Select Medical Holdings Corp (SEM) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Select Medical Corporation third-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 your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Don Murphy of Newnan Rousseau (ph).

Thank you for joining us today for Select Medical Corporation's Investor Conference Call to discuss recent corporate developments relative to yesterday's third-quarter 2003 earnings announcement.

By now, you should've received a press release. If, for some reason, you have not received the press release or are unable to log onto the Web cast, please call me, Donald Murphy of Euro RSCG Life NRP at 212-845-4274 and I will be happy to assist you.

This conference call is being recorded. It will also be available through a replay starting at 1 PM Eastern today and running until 1 PM Eastern on Thursday, November 6. To access this replay, please dial 877-519-4471 within the U.S., or 973-341-3080 internationally. The passcode to listen to this replay will be 415 2563.

Speaking today, we have the Company's President and CEO, Robert 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 business outlook and that open the call for questions and answers.

Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the Company, including without limitation statements regarding operating results in calendar 2003 and 2004, 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 statements as circumstances change.

For additional information, please see the cautionary statements included in Select Medical's most recent Form 10-k or other public filings filed with the Securities and Exchange Commission.

At this time, I will turn the conference call over to Robert Ortenzio. Please go ahead.

Good morning, everyone, and welcome to Select Medical's earnings call covering results of the third quarter of 2003.

I will provide some overall financial performance highlights for the quarter, as well as take you through operating performance in each of our business segments.

As many of you know, we completed the acquisition of Kessler Rehabilitation on September 2nd, and our results for the quarter include one month of operations of Kessler. For the quarter ended September 30th, we again exceeded earnings expectations with fully diluted earnings per share of 35 cents, 4 cents ahead of Analyst Consensus. This represents an 84.2 percent increase over fully diluted earnings per share of 19 cents in the same quarter last year.

Our net revenue for the quarter increased 26.7 percent to $353.5 million, compared to 279 million for the same quarter last year. Our earnings before interest, income taxes, depreciation and amortizations, or EBITDA, for the quarter increased 59.8 percent to $45.7 million, compared to 28.6 million for the same quarter last year. A reconciliation of net income to EBITDA and adjusted EBITDA, which we use to measure performance in our operating segments are attached to our press release.

Income from operations increased 64.3 percent to $36.9 million for the quarter, versus 22.5 million in the same quarter last year.

We had another strong quarter for cash flow, as our cash flow from operations was $73 million. Cash flow from operations for the nine months ended September 30th was $164.2 million.

Days of Sales Outstanding, adjusted for one month of Kessler revenues, declined to 54 days at September 30, down from 56 days at June 30th and 73 days at year-end, 2002.

We ended the quarter with $81.4 million of cash on the balance sheet. This was after repayment of all of our U.S. term debt of over $29 million and funding of $62 million in cash for the Kessler transaction.

Next, I'll take you through some of the key performance measures for each of our operating segments, starting with our Specialty Hospitals, which includes select long-term acute-care, or LTAC, hospitals and the four rehabilitation hospitals acquired in the Kessler transaction.

Our Specialty Hospital net revenue increased 42.7 percent for the quarter to $222 million, compared to 155.6 million in the same quarter last year. For hospitals opened prior to January 1, 2002 and operated throughout both periods, which I will refer to throughout as same-store, net revenues increased 22.2 percent to $186.5 million compared to 152.6 million in the third quarter last year. This increase was primarily driven by higher rate in these same-store hospitals.

Our Specialty Hospital adjusted EBITDA increased 132.9 percent for the quarter to $38.5 million, compared to 16.5 million in the same quarter last year. The same-store adjusted EBITDA increased 77.5 percent to $32.8 million, compared to 18.5 million in the third quarter last year. Adjusted EBITDA margin for this segment improved to 17.3 percent for the quarter, compared to 10.6 percent in the same quarter last year.

Excluding the effect of the Kessler acquisition, the adjusted EBITDA margin was 16.8 percent for the quarter. Same-store adjusted EBITDA margin improved to 17.6 percent for the third quarter, versus 12.1 percent in the same quarter last year.

Overall adjusted EBITDA start-up losses incurred in the third quarter for hospitals developed in 2003 or those in the start-up period were $2.2 million.

Overall occupancy in our LTAC hospitals was 67 percent for the quarter, down from 69 percent in the same quarter last year. Same-store occupancy rates declined slightly to 71 percent for the quarter, compared to 72 percent in the same quarter last year. Our occupancy in the rehabilitation hospitals was 95 percent for the month of September.

