Select Medical Holdings Corp (SEM) 2014 Q1 法說會逐字稿

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the First Quarter 2014 Results and the Company's Business Outlook. Speaking today are the Company's Executive Chairman and Co-Founder, Robert Ortenzio; and the Company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter highlights and then open the call for questions.

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, 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 for 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 Mr. Robert Ortenzio. Please proceed

Good morning everyone and thank you for joining us for Select Medical's first quarter earnings conference call for 2014. For our prepared remarks I will provide some overall highlights for the Company in our operating division and then ask our Chief Financial Officer, Martin Jackson, to provide some additional financial details before we open the call for questions.

I wanted to first note the results for the first quarter reflect Medicare payments changes that became effective on April 1, 2013, including a 2% reduction in Medicare payments that was implemented as part of the automatic reduction in federal spending mandated under the Budget Control Act of 2011, which we refer to often as sequestration reduction and an increase from 25% to 50% in the multiple procedure payment reduction for physical therapy services as mandated by the American Taxpayer Relief Act of 2012, which we refer to as the MPPR reduction.

The reduction in both the net operating revenues and adjusted EBITDA from sequestration was approximately $7.6 million in the first quarter. Reduction in both net operating revenue and adjusted EBITDA from MPPR was approximately $2.1 million in the first quarter. This is the final quarter in which these adjustments will have an impact on our year-over-year comparative results.

Revenue for the first quarter was $762.6 million compared to $750 million in the same quarter last year. During the quarter 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 outpatient rehabilitation segment which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the first quarter increased 1.2% to $564.6 million compared to $557.8 million in the same quarter last year. The growth was primarily related to volume growth and contracted labor services we provide to certain of our non consolidating joint ventures. We are able to more than offset the reduction in our Medicare revenue resulting in sequestration reduction which was $7.2 million in specialty hospital during the first quarter. Excluding the effects of the sequestration reduction net operating revenue in our specialty hospitals would have increased 2.5% in the first quarter compared to same quarter last year.

Our overall patient days increased slightly in the first quarter to over 341,000 days compared to over 339,000 days in the same quarter last year. Our occupancy rate was 73% in both the first quarter this year and last year. Our net revenue per patient day declined to $1,539 per day in the first quarter compared to $1,543 per patient day in the same quarter last year.

We generated approximately 83% of our specialty hospital revenue from our long-term acute care hospitals and 17% from our in-patient rehabilitation operations during the first quarter. Net revenue in our outpatient rehabilitation segments for the first quarter increased 3% to $197.9 million compared to $192.1 million in the same quarter last year. In the first quarter the sequestration reduction in our outpatient rehab segment was $400,000 and the MPPR reductions was $2.1 million. Excluding the effects of sequestration and MPPR reduction net operating revenues in our outpatient segment would have increased 4.3% in the first quarter compared to the same quarter last year.

In addition we experienced extreme weather conditions in several our outpatient rehab markets in January and February, which adversely effected the segment's net operating revenues in the first quarter. We were able to more than offset the sequestration, MPPR reduction and the adverse winter weather impact through incremental volume in our outpatient clinics and by the expansion of our contracted management services in both our clinics and contract therapy operations.

Net revenue in our outpatient clinic based business including our own debt managed clinics increased to $148.3 million compared to $145.2 million in the same quarter last year. For our owned clinics patients visits increased 1% to almost 1.2 million visits compared to the same quarter last year. Our net revenue per visit was $104 in the first quarter compared to $105 per visit in the same quarter last year. Net revenue in our contracted service business in the first quarter increased to $49.6 million compared to $46.9 million in the same quarter last year. The increase resulted from new contracts and expansion of services of existing contracts which offset reductions from terminated contracts.

