Select Medical Holdings Corp (SEM) 2011 Q2 法說會逐字稿

Good morning and thank you for joining us today for Select Medical Holdings Corporation earnings conference call to discuss the second quarter 2011 results and the Company's business outlook. Speaking today are the Company's CEO, Robert Ortenzio, and the Company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give an overview of the quarter highlights and then open the call for questions.

Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding the future events or the future financial performance of the Company, including without limitation, statements regarding operating results, growth opportunities, and other statements that refer to Select's plans, expectations, strategies, intentions, and beliefs.

These forward-looking statements are based on the information available to management of Select Medical today and the Company assumes no obligation to update these statements as circumstances change.

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

Thank you operator. Good morning everyone and thank you for joining us for Select Medical Holdings second quarter conference call for 2011. For our prepared remarks, I'll provide some overall highlights for the Company and our operating divisions and then ask Marty Jackson, our CFO, to go over some additional financial details before opening the call up for questions.

Our reported earnings per fully diluted share were $0.08 in the second quarter. However, this included a non-recurring loss on early retirement of debt related to the refinancing we completed June 1, 2011. Excluding this one-time loss and the related tax effect, our adjusted earnings for fully diluted share were $0.20 in the second quarter compared to earnings per share in the second quarter last year of $0.15.

Net revenue for the second quarter increased 20.5% to $698.7 million compared to the same quarter last year. We generated approximately 74% of our revenues from our Specialty Hospital segment, which includes both our long-term acute care and in-patient rehab hospitals, and 26% from our out-patient rehabilitation segment, which includes both our out-patient clinics and contract services.

Specialty Hospital net revenue for the second quarter increased 29.1% to $520.3 million compared to the same quarter last year. The primary driver behind the increase was the contribution from the hospitals acquired in the Regency acquisition, which contributed $80.8 million of net revenue in the quarter or 69% of the increase. The balance of the increase came from both improved Medicare occupancy and rate in our other Specialty Hospitals during the quarter. During the second quarter approximately 85% of our Specialty Hospital revenue came from our long-term acute care hospitals and 15% from our in-patient rehabilitation hospitals.

We experienced a significant improvement in our Specialty Hospital volumes in the second quarter as patient days increased 23.4% compared to the prior year to 327,001 days in the quarter. The primary driver of this increase was the contribution of the Regency hospitals.

Excluding the effects of Regency's, our hospital patient days increased 4.1% over the same quarter last year. Overall occupancy rates were 70% in the second quarter compared to 68% in the same quarter last year. Net revenue per patient day increased to $1,505 in the second quarter compared to $1,474 per day in the same quarter last year.

Net revenue in our out-patient rehabilitation segment for the second quarter increased slightly to $178.5 million compared to $176.8 million for the same quarter last year. During the second quarter approximately 78% of our out-patient revenue came from our out-patient clinics and 22% from our contract services.

For our own clinics, patient visits declined 2.4% compared to the same quarter last year and net revenue per visit increased 1% to $102 per visit compared to the same quarter last year. The primary driver behind our visit declines due to the transition of our Dallas out-patient clinics into the Baylor joint venture. Without this transition, visits would have been consistent compared to the same quarter last year.

Our overall clinic-based revenues including our managed clinics increased 2% and our contract services revenue declined 2.4% compared to the same quarter last year.

Overall adjusted EBITDA for the second quarter increased 11.5% to $99.9 million compared to $89.6 million in the same quarter last year. Overall, adjusted EBITDA margins were 14.3% for the second quarter compared to 15.5% for the same quarter last year.

The primary reasons for the decline in margins include the effect of the Regency hospitals, which had a 50 basis point effect on overall margins in the quarter and increases in our relative general and administrative expenses which had a 60 basis point impact on overall margins in the quarter compared to same quarter last year.

