Select Medical Holdings Corp (SEM) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Select Medical Corporation fourth-quarter and year 2003 earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Robert Ortenzio. Sir, the floor is yours.

Good morning, and thanks for joining us for today's Select Medical's investor conference call to discuss our recent corporate developments relative to yesterday's fourth-quarter and our year-end 2003 earnings announcement. By now, you should have received the press release. If you have not received it, or are unable to log onto the webcast, you can call 212-845-4274, and they will be able to assist you.

This conference call is being recorded. It will be available for replay starting at 1:00 Eastern Time today and running until 1:00 PM Eastern on Thursday, February 12th. To access the replay, dial 877-519-4471 within the U.S., or 973-341-3080, internationally. The pass code to listen to the replay will be 4422-300.

I am the President and CEO. I will be speaking today, along with Martin Jackson, who is our Senior Vice President and Chief Financial Officer. We will give an overview of the quarter and the year-end highlights, and then open the call for questions and answers.

Before we get started, I would like to remind you that the 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 2004; earnings per share in 2004; growth opportunities, and other statements that refer to Select Medical's plans, prospects, expectations, strategies, intentions and beliefs. The forward-looking statements are based on the information available to Select Medical today, and the company assumes no obligation to update these statements as circumstances change. For additional information, see cautionary statements included in our most recent 10-K or other public filings with the Securities and Exchange Commission.

I will start by covering the results of the fourth quarter and the full year. I will provide overall financial performance highlights for the quarter and full-year, as well as take you through the operating performance of each of our business segments. All earnings per share information provided today and in our press release reflect the two-for-one split of our common stock that occurred on December 22nd, 2003.

For the quarter ended December 31, we once again exceeded earnings expectations of fully-diluted earnings per share of 21 cents -- one cent ahead of analysts' consensus. This represents a 75 percent increase over fully-diluted earnings per share of 12 cents in the same quarter last year. For the year, we had fully-diluted earnings per share of 72 cents, a 60 percent increase over 45 cents EPS reported in 2002.

Our net revenue for the quarter increased 37 percent to $404.8 million, compared to $295.4 million for the same quarter last year. And for the full year, net revenue increased 24 percent to 1 billion 396.8 million dollars. Our earnings before interest, income taxes and depreciation and amortization, or EBITDA, for the quarter increased 69.8 percent to $57 million, compared to 33.6 million for the same quarter last year.

And for the full year, EBITDA increased 46.6 percent to $183.6 million. A reconciliation of net income to EBITDA and adjusted EBITDA, which we use to measure performance in our opening segments, are attached to our press release.

Income from operations increased 69.3 percent to $45.6 million for the quarter, compared to 26.9 million in the same quarter last year. For the full year, income from operations increased 48.1 percent to $150.2 million. We had another very strong quarter for cash flow, as our cash flow from operations was $82 million for the quarter. For the full-year, cash flow from operations was $246.2 million.

Day sales outstanding declined to 52 days at December 31st, down from 54 days at September 30th, and 73 days at year-end 2002. We ended the year with $165.5 million of cash on the balance sheet.

Next, I will take you through some of the key performance measures for each of our operating segments, starting with our specialty hospitals segment. This segment includes our long-term acute care, or LTAC, hospitals, as well as the rehabilitation hospitals acquired in the Kessler transaction. References to same-store hospitals throughout the specialty hospital segment information refers to the 63 long-term acute care hospitals opened prior to January 1, 2002, and operated throughout both reported periods by select.

Our specialty hospital net revenue increased 52 percent for the quarter to $256.4 million, compared to 168.7 in the same quarter last year. For our same-store hospitals, net revenues increased 16.2 percent to $189.4 million, compared to 163 million in the same quarter last year. For the full year, total specialty hospitals net revenue increased 36.5 percent to $853.7 million, and same-store hospital net revenue increased 18.3 percent to 726.8 million.