Overall adjusted EBITDA for the first quarter was $96.8 million compared to $100.1 million in the same quarter last year with an overall adjusted EBITDA margin at 12.7% for the first quarter compared to 13.3% margin for the same quarter last year. Our decline in adjusted EBITDA and our adjusted EBITDA margin was primarily due to the sequestration reduction of $7.6 million and the MPPR reduction of $2.1 million in the first quarter. Excluding the effects of sequestration, MPPR reductions adjusted EBITDA would have increased 6.5% to $106.6 million in the first quarter compared to the same quarter last year and adjusted EBITDA margins would have been 13.8% in the first quarter.

Specialty hospital adjusted EBITDA for the first quarter was $92.2 million compared to $93.3 million in the same quarter last year. Adjusted EBITDA margins for the specialty hospital was 16.3% compared to 16.7% in the same quarter last year. The primary reason for the decline in adjusted EBITDA and margin in our specialty hospitals in the first quarter was again due to the sequestration reduction. Excluding the effects of sequestration adjusted EBITDA at our specialty hospitals would have increased 6.5% to $99.4 million in the first quarter compared to the same quarter last year and adjusted EBITDA margins would have been 17.4% in the first quarter.

Outpatient rehabilitation adjusted EBITDA for the first quarter was $21 million compared to $22.8 million in the same quarter last year. Adjusted EBITDA margin for the out patient segment was 10.6% in the first quarter compared to 11.9% in the same quarter last year. Primary reason for the decline in adjusted EBITDA and margin for our outpatient rehab segment was due to MPPR and sequestration. Excluding the effects of sequestration, MPPR adjusted EBITDA in the out patient segment would have increased 3.1% to $23.5 million in the first quarter compared to the same quarter last year, and adjusted EBITDA margins would have been 11.7% in the first quarter. In addition we experienced extreme weather conditions in several of our outpatient rehab markets in January and February which adversely effected the segments operating results in the first quarter .

For the outpatient clinic portion of our business adjusted EBITDA was $17.1 million in the first quarter compared to $19.4 million in the same quarter last year. Adjusted EBITDA margins for the outpatient clinics was 11.6% for the first quarter compared to 13.3% in the same quarter last year. For our contract services adjusted EBITDA was $3.8 million in the first quarter compared to $3.5 million in the same quarter last year and margin was 7.7% in Q1 compared to 7.4% same quarter last year.

Our reported earnings per fully diluted share were $0.24 in both the first quarter of this year and last year. Our earnings per share for the first quarter of this year and last year included nonrecurring loss on early retirement of debt. Excluding those losses and their related tax effect adjusted income per common share was $0.25 inboth the first quarter this year and last year.

I also wanted to provide a couple of updates since our fourth quarter earnings call in February. In conjunction with our earnings release yesterday the Company announced that our Board of Directors declared a quarterly cash dividend of $0.10 per share at its meeting on April 30th. The dividend is expected to be paid on or about May 28th to stockholders of record on May 16. The Board of Directors also approved a $150 million increase to our common stock repurchase program to $500 million and extended the program to December 31, 2016. During the first quarter the Company repurchase 10 million shares of common stock under our authorized share repurchase program at a cost of $10.95 per share, and now have capacity under the program to repurchase $216.9 million of additional stock.

I also want to comment on the LTAC proposed regulation from CMS that was released on Wednesday evening. The proposed rule would increase overall LTAC PPS payments by eight-tenths of a percent in fiscal year 2015 compared to fiscal year 2014. This update includes a 2.7% market basket adjustments, a four-tenths of a percentage point cut for productivity, two-tenths percentage point additional cut mandated by the ACA and the final year of a one time budget neutrality adjustment of negative 1.3 percentage points, which CMS states accounts for overpayment in fiscal year 2003 the first year of LTAC PPS.

I want to emphasize that the reg is proposed and out team is still working through the entire reg to understand all possible implementations. I can say however several things after initial review of the proposed reg. First CMS discusses in some detail the implementation of the new LTAC hospital criteria that was signed by the President on December 26, 2013. As you have heard me say on other occasions, the LTAC criteria law better defines the type of patients who belong in the LTAC hospitals. The new three day ICU stay requirement adopted by Congress will serve as a necessary if also somewhat arbitrary proxy to measure patient acuity and to justify possible admission into a LTAC hospital. The new law resolves a great deal of regulatory uncertainty hanging over the LTAC hospital community and we were pleased to support it.