Specialty Hospital adjusted EBITDA for the second quarter increased 24.2% to $91.1 million compared to $73.3 million in the same quarter last year. The hospitals acquired in the Regency acquisition contributed $8.7 million of this increase. Adjusted EBITDA margins for the Specialty Hospital segment decreased 70 basis points to 17.5% compared to 18.2% in the same quarter last year.

However, excluding the effects of the Regency hospitals, Specialty Hospital margins would have been 18.7% for the second quarter, a 50 basis point improvement over the same quarter last year.

As I mentioned last quarter, we are pleased with the performance of the Regency hospitals so far this year. While performance for the second quarter was not quite as good as the first quarter, the Regency hospitals continue to contribute meaningful growth in our Specialty Hospital segment. And while margins in the Regency hospitals continue to lag behind Select's legacy hospitals, we are pleased with the progress to date and see this as an opportunity for us to continue improving the Regency assets.

Out-patient rehabilitation adjusted EBITDA for the second quarter declined 5.7% to $24.5 million compared to $26 million in the same quarter last year. Adjusted EBITDA margins for the out-patient segment declined by 100 basis points to 13.7% compared to 14.7% in the same quarter last year.

For our clinic portion of this segment, adjusted EBITDA margins increased slightly compared to the same quarter last year. Adjusted EBITDA was up $800,000 to $20.7 million and adjusted EBITDA margins were up 30 basis points to 14.9% in the second quarter compared to the same quarter last year.

For our contract services, adjusted EBITDA declined $2.3 million and margins were 9.5%, down 540 basis points from the same quarter last year. Decline in contract services was the result of the contract we lost in the second quarter last year as well as regulatory changes in 2011.

Before I turn the call over to Marty Jackson, I have a couple of other comments on our business operations and particularly regulatory matters as there was a lot of activity in July and August. We closed our previously announced rehabilitation services joint venture with Baylor Health Systems on April 1, 2011, which includes two in-patient rehab hospitals with 136 total beds, three managed rehab units with 57 beds and 30 out-patient rehab locations.

The integration and transition of services to the joint venture is going according to plan with this being the first full quarter of the partnership. We are pleased with the progress to date and look forward to continuing to enhance the partnership between Select Medical and the Baylor Health System.

During the quarter we recorded a pretax charge of $7.5 million to establish a settlement reserve related to our previously disclosed qui tam lawsuit in Columbus, Ohio. The charge represents our best estimate of a probable settlement and is included in our general and administrative expense during the quarter.

Also during the second quarter, we completed the sale of a building acquired in the Regency acquisition which hospital's operations were consolidated into an existing Select hospital and recorded a one-time gain on that sale of $4.2 million. We also recorded a $1.2 million one-time gain on the sale of assets to the Baylor joint venture.

Both of these gains were included in our general and administrative line item in the quarter and partially offset the charge taken for Columbus.

On July 29th, CMS published the Final Rule for in-patient rehab facilities for fiscal year 2012 to become effective October 1, 2011. The final rule includes an update to the standard payment conversion factor, among other changes, and provided updates to the relative waits and length of stay values for the specific CMGs.

CMS stated in the Final Rule, the expected overall impact to the 2.2% increase to IRFs but 1.9% for urban hospitals. However, we estimate the overall increase of rehab payments to our hospitals to be approximately 1.6% given our current mix of patients.

Also on July 29th, CMS published the Final Rule for skilled nursing facilities for fiscal year 2012, which included a net 11.1% decrease in SNF payment rates. The Final Rule also made changes to group therapy provisions. We do not anticipate a material impact to our business given the SNF rate changes. In addition, we estimate the impact of the group therapy change to be minimal on our business.

On August 1, CMS published the Final Rule for long-term acute care hospitals for fiscal year 2012 to become effective October 1, 2011. The Final Rule includes an update to the standard federal rate, among other changes, and provided updates to the relative wait and length of stay for specific LTAC DRGs. CMS stated in the Final Rule, the expected overall impact is a 2.5% increase to LTAC hospital payments.