Our specialty hospital adjusted EBITDA increased 141.3 percent for the quarter to $51.7 million, compared to 21.4 million in the same quarter last year. Same-store adjusted EBITDA increased 41.7 percent to $33.8 million, compared to 23.9 million in the same quarter last year.

Adjusted EBITDA margins for this segment improved to 20.2 percent for the quarter, compared to 12.7 percent in the same quarter last year. Same-store hospital adjusted EBITDA margin improved to 17.9 percent for the quarter, compared to 14.6 percent in the same quarter last year. Overall, adjusted EBITDA start-up losses incurred in the fourth quarter for hospitals developed in 2003, or in their start-up period, were $900,000. For the full-year, specialty hospital adjusted EBITDA increased 106.5 percent to $146.4 million, compared to 70.9 million last year.

Same-store hospital adjusted EBITDA increased 62 percent to $124 million, compared to 76.6 million in 2002. Adjusted EBITDA margins for this segment improved 17.1 percent for the year, compared to 11.3 percent last year, while same-store adjusted EBITDA margins improved to 17.1 percent for the year, compared to 12.5 percent in 2002. Overall adjusted EBITDA start-up losses incurred in 2003 for hospitals developed in 2003, or in their start-up period, was $7.2 million.

Overall occupancy in our specialty hospitals was 71 percent for the quarter, up from 69 percent in the same quarter last year. Same-store occupancy rates declined slightly to 73 percent for the quarter, compared to 74 percent in the same quarter last year. For the year, specialty hospital occupancy was 70 percent, compared to 71 percent for 2002. And same-store occupancy was 73 percent flat, compared to last year.

Admissions in our specialty hospitals increased 52.9 percent to 8,520 for the quarter, compared to 5,573 for the same quarter last year. Admissions in our same-store hospitals increased 6.9 percent to 5,742, compared to 5,369 in the same quarter last year. For the year, specialty hospital admissions increased 31.1 percent to 27,620, compared to 21,065 in 2002.

Same-store hospital admissions increased 9.3 percent to 22,573, compared to 20,655 in 2002. Specialty hospital patient days increased 29.2 percent for the quarter to 207,280 days, compared to 160,406 days in the same quarter last year. For the year, specialty hospital patient days increased 16.6 percent to 722,231 days, compared to 619,322 days in 2002. Average length of stay in our LTAC hospitals was 27 days for the quarter, and 28 days for the year.

Our specialty hospital net revenue per patient day, or rate, improved 15.9 percent, to $1,218 per day, compared to 1,051 per day in the same quarter last year. For the year, specialty hospital rate improved 16.3 percent to $1,173 per day, compared to $1,009 per day in 2002.

Our specialty hospital payer mix for 2003 was 69 percent Medicare; 2 percent Medicaid; and a 29 percent balance from commercial insurance and managed care. We opened two new LTACS this past quarter, giving us eight openings in 2003. Hospital openings this quarter incurred in Canton, Ohio and Wichita, Kansas.

Regarding PPS for LTAC hospitals, as of December 31st, all 76 of our eligible LTAC hospitals are now paid under the full federal PPS. The remaining three hospitals were still in their LTAC qualification period.

Moving over to our outpatient rehabilitation segment, which includes outpatient rehabilitation clinics and on-site contract rehabilitation services acquired in the Kessler transaction. Our outpatient rehabilitation net revenue increased 17.2 percent for the quarter to $142.5 million, compared to 121.6 million in the same quarter last year. Of our outpatient rehabilitation revenues for the quarter, $88.3 million was from U.S. outpatient rehabilitation clinics; 4.2 million from our managed clinics; and 50.1 million from our other outpatient services and our Canadian subsidiary. For the year, outpatient revenue increased 9.1 percent to $529.3 million, compared to 485.1 million in the prior year.