Our hospital patient mix for the quarter, which we base on the number of patient days, was 78 percent Medicare, 22 percent non-Medicare for our LTAC hospitals. For the month of September in the rehabilitation hospitals, the mix was 57 percent Medicare and 43 percent non-Medicare.

Our LTAC hospital net revenue per patient day, or rate, improved 21.7 percent to $1,221 per day, compared to $1,003 per day in the same quarter last year. Our rate in the rehabilitation hospitals was $1,143 per patient day in September.

Our Specialty Hospital payer mix, based on the latest (indiscernible) months ended September, 2003, was 68 percent Medicare, 2 percent Medicaid and the 30 percent balance from commercial insurance or managed care. LTAC hospital patient days increased 10.9 percent for the quarter to 171,971 days, compared to 155,105 days during the third quarter last year. Rehabilitation hospital patient days were 9,217 of the month of September.

Admissions in our LTAC hospitals increased 22.4 percent to 6,443 for the quarter. Admissions in our same-store hospitals increased 9.8 percent to 5,643 admits in the quarter. Rehabilitation hospital admissions were 582 in September.

Average length of stay in our LTAC hospitals was 27 days for the quarter, while average length of stay in our rehabilitation hospitals was 16 days for the month of September.

We opened two new LTAC hospitals this quarter, giving us six openings in 2003. We currently expect to open a total of one to two additional LTAC hospitals in the fourth quarter. Hospital openings this quarter occurred in Zanesville, Ohio and Omaha, Nebraska.

Regarding PPS for LTAC hospitals, we transitioned our remaining 25 eligible hospitals to the new prospective payment system during the past quarter and now have 74 hospitals operating under the new system. For 73 of those hospitals, we have elected to accelerate our payment to the national rate. Our remaining three hospitals are in their LTC qualification period.

Moving over to our Outpatient Rehabilitation segment, which includes the outpatient rehab clinics and the on-site contract rehabilitation services acquired in the Kessler transaction, our outpatient rehabilitation net revenues increased 8.3 percent for the quarter to $129.1 million, compared to 119.2 million in the same quarter last year. Of our outpatient rehabilitation revenues for the quarter, $87.2 million was from our U.S. outpatient rehab clinics and $4 million from our managed clinics and 37.9 million from our other outpatient services and our Canadian subsidiary.

Our outpatient rehabilitation adjusted EBITDA declined 11.4 percent for the quarter to $16.9 million, compared to $19 million in the same quarter last year. Adjusted EBITDA margin declined to 13.1 percent for the third quarter, compared to 16 percent in the same quarter last year. This adjusted EBITDA margin decline was primarily the result of the effects a the Kessler acquisition and the consolidation of a group of clinics we previously managed.

The Kessler outpatient operations experienced negative margin in the month of September, and the consolidated group of clinics had a negative effect on margin, compared to the same quarter last year.

Business in our U.S.-based outpatient rehab clinics increased 4.7 percent for the quarter to over one million visits, compared to 957.5 thousand visits in the same quarter last year. Net revenue per visit in these clinics remained constant at $87, compared to the same quarter last year.

During the third quarter, our outpatient rehabilitation division acquired 92 clinics, opened five new clinics and closed or consolidated 19 existing clinics. At the end of the quarter, we had a total of 814 clinics operating in 31 states, the District of Columbia and 7 Canadian provinces. We plan to continue to open new clinics in existing markets and consolidate and/or close clinics in several markets through throughout the remainder of 2003.

With that, I'll turn it over to Martin Jackson, our Chief Financial Officer, to cover our financial highlights in greater detail and to discuss our financial objectives for the coming quarter and for 2004.

Thanks, Bob. Once again, we are pleased to report solid financial results for another quarter. Operating expenses, which include our cost of services, general administrative costs and bad debt expense, increased 23.1 percent to $307.7 million in the third quarter, compared to 250 million in the same quarter last year.

As a percentage of our net revenue, operating expenses for the quarter decreased 250 basis points to 87.1 percent, compared to 89.6 percent for the same quarter last year.

Of our operating expenses, rent expense was 24.3 million, compared to 20.9 million 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 280 basis points to 80 percent for the third quarter, compared to 82.8 percent for the same quarter last year. Year-to-date, cost of services as a percent of net revenue has declined 190 basis points to 80 percent.