However, we estimate the overall increase in LTAC payments to our hospitals to be approximately 70 basis points given our current mix of patients.

On August 2, a bill entitled "Long Term Care Hospital Improvement Act of 2011" was introduced in the Senate. The bill was developed by the American Hospital Association to create certification criteria for LTAC hospitals. Select Medical supports the AHA's efforts to better define the LTAC patient population. This is the first step in the legislative process which is designed to better define the patient admission criteria for LTAC.

Finally, on August 3, our board of directors authorized an increase in our previously announced share repurchase program from $100 million to $150 million. All other terms of the program remain unchanged.

At this time, I'll turn it over to Marty Jackson, our Chief Financial Officer, to cover some additional financial highlights for the quarter before we open the call up for questions.

Thanks Bob. Good morning everyone. Our operating expenses, which include our cost of services, general and administrative costs and bad debt expense in the second quarter increased 22.2% to $599.7 million compared to the same quarter last year.

As a percentage of our net revenue, operating expenses for the quarter were 85.8% compared to 84.6% in same quarter last year. As Bob mentioned, this increase was primarily the result of increased general and administrative costs and the effect of the Regency Hospitals on our overall margins.

Cost of services increased 21.2% to $569.7 million for the second quarter. The principal reason for the increase is additional costs associated with the Regency Hospitals. As a percent of net revenue, cost of services was 81.5% for the second quarter compared to 81.1% in the same quarter last year.

The primary driver of this increase was a relative increase in salaries, wages and benefits expense. This increase was caused by both our Regency Hospitals and our Specialty Hospital segment and our contract therapy business and our out-patient rehabilitation segment.

G&A was $16.1 million in the second quarter, which as a percent of net revenue was 2.3% compared to $9.8 million and 1.7% of net revenue for the same quarter last year. There were several non-recurring items that contributed to this increase.

During the second quarter, as Bob mentioned, we recorded a $7.5 million charge for a settlement reserve on our previously announced qui tam law suit at our Columbus hospital. Partially offsetting this charge was $5.4 million in gains from the sale of assets during the quarter. This includes a $4.2 million gain from the sale of a building acquired as part of the Regency acquisition and a $1.2 million gain recorded on the contribution of assets to the Baylor JV.

Excluding the effects of these one-time gains and losses, G&A expense would have increased $4.2 million compared to the same quarter last year. Approximately $1 million of this increase related to the additional corporate costs to support the Regency hospitals and the balance related to increased executive compensation costs primarily related to incentive compensation.

Bad debt as a percent of net revenue was 2% for the second quarter, which represents a 10 basis point increase from the same quarter last year. We continue to expect bad debt expense to return to under 2% for the remainder of the year.

Our net accounts receivable balance decreased $32.8 million in the second quarter compared to our first quarter balance. Overall we experienced a four-day decrease in days sales outstanding to 53 days in the quarter compared to 57 days at March 31, 2011. The decline in DSO in the quarter was primarily the result of the timing of our periodic interim payments from Medicare for our specialty hospitals.

Turning back to the income statement, as Bob mentioned, total adjusted EBITDA was $99.9 million for the second quarter and adjusted EBITDA margins were 14.3%. This compares to the adjusted EBITDA of $89.6 million and 15.5% adjusted EBITDA margins in the same quarter last year.

Depreciation and amortization expense was $18 million in the second quarter compared to $16.6 million for the same quarter last year. The increase in D&A was primarily the result of the additional depreciation at the Regency hospitals which was offset in part by a fully amortized, non-compete agreement in 2010.

Net interest expense was $25.2 million in the second quarter, down from $29.3 million in the same quarter last year. The reduction in interest expense is primarily related to the expiration of interest rate swaps during 2010 that carried higher fixed interest rates and lower interest rates on a portion of our debt refinance during the quarter.