Our outpatient rehabilitation adjusted EBITDA declined 15.3 percent for the quarter to $15.2 million, compared to $18 million in the same quarter last year. Adjusted EBITDA margin declined to 10.7 percent for the fourth quarter, compared to 14.8 percent in the same quarter last year. The adjusted EBITDA margin decline was primarily the result of the effects of the Kessler acquisition and the consolidation of a group of clinics we previously managed. The Kessler outpatient operations experienced negative margin in the quarter, primarily due to severance expense associated with staff terminations.

For the year, outpatient adjusted EBITDA declined to 7.6 percent to $75 million, compared to 81.1 million in 2002. Adjusted EBITDA margin declined to 14.2 percent for the year, compared to 16.7 for the prior year. Again, this decline can be primarily attributed to the effects of the Kessler acquisition and the consolidation of clinics previously managed.

Visits in our U.S.-based outpatient rehabilitation clinics increased 10.8 percent for the quarter to over 1.0 million visits, compared to almost 925,000 visits the same quarter last year. Net revenue per visit in these clinics was $86 for the quarter, down from $87 in the same quarter last year. The decline in net revenue per visit is attributed to the Kessler clinics, which had a lower net revenue per visit in the quarter.

For the year, U.S.-based outpatient rehabilitation clinics were up 4.8 percent to 4 million visits, compared to 3.8 million visits in 2002. Net revenue per visit for the year was $87, an increase from net revenue per visit of $86 reported in 2002.

During the fourth quarter, our outpatient rehabilitation division opened eight new clinics, and closed or consolidated 35 existing clinics, including a number of clinics acquired in the Kessler transaction. At the end of the quarter, we had a total of 790 clinics operating in 29 states, the District of Columbia, and 7 Canadian provinces.

At this time, I will turn it over to Marty Jackson, our Chief Financial Officer, to cover financial highlights and to discuss our financial objectives for 2004.

Thank you, Bob. Once again, we are pleased to report solid financial results for another quarter. Operating expenses, which includes our cost of services, general and administrative costs, and bad debt expense, increased 33.1 percent to 347.7 million in the fourth quarter, compared to 261.3 million in the same quarter last year.

As a percentage of our net revenue, operating expenses for the quarter decreased 260 basis points to 85.9 percent, compared to 88.5 percent for the same quarter last year. Please note that there is over $1.25 million of severance expense associated with the termination of Kessler employees included in the operating expenses for Q4. For the full year, operating expenses as a percent of net revenue, declined 190 basis points to 86.8 percent.

Of our operating expenses, rent expense was 26.2 million, compared to 22.3 million in the same quarter last year. Rent expense for the full year was $95.2 million. Cost of services, as a percentage of net revenue, contributed to the decrease in operating expenses, as it dropped 220 basis points to 79.6 percent for the quarter, compared to 81.8 percent for the same quarter last year.

For the full year, cost of services as a percentage of net revenue, has declined 200 basis points to 79.9 percent. G&A, as a percentage of net revenue, decreased by 40 basis points to 3 percent for the fourth quarter, compared to 3.4 percent for the same quarter last year. For the full year, G&A as a percent of net revenue, declined 30 basis points to 3.2 percent.

Bad debt, as a percent of net revenue, remained constant at 3.3 percent for the fourth quarter, compared to the same quarter last year. For the full year, bad debt as a percent of net revenue, increased 40 basis points to 3.7 percent.

While total EBITDA increased 69.8 percent for the quarter, EBITDA margins improved 270 basis points for the quarter to 14.1 percent, compared to 11.4 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 the year, total EBITDA increased 46.6 percent to 183.6 million. And EBITDA margins improved 200 basis points to 13.1 percent.

For our business segments, specialty hospital adjusted EBITDA margins increased 750 basis points for the quarter to 20.2 percent. Same-store margins improved 330 basis points to 17.9 percent for the fourth quarter. For the year, adjusted EBITDA margins increased 580 basis points to 17.1 percent. And same-store margins improved 460 basis points to 17.1 percent.

Outpatient rehabilitation adjusted EBITDA margins decreased 410 basis points to 10.7 percent for the fourth quarter. 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 management arrangement. As Bob previously mentioned, the Kessler outpatient margin was negative in the fourth quarter, primarily due to the severance expense related to staff reductions in that division.