G&A as a percentage of net revenue decreased 50 basis points to 3.2 percent for the third quarter, compared to 3.7 percent for the same quarter last year. Year-to-date, G&A as a percent of net revenue has declined 20 basis points to 3.3 percent.

Bad debt as a percent of net revenue increased 80 basis points to 3.9 percent for the third quarter, compared to 3.1 percent for the same quarter last year. Year-to-date, bad debt as a percent of net revenues increased 50 basis points to 3.8 percent.

While total EBITDA increased 59.8 percent for the quarter, EBITDA margins improved 260 basis points for the quarter to 12.9 percent, compared to 10.3 percent in the same quarter last year. The improvement was driven by significant margin expansion in our inpatient operations, offset by margin contraction in our outpatient rehabilitation business.

For our business segments, Specialty Hospital adjusted EBITDA margin increased 670 basis points for the quarter to 17.3 percent. Our overall LTAC margins improved to 16.8 percent for the quarter with the remaining 50 basis point increase coming from one month of Kessler hospital operations. Same-store margins improved 550 basis points to 17.6 percent for the third quarter.

Outpatient Rehabilitation adjusted EBITDA margins , however, decreased 290 basis points to 13.1 percent for the quarter. As Bob previously mentioned, the decline in outpatient adjusted EBITDA margins was primarily the result of the effect of the Kessler acquisition and the consolidation of clinics previously under a management arrangement.

In addition, we also experienced a shift in business mix in this segment, where overall growth occurred in some entities that have a higher relative operating cost. We also experienced some incremental overhead cost associated with the consolidation of one of our central business offices during the quarter, where we experienced both incremental staffing costs at one business office and severance costs at another during the quarter.

Depreciation and amortization increased 35.1 percent to $8.8 million for the third quarter, compared to 6.5 million for the same quarter last year. This increase was primarily related to increased depreciational and fixed asset additions related to new hospital development and expansion, as well as increases in depreciation and amortization expense associated with Kessler of approximately $1 million in September.

Net interest expense decreased by 600,000 to 6.1 million for the third quarter, compared to 6.7 million for the same quarter last year. This decline in interest expense is the result of lower debt levels in the first half of the quarter and the prepayment of our U.S. term loan of 29.2 million in August, offset by the issuance of 175 million of 7.5 percent senior Subordinated Notes in mid-August.

The effective interest rate of our credit facility debt at the end of the quarter was 5.1 percent, which now includes only our Canadian term loan.

Tax expense was $12.2 million for the third quarter, representing an effective tax rate of 39.5 percent.

Net income increased 99 percent for the third quarter to 18.6 million, compared to 9.4 million in the same quarter last year.

EPS increased 84.2 percent to 35 cents per fully diluted share for the quarter, versus 19 cents in the same quarter last year.

We ended this past quarter with 369.9 million of debt outstanding and total leverage, or total debt to trailing 12 months EBITDA, pro forma for Kessler of 2.1 times. This compares to total leverage at year-end 2002 of 2.1 times and 2.2 times at the end of the third quarter last year. Total debt less cash, or net debt, was 288.5 million at the end of the quarter, and net debt to trailing 12 month EBITDA pro forma for Kessler was at 1.7 times. Debt to total capitalization was 49 percent at the end of the quarter, compared to 48 percent at year-end and 50 percent at the end of the third quarter last year.

Again, we had a solid quarter of cash flow from operations with operating activities generating 73 million of cash for the quarter. Contributing to the quarter's solid cash flow was improved operating performance, increased payables and accruals and a slight decline in Days of Sales Outstanding. DSO, adjusted for only one month of Kessler revenue, declined to 54 days for the quarter, compared to 56 days at June 30th.

Investing activities used $237 million of cash in the third quarter, including $8.5 million for purchases of capital equipment and 228.4 million related to the acquisition of Kessler Rehabilitation.

Financing activities provided 154.1 million of cash in the third quarter, which included the issuance of 175 million in Senior Subordinated Notes, 18.1 million from the issuance of stock, offset by 30.7 million in debt reduction payments, a 5.6 million payment of deferred financing fees, and a 2.5 million reduction in our bank overdrafts and finally, $300,000 in distributions to our minority partners.