Second I will also say that in the proposed reg CMS seems to be implementing the new LTAC criteria in a fair manner consistent with Congressional intent and recognizing that LTAC hospitals make compromises and concessions to address public policy concerns. For that we are grateful to administrate Marilyn Tavener, CMS and Congress.

Finally I don't want to split hairs but there are a number of issues in the proposed regs that trigger questions from us. I will give you two brief examples, first, CMS announced a change to the interrupted stay policy. We have understood and supported the traditional policy that CMS will not pay for two separate episodes of care if an LTAC patient is discharged from the LTAC and re-admitted to the LTAC. But as CMS moves the goalpost to 30 days it does make us have some concern over how far CMS plans to go with this policy. At some point it could look unreasonable and we will continue to stay on top of it and address the impact on us and other post acute care providers. Second we will have questions and comments for CMS about how the site neutral payments will be calculated. CMS noted in the proposed reg that some of the methods it may use to calculate for patients that do not meet the new LTAC criteria. Our overall goal is to always ensure that the LTAC hospitals are not incensed to avoid high acuity patients after all the LTACs were created by Congress and CMS to look after the sickest patients and we don't want there to be new unattended incentives to avoid those types of patients.

At this point I will turn it over to Marty Jackson to cover some additional financial highlights for the quarter before we open it up for questions.

Thanks, Bob. As bob mentioned, the impact from sequestration and MPPR totaled $9.7 million in the quarter, had we not experienced these Medicare payments reductions net revenue would have increased by 3%, and adjusted EBITDA would have increased by 6.5% in the first quarter. We also had the adverse impact of winter weather in many of our out patient markets in the first quarter.

For the first quarter our operating expenses which include our cost of services, general and administrative expense and bad debt expense increase 2.5% to $667.9 million compared to same quarter last year. As a percentage of our net revenue operating expenses for the first quarter were 87.6% this compares to 86.9% in the same quarter last year. Excluding the impact of sequestration and MPPR operating expenses as a percentage of our net revenue would have declined by 40 basis points to 86.5%.

Cost of services increased 2.2% to $638.8 million for the first quarter compared to the same quarter last year. As a percent of net revenue cost of services was 83.8% compared to 83.3% in the same quarter last year. The primary reason for the 50 basis point increase in our cost of service as a percent of net revenue were the sequestration and MPPR reductions. Cost of services as percent of net revenue excluding the effects of these reductions would have been 60 basis points lower than the same quarter last year.

G&A expense was $18.1 million in the first quarter which as a percentage of net revenue is 2.4% compared to $17.4 million or 2.3% of revenue for the same quarter last year. Bad debt as a percentage of net revenue was 1.4% for the first quarter. This compares to 1.3% for the same quarter last year.

Total adjusted EBITDA was $96.8 million and adjusted EBITDA margins was 12.7% for the first quarter. This compares to adjusted EBITDA of $100.1 million and adjusted EBITDA margins of 13.3% in the same quarter last year. Again excluding the effects of sequestration and MPPR reductions adjusted EBITDA would have been $106.6 million and adjusted EBITDA margins of 13.8% in the first quarter.

Depreciation and amortization expense was $16.2 million in the first quarter this compares to $15.8 million in the same quarter last year. We generated $900,000 in earnings of unconsolidated subsidiaries during the quarter compared to $1.1 million in the same quarter last year. Interest expense was $20.6 million in the first quarter. This was down from the $23.5 million in the same quarter last year. The reduction in interest expense is primarily related to lower interest rates on borrowings which have resulted from our refinancing activities.

The Company recorded income tax expense of $22.1 million in the first quarter. The effective tax rate for the quarter was 39.1% compared to an effective tax rate of 37.3% in the first quarter of last year. The first quarter of last year was favorably impacted by a reduction in the valuation reserves related to a state net operating loss carry forward and with the principle cause of the favorable effective rate in the first quarter last year.