For the full year, adjusted EBITDA margins decreased 250 basis points to 14.2 percent. Again, this decline can primarily be attributable to Kessler and the consolidation of the previously-managed clinics. Without the Kessler outpatient operations, the outpatient adjusted EBITDA margin, for the year, would have been 15 percent.

Depreciation and amortization increased 60.9 percent to 11.4 million for the fourth quarter, compared to 7.1 million for the same quarter last year. For the year, depreciation and amortization increased 35.3 percent to $35 million. The increase was primarily related to the depreciation and amortization expense associated with some of the assets we acquired with the Kessler operations, and increased depreciation on fixed asset additions related to new hospital development and expansion.

Net interest expense increased by 1.1 million to 7.6 million for the fourth quarter, compared to 6.5 million for the same quarter last year. The increase in interest expense is the result of incremental interest from the issuance of $175 million of 7.5 percent senior subordinated notes in the third quarter. For the year, net interest expense decreased 1.2 million to $25.4 million, compared to 26.6 million in the prior year.

Income tax expense was 15.2 million for the fourth quarter, representing an effective tax rate of 40.1 percent. For the year, income tax expense was 48.8 million, an effective rate of 39.6 percent. Net income increased 88.2 percent for the fourth quarter to $22.8 million, compared to 12.1 million in the same quarter last year.

EPS increased 75 percent to 21 cents per fully-diluted share for the quarter, versus 12 cents in the same quarter last year. For the full year, net income increased 68.4 percent to 74.5 million. And EPS increased 60 percent to 72 cents, versus 45 cents in the prior year.

We ended the year with 367.5 million of debt outstanding. And total leverage, or total debt-to-EBITDA, pro forma for Kessler, of two times. This compares to the total leverage at year-end 2002 of 2.1 times. Total debt, less cash, or net debt, was $202 million at the end of the year, and net debt-to-EBITDA, pro forma for Kessler, was 1.1 times, down from year-end 2002 net debt-to-EBITDA of 1.6 times. Debt-to-total capitalization was 47 percent at the end of the year, compared with 48 percent at the end of last year.

We once again had a solid quarter of cash flow from operations, with operating activities generating 82 million of cash for the quarter. Contributing to the quarter's solid cash flow was improved operating performance, increased payables and accruals, and another decline in day sales outstanding. DSO declined to 52 days, compared to 54 days pro forma for Kessler September 30. For the year, we generated over 246 million of cash flow from operations. Investing activities used 261.5 million of cash for the year, including 35.9 million for purchase of capital equipment, and 227.7 million for acquisition-related payments.

Financing activities provided 124.3 million of cash for the year, which included the issuance of the 175 million of senior subordinated notes, and 28.6 million from the issuance of stock, offset by 69.3 million in debt reduction payments; 5.9 million payment of deferred financing fees; 3.1 million in dividend payments; and $1.3 million in distributions to our minority partners.

For 2004, as outlined in our press release, we expect overall net revenues in the 1,620,000,000 to 1,660,000,000 range. We expect fully diluted EPS in the 91 cents to 95 cents range, representing a 26 to 32 percent annual increase over 2003.

For each of the respective quarters, our expectations are as follows. We expect for the first-quarter net revenues between 395 and $405 million, and fully diluted EPS of 23 to 24 cents. Second-quarter net revenues of 405 to $415 million, and fully diluted EPS of 24 to 25 cents. Third-quarter net revenues of 400 to 410 million, and fully diluted EPS of 21 to 22 cents. And finally, the fourth-quarter net revenue of 420 to $430 million, and fully diluted EPS of 23 to 24 cents.