As we noted in our press release, we have again increased the financial objectives for the fully diluted earnings per share in the fourth quarter of 2003. For the fourth quarter of 2003, we continue to estimate net revenue in the range of 380 to 390 million and now expect our fully diluted earnings per share in the range of 37 to 39 cents range, representing an increase in fully diluted EPS of 48 to 56 percent versus the fourth quarter last year.

With the positive performance to expectations in the first three quarters of 2003 and the revised objectives for the fourth quarter, we now expect full-year 2003 net revenues in the 1.372 billion to $1.382 billion range and fully diluted EPS in the $1.38 to $1.40 range.

For 2004, as outlined in our press release, we expect overall net revenues in the 1.620 billion to $1.660 billion range. We expect fully diluted EPS in the $1.85 to $1.89 range, representing a 32 to 37 percent annual increase over 2003 expectations.

For each of the respective quarters, our expectations are as follows -- we expect, for the first quarter, net revenues between 395 to 405 million and fully diluted EPS of 47 to 48 cents, second-quarter net revenues of 405 to 415 million and fully diluted EPS of 49 to 50 cents; third-quarter net revenues of 400 to 410 million, and fully diluted EPS of 42 to 43 cents. Finally, the fourth quarter net revenues of 420 to 430 million and fully diluted EPS of 47 to 48 cents.

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

Thank you, Marty. Let me say that, overall, we are pleased with the results for our third quarter and the first nine months of 2003, as well as the prospects for the fourth quarter and next year. The completion of the acquisition of Kessler Rehabilitation this past quarter offers, we believe, some exciting opportunities for Select. We are pleased to welcome Kessler to Select Medical, given their reputation of outstanding quality in the rehab industry. Throughout the past two months, our integration team has been working at Kessler, and we believe there are substantial operating efficiencies to be recognized over the next several years.

On the outpatient business, we continue to experience margin compression versus the prior year, some of which is attributable to the items we have discussed. In addition, we've seen a reduction in same-store visits, which we attribute to the macro-economic conditions that many other hospital companies have experienced on an outpatient basis.

Our plan is to continue to provide good quality care, coupled with cost-effective infrastructure.

Our LTAC business has done very well this past year and we expect to see continued growth and expansion of margin in this business.

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

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) A.J. Rice of Merrill Lynch.

Hello, everybody. Thanks for the update. Real quick on the inpatient rehab business, how would you characterize your priorities for sort of growth of that business, going forward? I guess there's the opportunity to improve the Kessler platform. I don't know if you are thinking about this in the same way you think about the LTAC businesses there would be the chance for the development (sic) and then obviously acquisitions. What are the prospects for doing acquisitions and what would the criteria be? Would they be similar to your criteria for LTACS, or would they somehow be different?

A.J. let me take you through those. I hope I can get all the questions; if I don't, just follow-up. We think that there's a number of opportunities for us at Kessler. They have a great reputation and also enjoy very significant occupancies at their four rehabilitation hospitals. We think that the greatest opportunity for growth and improvement at Kessler in the short-term is probably in the outpatient and the other components of their business. As we mentioned in the call, the 92 outpatient clinics at Kessler actually had negative EBITDA margins, and that was not unexpected and was consistent with what we saw during the due diligence period.

We certainly will want to continue to support the growth of the inpatient side of the business at Kessler and would certainly look for other opportunities for development or acquisitions. I don't think that you'll find that they will likely follow the same model as Kessler, as you frankly don't find very many rehabilitation hospital companies like Kessler in the United States. That really went to how pleased we were at being able to acquire Kessler, as it is really a unique rehabilitation company in the United States today.

But having said that, we do think that there are other rehab inpatient rehab opportunities, but they would probably not follow the model of our LTAC development, which as you know is primarily the hospital-within-a-hospital model.

Okay. On the outpatient side at Kessler -- just a follow-on maybe -- is the issue, in terms of improving the profitability there, renegotiating their contracts principally, or is it restructuring the way they've operated historically?

It's mostly expense. But when you say "recharacterize their operating model" -- I mean, Kessler had 92 clinics that operated in 10 states and in a number of those states, they had one, two or three clinics. That's not a particularly efficient operating model.

We were fortunate that the overlap with the Kessler clinics in the 10 states where they operated overlap nicely with where Select or our NovaCare subsidiary had operations, so we will be integrating most of those clinics into the Select platform.