The Company recorded income tax expense of $10.9 million in the second quarter which represents an effective tax rate of 44.4% compared to an effective tax rate in the same quarter last year of 39.8%. The increase in our effective tax rate has resulted from a difference between a tax accounting basis in the financial accounting basis associated with the hospital exchange transaction we did with RehabCare on January 1st of this year and an increase in our reserves for uncertain tax positions resulting from the Columbus settlement reserve.

Net income attributable to Select Medical Holdings was $11.7 million in the second quarter, and as Bob mentioned, fully diluted earnings per share was $0.08. This includes a non-recurring loss on early retirement of debt of $31 million related to our refinancing we completed on June 1 of 2011.

Excluding this one-time loss and the related tax effect, our adjusted earnings per fully diluted share was $0.20 in the second quarter. Excluding the non-recurring loss related to the early retirement of debt and its tax effect, we expect the refinancing to contribute $0.02 accretion to EPS for the full year 2011 and be approximately $0.03 accretive annually beyond this year.

We ended the quarter with $1.43 billion of debt outstanding and $13.6 million of cash on the balance sheet compared to $1.47 billion of debt and $15.1 million of cash at the end of the last quarter. Our debt balances at the end of the second quarter included $167.3 million of HoldCo senior floating rate notes, $345 million of 7-5/8 senior subnotes, $841.6 million of term loans outstanding and $65 million in revolving loans outstanding, with a balance of $8 million consisting of other miscellaneous debt.

As we previously announced, we refinanced a portion of our debt structure on June 1, 2011. This includes entering into a new senior secured credit facility including a seven-year, $850 million term loan and a five-year $300 million revolving loan, which was $125 million drawn at the close -- at the closing of the transaction -- of the financing transaction, and $65 million drawn at the end of the second quarter.

As part of the refinancing, we tendered for $266.5 million of our 7-5/8 senior subordinated notes leaving $345 million outstanding at the end of the quarter. We also repurchased and retired our $150 million 10% HoldCo senior subordinated notes as part of this refinancing.

Operating activities provided $88.6 million of cash flow for the second quarter compared to $74.5 million in the second quarter -- in the same quarter last year. The provisions of cash was primarily the result of improved cash earnings as well as decreases in our accounts receivable balance and increases in accrued interest and other accruals, which were offset in part by an increase in prepaid taxes during the quarter.

Investing activities used $12.7 million of cash flow for the second quarter. $10.8 million was for the purchase of PP&E and $13.5 million for investments in businesses. This was offset in part by $3.9 million in acquisition related payments resulting from the working capital settlement from the Regency acquisition and $7.6 million in proceeds from the sale of assets.

Financing activities used $77.3 million of cash for the second quarter. This resulted primarily from the refinancing activity in the quarter and $60 million in subsequent repayments under our revolving credit facility. We also paid $26 million in debt issuance costs and tender premiums during the quarter.

Other financing activities include $11.5 million in proceeds from bank overdrafts offset by $1 million in other debt payments, $1.3 million for repurchases of common stock and $600,000 in distributions to non-controlling interest.

During the second quarter we repurchased 139,784 shares of our common stock in the open market transactions for a total of $1.3 million. The Company has spent a total of $47.4 million of our now $150 million authorized stock repurchase program to date.

We are updating our prior business outlook for calendar year 2011 to reflect the impact of the refinancing that we did as of June 1st. We continue to expect net revenue for the full year 2011 to be in the range of $2.65 billion to $2.75 billion and adjusted EBITDA for the full year to be in the range of $365 million to $385 million.

We now expect fully diluted income per common share to be in the range of $0.57 to $0.62. On an adjusted basis, excluding the non-recurring loss related to the early retirement of debt and its tax effect from the refinancing, fully diluted income per common share would be in the range of $0.69 to $0.74 compared to our previous income per common share guidance of $0.67 to $0.72 per share.

At this time I'd like to turn it over to Bob for some closing remarks.