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

Let me say that, overall, we are very pleased with the results of our fourth quarter and the full year 2003, and look forward to our prospects for 2004. We continue to move forward and make progress on the integration of the Kessler operations. Our outpatient business continued to experience margin compression versus the prior year. We have discussed what we believe to be the primarily drivers behind this decline, and continue to experience some challenges related to visit volumes, due to the current macroeconomic climate. We continue to focus this business segment on providing good quality care, coupled with a cost-effective infrastructure.

Our specialty hospital business has done very well this past year, strengthened by the transition to P.P.S for our LTAC hospitals. The addition of Kessler rehabilitation hospitals and our continued development efforts, opening eight new LTACs this past year, we continue to expect this business to grow and expand its margin over the coming year.

The remainder of time is allocated for your questions. We would like to open up the call for questions at this time.

(OPERATOR INSTRUCTIONS). AJ Rice, Merrill Lynch.

I had a couple of questions. Hello everybody. First of all, on the cash balances, as Marty went over, you've run up a good size cash balance. As to dividend early last year, that has not really absorbed too much of it. And with prospects for decent cash flow going into the new year, any thoughts being given to other ways to use some of that cash in terms of buyback, debt repurchase, or other things?

This is Bob. We have given some thought. I think the excess cash that we will generate in '04, we'll continue to look for acquisition opportunities, although primarily in our inpatient side of our business. We will also be considering, with our Board, a share buyback provision.

Okay. On the new rule that just recently came out, regarding the '04 -- or '05, rather -- update on the LTAC reimbursement perspective payments, I know that came out after you initially gave your '04 guidance and outlook, but there are some provisions in there. Can you comment whether -- how that came out relative to the guidance that you originally gave for this year? And what are some of the key provisions that might impact you?

I think the update factors were generally in line. I think that we felt that they were better than maybe what we initially expected. And, we probably built some of our budgets and projections for '04 on probably slightly less reimbursement for Medicare on PPS. But, until that plays out over the course of the first couple of quarters of '04, we really are not changing any of our projections or guidance.

And the key elements would be (indiscernible) contemplated, which that's probably not new. But the timing, I guess you get that a little early?

Yeah, we get it a little early. And you get the 2.9, then you get the slightly acceleration of the reduction, of the reduction, so-called, of the make-hold (ph) provision for the providers who accelerated 100 percent to the federal rate for PPS.

Okay. And finally, maybe I'll just ask you on the EBITDA margin in the LTAC business. I guess essentially the same-store numbers for the specialty hospital division would be, at this point, still 100 percent LTACs, I guess. And you are at about a 17.9 percent run rate. You've got all the facilities on the PPS system at this point. Is that sort of a good baseline? Or, are there some things that are still happening that don't yet put that at really the margin where you think that business will be long-term?

What we've always indicated is we think that we can achieve the same EBITDA margins as the acute care hospitals, which are anywhere from 16 to 22 percent. We think the 17.9 fits there right in the middle. We think we can continue to expand that EBITDA margin.

Okay. Okay, thanks a lot.

Kemp Dolliver, SG Cowen Securities.

A couple of questions. I think, Marty, in your prepared remarks in the outpatient segment, you quantified the severance payments for Kessler, which I did not catch. Could you repeat that?

Well, what I said was, under the operating expenses, I said that there was over $1.25 million of severance expense paid out to Kessler employees that were termed.

Okay. Excellent. With regard to 2004 in the inpatient business, I know, figuring out the timetable for openings is a bit difficult. But, do you have any sense as to how it should play out this year versus previous years?

No, we don't. We are probably not expecting to have any openings in Q1. I expect that we will see a number of openings in Q2, and then through the balance of the year. Our pipeline is really very strong, and I am feeling very comfortable about our guidance of 8 to 10 new hospitals. But again, there are so many factors that can impact actually when these facilities actually open. So, I would think to look for the openings in the second, third, and fourth quarter.

Okay. That is great. And, in the 10-Q, do you plan to provide further detail of the inpatient division stats broken down between the Kessler hospitals and your LTACs?

No, I think what we will be doing is we will be including the Kessler results in the operations in with our specialty hospitals in terms of the statistics that we will break out.