In New Jersey, we are combining -- in North Jersey, we are combining the former Select clinics really under the Kessler name, and they will -- (technical difficulty) -- it through the hospital under the direction of a Select Medical regional outpatient operating Officer.

Thanks a lot.

Kemp Dolliver of S.G. Cowen.

Thanks and good morning. On the inpatient business, one trend that's been interesting to me as you've gotten further into the PPS is that your admissions growth has actually accelerated. I'd like some color on what kinds of things you're doing in terms of patient referrals and maybe even patient mix to get that acceleration. Also, just any thoughts regarding how that process should play out from here. Thanks.

Well, I'm not sure how to answer your question. We have seen accelerated admissions, primarily at the LTAC hospital. That just really reflects the continued growth and maturation of the hospitals -- because we've been on a path of opening six to eight new hospitals per year. While those hospitals breakeven, oftentimes in -- eight to ten, sorry -- while they've broken even in the seventh month, they still have great opportunity to grow in the second and third year of their existence in operation. So, I think we expect to continue to see that. I don't know if that's responsive to your question. You can ask a follow-on.

I guess one way I'm thinking about the PPS is that you've done a great job of maintaining occupancy. Depending on how your development pace plans out, that occupancy might gradually increase. It just seems to me that you're finding incremental business somewhere or somehow, and whether it's, say, maybe different emphasis on referral sources in general, or the like -- because I think other operators in the business have indicated that maintaining the occupancy level, even under a PPS, is pretty important to maximize the benefits.

I think the answer is really what I mentioned; as these hospitals are in their markets longer, they garner a reputation; they get the trust of local physicians; they get the opportunity to work with some payers. Oftentimes, when we go into a market, we may not have all of the payer contracts with all the local payers, but over the course of a year, two years, we get a patient or two maybe out of contract. What we hope and what often happens is a year or two in, we end up signing a contract with that payer and then we will get more volume.

We also try to be very responsive to the needs of the local medical community in terms of structuring our clinical programs.

Select LTAC hospitals, unlike a lot of other LTACs in the industry, really have a greater breadth and scope of clinical programs than what you often find. This industry really grew up as a ventilator business. If you look at Select's base of business, we have patients from clinical programs really far beyond the respiratory and ventilator, which represents now only about 33 percent of business in our hospitals.

That's great. Just quickly on the outpatient business, you mentioned same-store visits were down. Could you quantify that?

No, we have not disclosed that, Kemp.

Frank Morgan of Jefferies & Company.

A couple of questions, and I will start on the LTAC side. Could you give us a little color on the phase-in over the course of the quarter in terms of the remaining batch, the 25 facilities that rolled into PPS? Where they in there for the entire quarter, or was there any kind disproportionate weighing toward front or back end? That's the first question.

Then secondly, how long does it normally take after a facility converts to PPS when you've see the margins kind of ultimately max out under the new -- operating under this new structure? Then I will ask too on the outpatient side.

Okay, Frank. In Q3, we actually had 25 converts, five of which were in July, eight were in August and 12 in September.

The second part of your question was, how long does that typically take? What you typically see is about a one-quarter Lag to realize the benefit.

Okay, so the margin opportunity -- so there's still some -- in same-store portfolio, there's still some opportunity for margin expansion, even with the balance of the portfolio rolling in, particularly since it seems like it's -- half of it -- (multiple speakers)?

(Multiple Speakers) -- back-ended. Yes. We believe the answer to that is yes.

Okay. With regard to -- any trends that you're seeing developing in terms of case mix? Has that changed? It looks like length of stay is staying about flat. Any changes in case mix and in terms of the growth in the revenue per day? Is it more driven by declining length of stay, or is it acuity, or is it just simply the new system?

It's the new system. We haven't seen material changes in our patient profiles and as you can see, length of stay is approximately what it has been. So, the new reimbursement really layered in on our existing model of operations, so you really haven't seen a lot of changes in our operating profile or our patients or our mix as a result of PPS.

Okay. Then on the outpatient side, a couple of questions -- would you care to quantify the amount of the EBITDA loss related to Kessler? (indiscernible) outpatient side, or could you tell us how significantly you can implement the changes? It looks to me like you can probably rationalize and consolidate a lot of facilities and improve the results there fairly quickly. Can you give me any more color there?