Thanks Marty. Before I open it up for questions, I just want to say we were pleased with the results for this quarter in particular. We saw nice growth for both revenue and EBITDA in our legacy specialty hospitals. Cash flow was strong and we see much opportunity for increased profitability in the Regency assets.

So at this time, I'll ask the operator to open it up for questions.

Thank you Mr. Ortenzio. (Operator Instructions)

A.J. Rice with Susquehanna Group.

Thanks. Hello everybody. Maybe just a couple of different questions if possible. I want to make sure on the Baylor joint venture, you gave us a little bit of color on this, Marty, but are there -- it sounds like there's some one-time startup costs associated with the new facility, et cetera, running through that. How long do you think those will persist, if you assume that there really isn't much contribution from that in your guidance for the back half of the year?

A.J., I think more importantly than a couple of the startup costs there, I think we also have -- it's important to note that there is a -- there's two in-patient rehab hospitals in that JV. One of those in-patient facilities is a startup and that startup is incurring startup losses. And I think that will continue through the end of this year.

Okay. And then it would turn positive, so really it's sort of a 2012 contributor is the way we should think about that?

Yes.

Okay.

But also along those lines, A.J., you ought to think along the lines that there's going to be substantial contribution from just more than one in-patient rehab facility.

Okay. Bob, you mentioned the LTAC legislation in the Senate. Have you -- do you guys have enough clarity at this point to take a look at how that might impact your business if it were to move forward in its current form? Do you feel like you could adjust to that without it having a material change or is it too early to tell?

A.J., I'd say it's really too early to tell. We're always looking at everything that's out there but our practice is not to comment on really proposed regs, proposed legislation. I would just say that the same thing we've said for years which is enhance the patient facility criteria for the industry is nothing but a good thing for the industry long term.

I think the patient facility criteria is certainly not going to be a windfall for the industry because it is going to have to score a savings to continue to move. And it could see some changes as it moves through the legislative process. So I'd say it's an important first step for the long term strength of this industry but it has a ways to go.

All right. And then one final question if possible, just, obviously the HealthSouth LTACs have changed hands in the quarter. I know you're always looking for acquisitions and JV [commentary]. I don't know if there's anything to be said about whether you looked at the HealthSouth assets or what the overall pipeline might look like.

For us, the Regency acquisition is really where our focus is. As you can see, these integrations take time and energy and resources, so Regency was our acquisition. Is it still? Though we've talked about it on two -- a couple of conference calls since we've signed it, we've only really had it as part of Select for about 11 months, so less than one year. So as you can see, we continue to have work and opportunity on those assets, so for now, on the LTAC side of the business, that's really our focus.

Okay.

Kevin Fischbeck with Bank of America Merrill Lynch.

Mr. Fischbeck, your line is open.

Can you hear me?

Go ahead.

Okay. Sorry about that. Good morning. I guess the LTAC rate and the ERP rate came in a little bit stronger than the proposal. I just wanted to see if you were building out something from that contribution into your outlook for the fourth quarter and if so, what that might contribute.

Kevin, for our forecast moving forward we always bake in zero percent increase, so any positive benefit we get is not reflected in the current numbers.

And as you heard from my remarks, the headline increase for both the rehab and the LTAC rule were higher than what we are projecting the impact is on our business.

Okay, and then could you just talk a little bit about what's going on in Washington around the debt ceiling. Are you -- it sounds like if anything you guys might be able to include this patient assessment criteria bill into that negotiation and score as a saving. But are you concerned about any other one-off type focus on LTACs or are they largely immune outside of a 2% [trigger] across the board?

I know as much as most people just by reading the paper and looking at -- listening to the news. I would never say that we are immune because I don't think anybody's immune. This discussion/debate kind of continues to change direction frequently. I think the patient facility criteria is something that has been talked about and -- for years and years and it is gratifying to see it start to get some legs.

