patients and lower costs for a number reasons, one of which is the model- the hospital within a hospital model, where we have inherently lower capital costs.

And to focus on that on the revenue side of that, when you look at the numbers you're putting up today, is it possible to give an idea of what type of growth we are seeing from organic sources, organic might be the wrong term, but from the growth you are deriving through more normal means or sustainable means?

Well we continue to see growth in the same store occupancy and that's obviously one place where we are going get additional growth from hospitals. And we also continue to see, also have an appreciation for the fact that your commercial or private pay forces are still much higher reimbursement on revenue per day than what you will get on a Medicare patient. So, as we continue to build our hospitals, and they mature and they have greater commercial tag and overall census goes up that's going to be contributive to growth.

Okay. Thank you.

Thank you. Your next question is coming from Jerry Doctrow of Legg Mason. Please go ahead with your question.

Hi, thanks. I have a couple of specific things, can we get your end of quarter share count?

Yeah, if you can hold on just for a second we will get that for you.

Okay. And maybe while you are looking, I also just wanted to clarify the US Rehab centers, just net of the Canadian, the number?

Yeah, let me address the share count.

Okay.

Common shares at the end of the period, you mean on the non - that are not fully diluted?

Right that's it.

Yeah it's 48.57m.

Okay. And then just the number of US Rehab centers, could you provide the stats on those, just want to get the centers that we are talking about?

There is 606 US based clinics.

Okay. And then, there is some additional manage in the US and there is a net for Canada is that?

Yes. We have 30 managed clinics in the US and then we have a 101 Canadian based clinics.

Right, okay. I just wanted to also clarify one thing I think you said before, I think you said you will move Kessler in under the sort of the hospital segment is that right or are you going to split it so that is partially under the rehab segment, partially under hospital or - just for reporting purposes to go forward?

Reporting purposes the hospitals will go under the specialty hospitals line, and the outpatients will go into the outpatient.

Okay. And would you, you expect to provide sort of separate stats just operationally on the rehab business, rehab hospital business?

Yes we do.

Okay. All right, great thanks that's all for me.

Sure.

Thank you. Your next question is coming from Van Brady of Presidio Management. Please go ahead with your question.

Yeah. I wonder if it is a fair question to ask you to quantify some of the accretion you see from Kessler next year and the fourth quarter too, if you care to.

Given the fact that we are going to capture Kessler in our specialty hospital group, we are not planning to indicate the accretion of Kessler.

So, you are just leaving at the fact that it is accretive without trying to quantify that for investors.

Yes, we have indicated the on street that it will be accretive.

Okay. I had a question about the third quarter. I haven't followed your company for that long. There is obviously some seasonality and it looks like it has more to do with margins than it does with [Inaudible]. Looking at the fact that you are going to be bringing 24 new LTACH hospitals on and as Joe pointed out the billing has an impact on that, there will be 5 that were brought over in June, but did not bill. It looks like your guidance is kind of conservative for the third quarter.

Let me address your issue. There is certainly seasonality in our business. If you take a look at the third quarter of the past couple of years you'll see that seasonality. One of the reasons you see the revenue increase and there's two different phenomenon going on here. What happens on our outpatient business is in the third quarter you typically see a revenue drop and you see an EBITDA margin drop. In particular, because a lot of physicians and lot of patients are on vacation during the third quarter, also you had that is one phenomenon. You also have the phenomenon of four hospitals that we brought on, our newly developed hospitals. So you are going to see an increase in revenue there and you are not going to see any associated EBITDA with those hospitals as matter of fact, you will see losses associated with those hospitals. And consequently that's why you see the numbers where they are.

I see. So there is a big uptake from new hospitals converting -- okay, well that includes everything I see. Thanks very much.

Thank you. Your next question is coming from Peter Volkmer (ph) of Alpine Capital. Please go ahead with your question.

Hi. Just needed two figures from you-the total number of beds at the end of the quarter and the total number of admissions, on the inpatient side?

Okay, we will get those.

Admissions for the quarter?

Yes.

That's 6,117.

Okay.

And the total number of licensed beds is 2758.

Okay. And the $600,000 cash flow due to share issuance, did that also contribute to a higher share count at the end of the quarter, I assume it did, I mean it wasn't just option grads?

Yes. That is option exercises, and yes that did account for higher share count.

Yes. Can you indicate how many shares that accounted for?

We don't have that on our fingertips right now.

Okay. Maybe I will follow-up offline then.

Yes.

Thanks.

Thank you.

Thank you. Your next question is coming from Michael Weisberg (ph) of ING. Please go ahead with your question.

What are you doing -- I know that the year-to-year count in outpatient hospitals is down, outpatient rehab hospitals were down, I missed the first part of the call, and I apologize, but maybe could you talk about, where you expect to go in terms of openings and closings for the balance of the year?

Michael, what we have indicated to everyone is we expect to see 30 to 40 outpatient rehab clinics growth on an annual basis. What we do is we really take a look at the opportunities to present themselves at any particular time.

Okay.

We will take advantage of...

Am I right? Is it running down on a year-to-year basis?

What's that?

It was running down on a year-to-year basis, at outpatient.

We are probably down two or three clinics.

Right. So I was just trying to calculate, because I know you are trying to open 30 or 40, so does that mean you closed a number? How does that happen on a year-to-year basis?

Yes, we have had some closures, over the past two quarters.

Okay. Great, and should that continue in other words, what would be a reasonable account for outpatient clinics net at the end of the year?

It's impossible for us to give you that indication right now Michael, but as I said, what we do is we have our operators advise us of those clinics they want to open, and we take a look at the economics and if they are good then we will open them. If they are not then we are not going to spend our cash to do that.

Great. And maybe one final thing in that regard. Are you seeing any change in the ability to collect co-pays? I know you people are very aggressive about getting it, you know up-front, which is great, but have you seen any decline in the ability of people to handle the co-pays as this year has progressed?

No, we've not seen any decline.

Great, thanks a lot.

Sure. Thank you Michael.

Thank you. Your final question is coming from Frank Morgan of Jefferies & Co. Please go ahead with your question.

Thanks again, hey could you give us a little color on the recent openings of four that you opened in the quarter in terms of little about the local market, who are your partners, competitive landscape in those markets, and then maybe in terms of fourth quarter, I'm sorry, third quarter openings, any color there as well? Thanks.

I can't give you anything on future openings because we don't announce sign deals, we only announce when they are opened. I mentioned that we opened hospitals in Augusta, Durham, Knoxville and Conroe. In Augusta, Georgia, we opened with the Medical University, that's the market where we already have a presence, so, that would just be additional market share. In Durham, we have opened an affiliate of Duke University Medical Center, which we think, is a great hospital and we'll be very successful. And then we opened in Knoxville and Conroe. A comment on Conroe, Conroe is a suburb of Houston. We have a number of hospitals already in Houston, so, that's further kind of market penetration in Houston. So, we think that those are four good strong hospitals and we're still optimistic they will get to our eight to ten announced per year.

Okay, thanks.

Thanks, Frank.

Thank you gentlemen. There are no further questions.

Thank you.

Do you have any further comments?

No, but thank you very much for your attention dialing in the call and we look forward to updating you again on the next quarter results.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.