What we can say, generally, is of the factors that I mentioned, which was the addition of the Kessler Outpatient and the consolidation of operations that were previously managed, probably made up over 50 percent of the decline. The other 50 percent -- less than 50 percent -- was the result of those more of what we said, macro economic forces, where, frankly, we saw declines in outpatient in certain markets as a result of general economic conditions.

The growth in the bad debt expense ratio, is that primarily related just to the outpatient part of the business? I don't --.

Actually, Frank, most of the bad debt increase is related to the inpatient. The rationale behind that is, as you all know, we are onto a new reimbursement system. Unlike the typical acute-care hospitals, many of our patients -- because their Medicare has secondary insurance -- we don't have a good history on how that secondary insurance is paying the deductibles and co-pays. Consequently, we want to make sure that we are increasing the bad debt percentage until we have a much better history.

Really have an abundance of caution.

Joel Ray of Wachovia Securities.

Good morning, guys. I was wondering if you could go and discuss with us the competitive landscape on the LTAC side, vis-a-vis what you're seeing up there? It sounds like, for this year, we should be looking at seven to eight LTACs opening. I just wanted to kind of get your thoughts there.

Sure. You know, I would make a distinction, Joel, between linking the competitive landscape with our pace of openings. We have, I think, on the development side, a very good pipeline with very good projects that we've opened this year. We have a good number of hospitals that really are keyed up. As you know, we only announce openings. We have not seen more difficulty as a result of competition in securing new deals.

Having said that, I will say that the competitive landscape has not changed dramatically. There are two large players in the LTAC industry, and that is (sic) Select and the hospital business of Kindred. Below that, there are no public companies and much smaller organizations that develop and operate LTAC. Those providers may have anywhere from 8 to 12 or 13 LTACs.

We have not seen a lot of new entrance into the business, although we've gotten a lot of questions about that. Primarily, we think, because of the sheer number of hospitals, that you need to be able to support the infrastructure required to operate the LTAC business.

So is it fair to assume, then, that while we are only looking at seven to eight this year, there isn't anything that's changed dynamically, going forward?

That's absolutely a correct statement. I think that we will go into 2004 with a pipeline of signed projects that is probably stronger than it's been in the last couple of years.

We have stepped up and increased our focus for development in CON (ph) states and as you probably know, CONs have a much longer leadtime. We have been working with more and have opened more hospitals in university settings, most recently last quarter with Duke University Medical Center. Those projects tend to take a longer time as well, but I continue to be very pleased with the quality of our projects.

Let's shift gears and talk a little bit about plans to use of cash flow as we go into 2004. Maybe you could go and give us some thoughts there.

Well, we certainly have sufficient cash flow and cash on the balance sheet to support all of our development uses on the LTAC side, or even opening of new clinics in markets where we already have a presence.

You know, the balance of the cash, you know, we really have available to take advantage of opportunities that we may see out in the marketplace, particularly on the inpatient rehab side. Also, just to note that in '05, we have the ability to repay -- I think it's $175 million of 9.5 high yield or Senior Sub Notes that we placed a number of years ago. So, that will certainly be a use of capital in '05.

Finally, are there any unusual changes to your business that you are using in your assumptions with your 2004 guidance relative to the trends we are currently seeing?

No, there are not. Also, I just would note, as is our practice, '04 guidance does not include any acquisitions.

Eric Percher of Thomas Weisel Partners.

Can we focus a bit on what you might call organic or the long-term growth rate -- once we get out of the PPS change environment? I'm curious what you see as the base rate coming out of those eight to ten centers that you're opening and the maturity there and maybe how that boils down to the bottom line.

Sure, Eric. What we have told people that, for the foreseeable future, I mean, once we're passed this period of time, they can expect to see, on a top line growth basis, somewhere in the neighborhood of 10 to 12 percent, EBITDA in the 14 to 16 percent and EPS in the 20 to 25 percent growth range. There's no acquisitions -- (multiple speakers) -- we make that statement.

Okay. Then a couple of (indiscernible) here. On the businesses that Kessler had that are not in your core competencies, do you intend to keep those businesses?

We're still currently evaluating that, and we should be in a position at the end of next quarter to let you know.

The tax expense trickling up this quarter -- any change there?

It was actually a Kessler jersey. Their rate was a little bit higher than our standard corporate rate.

Michael Scarignella (ph) of Merrill Lynch.

Good morning. Two numerical questions to start out with. Marty, do you happen to have cash, interest and taxes for the quarter?