How that plays into kind of the broader debate in Washington over debt ceiling, I have no way to handicap that other than to say the numbers associated with LTAC Medicare reimbursement are so small relative to the overall numbers they're talking about in the broader debate that they'd be almost not even worth talking about the two in the same sentence or paragraph.

So we don't know what legislation is going to move. I think it's clear, I'm speculating that the LTAC legislation probably doesn't move on its own as a stand-alone bill so it probably needs to be part of something else. If it gets introduced in the House and depending on what change it goes through, there's just no way for me to predict that, other than to say that this was, I think, a good first step for getting greater facility and patient criteria to the LTACs, which as I mentioned in response to the question from A.J., is probably nothing but a good thing for the long term health of this industry.

Have we gotten the score back on that? I haven't seen an official score on that besides I think the initial indication from AHA that it might score $0.5 billion in savings.

I don't believe so and that's something that the AHA could answer best.

Okay. And then if you could just go to Regency for a second, I guess I think last quarter you talked about 13% type target margins for the year. Do you feel like that's still a good bogey for where you are or has anything changed there?

Go ahead Marty.

Kevin, we do feel that 13% is very achievable this year. I think if you take a look at the first quarter, we were in the 16% range. This quarter we were close to 11%. This quarter I think we -- the volumes we thought were a little light and the expenses we still have some work to do on that but I anticipate through the back half of the year we will be in good shape.

Okay, and then any reason why you can't get that to your corporate margins over the next few years?

No, absolutely not. We don't see -- we see absolutely no impediment to get to the legacy Select EBITDA margins. But, as we've indicated since the time of the Regency transaction, that we think that that's really a two to three year process. I think for the first year we talked about hitting 13% and year to date we're at 13.6%.

And I continue to feel bullish about the Regency assets. As I mentioned before, it's only been part of the Company for 11 months and it does take some time and it's not a straight up exercise in terms of EBITDA and margins. But I agree with Marty's comments. We're pleased with where we are right now and I feel it still has opportunity for us and we'll be realizing that over the coming quarters and years, so this is a good growth engine for the Company.

Great, thank you very much.

Frank Morgan with RBC Capital Markets.

Good morning. As we think about the second half of the year, as we kind of progression on the EBITDA line, on the EPS line, is there anything that we need to be aware of or sensitive to in terms of where the contribution comes? As I recall, summertime is typically, seasonally from a volume standpoint, lower. Are there other things? Are there -- because the guidance reflects a share repurchases, any more JV activity in the year and, or does it say anything special about the Regency?

It sounds like maybe the call side is easier to fix near term than the volume. But just in terms of how we think about the progression of earnings laid out over the balance of the year, any unique issues we need to be aware of with regard to just the geography? Thanks.

Frank, there is no unique aspects that we see in the third and fourth quarter of this coming year. And we feel pretty comfortable in what we see to date. We're pretty bullish on the back half of the year.

And if we get a JV done before the end of the year, we certainly wouldn't see any contribution for that until -- from that until next year, so I think we see the balance of the year as continuing the blocking and tackling and the operations that we've done. Regency is obviously, as I said, an opportunity and we'll continue to move on all fronts.

Okay, thanks.

Gary Lieberman with Wells Fargo.

Thanks. Maybe if you could just give us a quick update on the margins, on the HealthSouth out-patient clinics?

Gary, the margins on the HealthSouth, the former HealthSouth clinics, continue to improve. We are right now within three points. I think when we first started the HealthSouth -- when we first did the HealthSouth acquisition, we were north of 7% differential between our legacy out-patient clinics versus the HealthSouth clinics and we've -- we continue to make improvements in that area. There's still some room left but we're -- I think the operators are doing a very good job closing that gap.

How much longer do you think it takes to finish closing the gap?

I think probably within the year we will have very little difference between the HealthSouth assets and -- the former HealthSouth assets, and our legacy assets.