If you take a look at the -- we have 79 LTACs for inpatient rehabilitation hospitals. At this point in time, we manage those in total. And consequently, from that perspective, we are not going to break them out.

To the extent that later on down the road, we require more inpatient rehabilitation, we will sit down and determine whether it makes sense to break them out at that time.

Okay. That is great. The last question on outpatient, you consolidated a number of Kessler-related clinics. Any sense as to where you are in that process? Do you think you're about halfway through in terms of evaluating? Or, most of the way through?

I think your first inclination was probably more correct. It's probably halfway through.

I think the evaluation process is done. It's really the execution. So we really know strategically where we want to go with the Kessler outpatient and where they will ultimately reside and be managed, and so forth. Now, it's just a function of executing on that. And we think that we will probably see that through the balance of this year.

All right. That is great. Thank you.

Joel Ray, Wachovia Securities.

A couple of questions for you guys. Could you possibly elaborate a little more for me, Marty, vis-à-vis the cleanup of the Kessler outpatient clinics? What type of synergies do you think you can get out of this? And, where can the blended margin rebound to as I look into 2004, 2005 timeframe for the outpatient side.

What we have said all long is we feel pretty comfortable that over a 12- to 18-month period we can bring the Kessler outpatient rehabilitation clinics much closer to our margins of 15 percent. And we still feel pretty comfortable with that.

Okay. And secondly, on the development and acquisition front, are you seeing any change in the demand or the business cycle, selling cycle, arising because the traditional general, medical surgical hospitals are getting less in the way of outbuyer payment, being more of them realizing that you are a white knight, and coming to you with greater interest in doing the transaction?

No, I cannot say that we've really seen that as a result of the -- that would be hard to quantify. But I cannot tell you that we have really seen a big change in demand in our pipeline. Our pipeline is pretty solid. But no, I would not able to attribute our development -- any increase in development -- as a result of that.

Okay. And on the acquisition front, it sounds like you would be interested in potentially acquiring rehabilitation hospitals. What does the market look like out there?

Very thin. I would not suggest to you that there is a lot of opportunity for rehabilitation. I think there probably is some, and we will be on the lookout. Now that we have Kessler as a platform, we have the opportunities. If we have the opportunities to either acquire or develop rehabilitation hospitals, we will certainly take advantage of those.

Okay. Thanks.

Frank Morgan, Jefferies & Company.

Hello?

One moment, as we move on to the next question. (OPERATOR INSTRUCTIONS). Mr. Lynch, your line is live. Please proceed with your question.

I hope I was not holding things up. I did not hear myself pulled. One follow-up questions on some of the CMS rules. There was a small change in some of the specifics on interrupted stays. And I was wondering if that has any impact on your business?

We have looked at that, and no impact.

Okay. It sounded like it was relatively small. And just one quick balance sheet question. It looks like third quarter to fourth, there was some buildup in current liabilities, which are not broken out between receivables and other. I was wondering in you could talk about what that might represent, and if there's any change to expect going into the first quarter?

I am unclear as to your question. Liabilities are receivables?

This is in your disclosure. So far, you have a basket of current liabilities, outside of current year debt. It looks like it built up a bit third quarter to fourth.

Yeah. Let me -- if you can hold on for a second, we will take a look at that right now, Charlie. The two major components of the buildup there is, we have moved -- we had about $12 million worth of credit balances in RAR (ph) that we have moved from the AR (ph) over to payables. That is about $12 million of that. And then we also had some buildup of due-to-due (indiscernible). Those are the two major components.

Okay, would those reverse course at all in the first or second quarter or --?

Yeah, those two items constantly change.

Okay. Great. Thanks a lot.

Matt Ripperger, J.P. Morgan.

A couple of questions here. I wanted to see if you could provide guidance for '04 in terms of cash from operations and CapEx.

What we have been talking about, Matt, is cash from -- or CapEx for '04 would be 40 to $45 million.