Yes, just give us a second. We will chase them down. Cash paid for interest for the quarter was 2 million; cashes paid for income taxes was just a little bit south of 1.4 million.

Thank you. Just a follow-up on the earlier question on outpatient margins, just trying to get a feel for kind of what margins might have been, ex the Kessler acquisition and the managed clinics acquisition. You know, based on what you said, that it's maybe like a 50-50 split between economic softness and the other factors, should we view the decline from 16 to 13 as maybe somewhere in the middle as where you would've come out?

I think what you ought to do is, over the next couple of quarters, take a look at the outpatient EBITDA margins to be in the 15 percent range. Obviously, that's going to vary depending on the quarter itself because of seasonality, but I think, over the next couple of quarters, you're going to see it somewhere in that range.

Great. Then, Marty, also on your '04 quarterly guidance, I know you guys are restricted from talking about EBITDA numbers, but I think on the call last quarter, you gave us some indication kind of quarter-over-quarter increases that we should expect. Is there anything you could do for next year along those lines?

At this point in time, I don't think we're prepared to do that, Mike.

Okay. Just lastly on Kessler, in your short experience there, can you just comment on what you've seen in terms of any positive surprises, negatives surprises, any systems integration issues? Anything we should know about?

I think, generally speaking, our assessment with Kessler is we are very pleased with the opportunities that we see there with Kessler. We certainly have what we do call the typical challenge that you have with an acquisition of that size in terms of integration and consolidation, particularly on the outpatient and their other business side, where we will really be moving many of those operations onto the Select platform. We will have our share of systems integrations work to do, but that's really not new to Select. As you'll recall, when we acquired NovaCare back in late 1999, I think, at the time, we had 12 different systems that we had to work through to integrate with disrupting cash and with continuing to reduce receivables, which we've done. That was a more daunting task than I think we face at Kessler.

So while those challenges are out there, there's nothing that has come to the fore that we really consider a curveball or something that we think there's going to be extraordinary difficulty accomplishing.

Jerry Doctorow of Legg Mason.

I just have a couple of things. I think the final rules now on this change in -- I guess it's the 65/35 (indiscernible) the rules on the rehab hospital. I think there were some questions on that last call and now that we've got some regulations, I was just curious as to what impact you think it's going to have, if any.

What we have right now, unless something has happened while we are on the call, there are proposed regs out from CMS, and we are in the comment period, I think, through November second. There is still a lot of dialogue going on with CMS of what the final rules will look like. No one knows for sure. I do think that there will be some modification between -- positive modification for the industry, the rehab industry -- between the current proposed rules and the final rules.

Just for those who may not be familiar, this is the 75 percent which is criteria for participation for rehab-only, so this effects the (indiscernible) rehab hospitals that we have with Kessler.

Our belief is that, given the current profile of patients at Kessler, the marketshare that they enjoy and the fact that New Jersey is a fairly regulated COM (ph) state, that Kessler will be able to comply with any of the rules, the new 65 percent rules, that come down, especially given the fact that, even in the current proposed rule, there is a fairly long leadtime for providers to come into compliance.

In terms of financial impact, it's not going to be material?

That's correct.

Then just a number of sort of housekeeping things -- can I get weighted average -- the basic shares versus your diluted count -- ending share count as well?

Sure, hold on. Hold on a second, we are getting an answer on those diluted shares.

The actual outstanding common shares was 50,381,000.

Then the ending?

Fully diluted -- 2,565.

Was that weighted, or that was the ending?

That's ending.

Jerry Doctorow. Then can I just get total beds -- if you just break down the -- you know, you closed some clinics and that sort of thing -- just the Canadian count, the owned count and the managed count kind of at end of quarter?

Jerry, what you ought to do is give me a call off-line and we can provide that to you.

Peter Vulkner (ph) of Alpine Capital.

I'm actually looking for the total beds for the quarter also, the occupancy rate. I apologize if you've already given that -- and the average length to stay for the LTACs?

Hold on a second.

Thank you.

Robert Ortenzio; Sure, the total licensed beds were 2,829. Average length of stay was 27 days. The occupancy rate was 67 percent; that's the full occupancy on all of our hospitals.

Does that includes before Kessler hospitals?

No, that does not.

We have reached our allotted time. I would like to turn the floor back over to management for closing remarks.

Thank you for your participation and we look forward to talking to you to go over the results of the next quarter's results.

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