And then it doesn't sound like you expect too much impact from the changes to group therapy that were part of the SNF rule and that maybe, that sounds like it's certainly smaller than the impact, that the changes to concurrent we're having. Can you maybe just give us some color there between the difference and the reason you don't think the group's going to have too much of an impact?

Sure. There's really -- the issue with the group billing is how much of the business are you currently doing group versus one-on-one and I think what's happened is over the past couple of quarters we've actually seen the operators gravitate or gravitate more towards a one-on-one type of service already. So from a group billing perspective, we don't believe that that's a material impact to us.

Okay. And then maybe a last question, just, is there any additional opportunity to at some point maybe tender for more of the 7-5/8 notes or do you think you're done for the foreseeable future?

We are always looking at the opportunity to improve the balance sheet and we think that tendering for those bonds will ultimately be a good thing for the Company, so I would not be surprised if you see us purchasing some of those bonds back.

Great, thanks a lot.

Sure.

Doug Simpson with Morgan Stanley.

Good morning everyone. Marty, could you just talk about out-patient volumes in the quarter generally, how they sort of tracked relative to your expectations? A little bit of a slowdown I think on a year over year basis versus Q1 and obviously Q1 you had some of the weather issues in the northeast. So just sort of how did it come in relative to where you were thinking?

Sure Doug. The -- if you take a look at the total visits in the quarter, what you have to recognize is that we had moved out our Dallas out-patient clinics from owned over to the Baylor. If you added back those 20 -- I think it was 28,000 visits to the total visits, we would have been basically consistent with the prior year, same quarter.

Okay. Okay, so there's no real change to the full year outlook as we think about modeling into the second half of the year but for that adjustment?

That's correct.

Okay. And then maybe could you just update us on the facilities that were challenged in the second half of last year, obviously trends have improved. What have you done there? What's worked and what's really driven that improvement?

And then I guess just to connect to that, third quarter last year was tough. Obviously you're only one month into it but maybe just to the extent you could talk about trends that you saw as Q2 ended into the early part of Q3. Did this give you confidence that the second half of this year will track better?

Let me -- your first question, Doug, I really can't comment on individual facilities. We did that almost a year ago or a little less than a year ago in the second quarter of last year, as I was just trying to give more detail and color on the miss that we had in the third and fourth quarters. So I think it's just as a general matter, volumes have increased for us across the board in all of our hospitals and I think that you can assume that they increased even greater in those facilities that were challenged.

And if you recall at the time the various buckets that I tried to put those on to give some color to investors, I think you just make the assumption that we were successful in moving the needle in those hospitals whether it was attracting needed physicians or increasing volumes or getting the move to relocated and just stuff that's part of our day to day business and running LTAC hospitals.

The second part of your question --

The second part, Doug, is on an overall basis, I think at the fourth quarter last year, one of the things the operators have done, and I think has done a tremendous job, is focus on volume. And it's really focusing on increasing admissions and you can see in the first and second quarter that we benefited from that focus and we think we will continue to benefit over the balance of the year.

Okay, so those -- you would characterize those improvements as sticky and they should continue to bear fruit?

Yes.

Okay. And then just, I think you answered this but make sure I heard correctly, the Regency seasonality, just thinking about the margins, did you say it's not that different from the core business?

No.

From the legacy business?

No. What we said was there -- we think that the volume was a little light from what we expected in the second quarter for Regency and the expenses are still too -- running too high. So we don't think -- relatively speaking, we're happy with Regency but in the second quarter there needs to be improvements made.

Okay. And once those improvements are made, should we expect the seasonality though to be roughly similar?

To our legacy business?

Yes.

Yes.

Okay. All right. Great, thank you.

Sure.

Ladies and gentlemen, that will conclude the Q&A portion of today's events. I'd now like to turn the presentation back over to Mr. Robert Ortenzio for closing remarks.

I just want to thank everybody for joining us and we'll look forward to updating you again after next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.