Net income attributable to Select Medical Holdings were $33 million in the first quarter and fully diluted earnings per share were $0.24 compared to $34.4 million of net income and fully diluted earnings per share of $0.24 in the same quarter last year. The Medicare payment reductions for sequestration and MPPR had a $0.04 negative impact on fully diluted earnings per share in the first quarter of 2014. During both the first quarter 2014 and 2013 we incurred losses on early retirement of debt related to refinancing activity excluding these losses and the related tax effects adjusted net income per share was $0.25 for both the first quarter of this year and last year.

We ended the quarter with $1.61 billion of debt outstanding and $4.7 million of cash on the balance sheet. During the first quarter we made a prepayment of $34 million on our existing term loans related to our excess cash flow for 2013. We also repriced the remaining term loans with more favorable terms, reducing borrowings by 25 basis points and 50 basis points on the two different term loan tranches. In addition we issued a $110 million add on to our existing 6 3/8 senior notes. The add on was priced at 101.5 for an effective yield of 6.03. Our debt balances at the end of the quarter included $775 million in term loans which are net of the original issue discounts,. $711.6 million in the 6 3/8 notes which includes an issue premium,$105 million in revolving loans with the balance of $20.6 million consisting of miscellaneous debt. Operating activities used $16 million of cash flow in the first quarter. The use of operating cash flow primarily resulted from increases in our accounts receivable which was offset in part by cash income and other changes in working capital.

Days of sales outstanding or DSO was 55 days at March 31, 2014 compared to 48 daysat December 31, 2013. The change in DSO is primarily due to the timing of our periodic interim payments we receive from Medicare for services provided at our specialty hospitals.

Investing activities used $27.8 million of cash flow for the first quarter. The use of cash was primarily related to property improvement and equipment purchases of $27.3 million and investment in businesses and acquisition payments of $500,000. Financing activities provided $44.2 million of cash in the first quarter. The primary use of cash resulted from the proceeds of $111.7 million related to the issuance of an additional $110 million of senior notes and incremental net borrowings of $85 million on our revolving line of credit. This was offset in part by $109.5 used to repurchase common stock, $34 million to make a mandatory excess cash flow prepayment required under our term loans and $14.1 million in dividend payment in the quarter.

And finally I would like to overview the financial guidance for calendar year 2014 that we provided in our earnings release. This includes net revenue in the range of $3.05 billion to $3.15 billion, adjusted EBITDA in the range of $365 million to $385 million. We have adjusted our prior business outlook for fully diluted income per common share and include adjusted income for common share for an estimated financial impact from our refinancing and share repurchase activity in the first quarter. We now expect adjusted income for common share which excludes the loss and retirement of debit and its related to tax effects for the full year 2014 to be in the range of $0.89 to $0.97. We now expect the fully diluted income per common share for the full year of 2014 to be in thee range of $0.88 to $0.96.

This concludes our prepared remarks. At this time, we would like to turn it back over to the operator to open up the call for questions.

(Operator Instructions). Your first question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

You have had some success obviously with getting this patient criteria put in place. It sounds like the proposed rule for fiscal 2015 looks generally acceptable. I am curious if you could assess how you see the run way on visibility going ahead. And could you comment on this recent development with this impact legislation floated in House Ways and Means and Senate financed on a post acuity payment system or a site neutral payments? Thanks.

Sure, Frank. To take your first question on how we see the criteria impacting the broader LTAC community. I think it is going to be choppy. First of all we really don't have full implementation or really any implementation until 2016 or cost reports after late 2015 that is. I think you are going to see business as usual in the short term, but when the criteria takes full effect, I do think as with a lot of these more significant regulatory or legislative changes the impacts are going to be relatively uneven. You are going to have I think some providers are going to struggle and others will be able to adapt and do well. For us we are really focused on our business in our hospitals. Fortunately we generally have taken care of a patient population with much higher case mix index over the years, so I think that positions us pretty well. I think our model which is the primarily model which is hospital within a hospital more smaller hospitals also positions us fairly well. I think we feel pretty good about the runway we have, the current profile of our hospitals and our prospects for adapting to the new criteria. I will add that it is our current strategy to not emphasis the site neutral payments, but to be more focused on the LTAC eligible patients. I will take a follow up on that, Frank, if you like. But as you think about that let me make a comment on the impact bill.