And how much of that would be maintenance versus growth CapEx?

Normally, what we do is we take a look at about 1.2 to 1.3 percent at topline revenue, the maintenance CapEx. And then we have another two components, one of those components goes into IS (ph). You know, typically, that is a couple of million dollars a year. And then, the balance comes from our development.

Okay, and can you provide any kind of range from cash from operations?

What we have done is we provided a range with regards to free cash flow expectations. And, that is 80 to $100 million for '04. Okay?

The second question I had is -- in the past, you have commented on the 55 percent rule, that it would not have any impact on your business. I just wanted to see if you could give us an update in terms of where it stands right now in Washington? And, whether you think it will be implemented in any form at all this year?

There still is a lot of conversation around the 75, 65 percent rule. There was some momentum to get something done before there was a change of CMS administrator. That did not get done. They're really back to more discussion on it. And my expectation is there will continue to be a moratorium on enforcement of the 75 percent rule, and there may be a study commissioned or other work done before they come out with any final proposed rule. So, I would like to think that something will come out this year. But, you know, as these things go in Washington, they get held up.

I think the important point for investors to know, with respect to Select Medical, and more specifically, Kessler, is that we feel that Kessler can be in compliance with the latest proposed rule. And, we think that any rule -- the signals are that any rule that comes out will be less than what the last proposed rule was. In other words, more liberal. So we feel that Kessler will be in very good shape, and this really is not an issue for Select now. It really becomes more of an industry issue.

Great. Thanks very much.

Frank Morgan, Jefferies & Company.

I got cut off, so I apologize if I'm asking something that someone has already asked. One final question on the outpatient margins, and I will leave it alone. I want to make sure I understood, Marty, that you said that pro forma -- I think, pro forma-ing out Kessler, that the margin run rate for the year was about 15 percent.

That is correct, Frank.

But that did include the recently-manage ones the converted over to owned ones?

That did not include those.

Did not -- okay. What about in the fourth quarter? What would have been the margin there? I mean, would it be about the same? Or more or less, pro forma-ing out Kessler and the managed?

I think if you pro forma out Kessler and the entities that we acquired, we were probably about 118 basis points under where we were last year.

Okay.

So probably 13.6.

13.6 pro forma -- okay. Okay, and over on the margin side for the LTACs business, I am curious about any differences as you develop new facilities, going forward. Obviously, after the six months qualification period, they will immediately go to PPS. But, have you had enough experience yet to see how either margins start out or how they ramp up on the new facilities that are opening in the post-PPS world, as opposed to the facilities that were operating under the old world and convert over? That is my first question, on just the concept of margins.

And secondly, could you comment on the margins, in a very general way, or maybe in a general range, with regard to the facilities that converted, say, back in the fourth quarter of '02? And how that compares to facilities that converted since then? And I will stop right there.

Okay, let me take the first component of your question -- can we give you an indication as to what the margins are in the newly-opened facilities? I think our response there is, it's still too early to tell. You know, I think we're probably going to need at least another year to make that determination.

And the second question had to do with -- how are the LTACs that went under -- that fully phased in -- or, did not phase in, but fully went into the new reimbursement system Q4 of '02. And, I can tell you those continue to do exceedingly well.

Are those higher margins than the ones that have converted, say, like in the more recent quarters, say, third our fourth quarter -- sorry second or third quarter?

They are currently higher margins than those in Q3 of '03.

Okay. What about on the case mix side? Anything changing there? I noticed your -- obviously, your occupancies are down a little bit. That kind of makes sense with your length of stays. But, anything going on, on the acuity of the case mix? Any change there either higher or lower acuities?

No. About the same.

Okay. What about any comments on the mix of -- either patients or revenues related to the LTAC business that is attributable to either short stay or long stay outliers?

I don't really have any comment on that. It's really been consistent. We have not seen a shift in our business on any of those.