For those of you who don't follow it as closely as many of us do, the impact bill is the improving Medicare Post-Acute Care Transformation. And a draft of that was released in March of this past year. That bill represents a couple of years of work by both and House Ways and Means and Senate finance committees and it is relatively bipartisan. I think the main take away is that Congress is really looking at post acute care. And I think we were a little gratified that they came generally to the same conclusion that we have been saying for some years and that is that this bundling payment and preserving access to care is going to be a lot harder than some of the more abstract policy research has suggested. I think the possible bundling of post acute services is some years off. I think it needs to be because of the complexity associated with bundling care in the post acute. Having said that, I don't want to minimize the point that Congress and many policy makers would like to see greater integration across post acute care and we are certainly fine with that,. I hope that answers the question, Frank. If it doesn't, I will take a follow up.

No that's got it. Maybe just one more and I will hop off. Could talk a little bit more specifically about the strategies you are putting in place in the early stages here of patient criteria? Thanks.

Some of the strategies are just us being is more intensive in areas we have been working on some time. Obviously you want to do everything you can to build efficiencies into your hospitals. We want to expand and become better at those programs those clinical programs that will attract those LTAC eligible patients. Beyond that we are really looking at a lot of data sets that allow us to identify where those LTAC eligible patients are, where they are currently going their discharge destination and be able to identify those in really a market specific area at the same time looking at our competition in those markets, our market share and our position so we can put ourselves in place to replace any loss volume because of the criteria with LTAC compliant volume. I will let Marty comment a little bit on some of the information and data we are building an d using around that strategy.

Before I comment on that data, Frank, I would just like to point out we are very pleased with the operators and how they have really focused on cost management. We think they have really done a very, very good job. And one of the reasons we have been talking about sequestration and MPPR a lot I think it hides that. If you take a look what we have done with our cost on a per patient day basis, the operators have done a terrific job. With regards to the market analysis we are doing, we really have done a deep dive into each of the different regions that we have and really identified specific patient population that are compliant. And what we are doing is we are retooling the marketing strategy that we have in each of those regions to really go after those patients. And that is really a two prong approach with people that are actually on the ground in those market places as well as with our Chief Medical Officer and his staff.

Great, thank you.

Your next question comes from the line of A.J. Rice with UBS. Please proceed.

First a technical question and then I want to ask you about criteria as well. The capital spending in the quarter $27 million that is a higher run rate. I think you did 70 all year last year. Is there anything worth highlighting there or is there a step up this year you are expecting in capital spending?

A.J., you are absolutely right. The first quarter was up to $27 million a significant portion of that or a good portion of that actually had to do with expenditures we made with regard to the moratorium and different new projects that we had. There was a requirement in order to be in a position to open up new hospitals you had to have expended 10% of costs of the projects and we accelerated some those costs. Historically what we have talked about or at least at the last earnings call we talked about we thought we would be north of 150 additional beds during this moratorium periods. Today we believe we are going to be north of 300. Okay.

All right. And then going back to commentary on criteria the strategy of really emphasising the LTAC eligible makes a lot of sense and de-emphasising some of the service lines that attract more the site neutral. I guess I am trying to think through, we sort of have two years until we are fully or even start to phase in really the new criteria. Do you start that process now and start shifting the patients over or shifting the emphasis for the patients you attract over, or do you wait until you are closer to the time frame? And if you do start switching now , is that a positive impact under the current rules financial or is that a drain financially currently if you make that transition?