Okay. And finally, would you, by chance, have a length of stay on the rehabilitation hospitals? I know you don't break out a lot of numbers, but you mentioned 27 days on LTACs. I think last quarter it was around 16 or 17 days. Has that changed any on the rehabilitation side?

Hold on one second, we can probably give you that. 14 for the quarter and 15 for the year.

Okay. Thank you.

Eric Percher, Thomas Weisel Partners.

I notice that this is the first time we've seen adjusted EBITDA margins for all hospitals on the inpatient side above the same-center hospitals. I know that you obviously have some new facility (indiscernible), but can you give me an idea of what is causing that change?

I think probably what you would think -- we concluded that the margins on the rehab hospitals, or that have recently been added, are higher than the LTAC margins.

Simply that? Okay. And then separately, has there ever been a correlation between what we see in inpatient admissions and a strong flue season? Of course, you do some respiratory business in your business itself, whether it's positive or negative.

Winter can often be stronger -- severe winter months in hospitals where they have severe weather can result in an increase of some of your patients, particularly on the respiratory side.

Okay. Finally, on the termination expense, you saw this last quarter in some of the expenses we saw at Kessler. Is that now pretty much done? And, can we expect that those businesses will run at the 4 to 6 you said they had been running at? I know it takes a lot longer to get them up to your margin, but kind of bouncing back in this quarter?

I think what you are going to find is that the severances continues through January, but then it rapidly declines.

Excellent. Thank you very much.

Michael Scarangella (ph), Merrill Lynch.

Two questions this morning. The first one, Bob, you mentioned on the outpatient volume side that you guys continue to see some softness. Actually, when you look at visits per clinic, it looks like it's up quarter-over-quarter, but that's got Kessler in, so it's probably a little skewed. Could you just elaborate on that a little bit, and maybe let us know what those trends look like on a same-store basis?

We do not do same-store outpatient like we do on the inpatient side of the business simply because the nature of the outpatient business -- with nearly 800 clinics, and you have closings, consolidations of clinics -- it really makes same-store impossible to calculate, and if we try, it's probably meaningless. But what we can say is we have seen some softness in the outpatient area. Really not so much in new business or referrals, but in terms of number of visits per patient have gone down. That is really the most significant trend, Michael, that I can identify.

Do you think that is worse than last quarter? Kind of the same? Still soft or maybe improving?

Probably about the same.

Okay. Great. Second question, Marty, on the 9.5 percent, I notice you have outstanding -- I think you previously said that you were kind of focused on the '05 call date to deal with that. Any change in your thinking, given your increased liquidity and cash position to deal with that before '05?

No, our full intent right now, Michael, is -- come June of '05 to call those months.

Okay. Great. Thanks, guys.

Jerry Doctrow, Legg Mason.

One general one. I wonder if you could just talk a little bit about the competitive environment, primarily for the LTACs (indiscernible) rehab. Because my sense is, talking to some other firms, there's just a lot more people seemed to be interested in the business. Obviously, Kindred (ph) is stronger than it was. You've got ManiCare (ph) that continues to talk about it. Some of the nursing home guys as well. Are you seeing more competition there? You said you were confident in your pipeline, but give me a little more color on what is going on out there in the business.

We have not seen, in the marketplace -- and we are looking for deals. We have not seen new competitors entering onto the landscape. It is the same companies that have been out there. It is true that you hear a lot more talk about the LTACs. We hear that mostly when we go to investor conferences more than we hear it out in the marketplace. So, I would say that there is a greater interest, and you hear more about the LTACs, in part, because of the success that Select Medical, and probably Kindred, has seen. But we have not seen an increase in the competitive environment out there where we're looking for deals.

And, are there acquisition opportunities on that side? Or it's pretty much a growth business in terms of adding new facilities?

It's pretty much a growth business, although there are other companies out there that, over time, could be candidates. But I cannot comment, really, beyond that.

All right. Thanks.

I'd like to turn the floor back to Mr. Ortenzio for any final comments.

Thank you all for your participation, and we look forward to addressing you when we talk about first-quarter results.

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