A.J., Our plan at this moment is pretty clear we will not be shifting over and accelerating the model to comply with the new criteria in any significant way in advance of when it applies to our individual hospitals. We will be talking in future quarters about our preparation and what we are doing and what we are looking at, which I think will be targeted and significant efforts. I don't see us changing our model very far in advance of the criteria. In some ways because our acuity is pretty high and because we have a pretty high percentage higher than the average percentage of compliant patients now we don't see any reason to start excluding patients that are currently eligible.

Okay.

A.J., that doesn't mean we won't be pursuing the compliant patients, so for those hospital we have that have a capacity to the extent we are going through the retooling of the marketing process we put in place we anticipate we will be in a position to take on some of those newly compliant patients. But as Bob said, the elimination of the noncompliant we don't see that happening until after new reg come into place.

To follow up quickly on that, so taking on more of the LTAC compliant ones today does not have any negative financial implication to it right now under the old rules. And then second, when you decide to really push this, I know you are only talking about switching out six to eight patients on average in the facilities in the hospital within a hospital model, how quick do you think you can execute that switch when you say, let's really make that happen?

Our plan is to be prepared and to do it as quickly as possible when the time is. And that is really what the preparation is now over the next year to two years. That is what we are planning for and that is really in the execution.

And with regards to the first part of your question on the profitability of the compliant patients, we anticipate that those patients are actually a little more profitable than --

-- under the current system.

That is correct.

That is great. Thanks a lot.

Sure.

Your next question comes from the line of Kevin Fischbeck with BofA Merrill Lynch. Please proceed.

Great, thanks. I wanted to go back to that last question. I think you mentioned, Marty, in the response that there are going to be some newly compliant patients under the new criteria. How do you think about that opportunity set expanding for you in terms of percentage of business? Is this something where you look at it and say we are going to lose X but there is Y potential offset from a market expansion perspective?

Kevin, the thought process is the compliant patients we are talking about are basically the new -- in essence we are looking at the new regulations. So it is really the three plus day ICU stay or the 96 hours on a vent. As we have gone back, we have taken a look at the MedPAR data the industry has gone back taken a looks MedPAR. For 2012 we took a look at what the size of that market is. It is a very large size and then we have broken it down by region. So when you take a look at it by region and then by discharging, you know who is the discharging hospital. Being able to identify that we think will help us in the marketing approach.

Just to be clear on I think a comment you made, there are no newly compliant patients. Patients that will be compliant under the new criteria are all compliant now. I think the point that Marty and I have made consistently is there is a universe of compliant patients out there that the industry and certainly Select are not getting now, but they would still be compliant under the old criteria as well as the new criteria.

Okay. That is how I understood it as well. So in that context it sounds like you have better data today than you did a couple of years ago which allows you to target this business a little bit better, but wouldn't you expect this is the competitive response of (Inaudible) as well, that they are going to be going more aggressively after the compliant clients? How comfortable are you in your ability to gain that share within that population?

The immediate response to your question is we are very confident we can gain share. The fact is we think we have done a pretty good job with the data sets that are out. A lot of the data sets that we are reviewing are relatively new, so from our perspective we feel pretty comfortable with that,.

The other thing in terms of taking share remember the other thing that I think plays into this is the moratorium. The competition that is there by and large is the competition that is going to be the. That is why I always said the moratorium cuts both ways for us. It is a barrier to growth in our LTAC division, but on the other hand it does allow you to execute on the new criteria without having additional competition in the local markets.

That makes sense.

Kevin, the other thing I think you need to think about is when you take a look at -- there is a real bifurcation in the industry today between higher acuity providers such as us versus lower acuity providers. If you take a look at the case mix index, there is a number of providers that have very low acuity. And the ability to switch your clinical programs, the ability to change out your staffing to address the needs of that higher patient acuity is a very, very difficult thing to do.

Okay, great. Thanks. You mentioned in some of the papered remarks that there has obviously been rate pressures, but one of the offsets you highlighted was I think you said services provided to some of the hospitals I guess maybe the JV partners. Can you talk a little bit about what those are and where the run rate is for that line item?

With a number of our JV partners we actually take on all the employee and to a certain extent we pass back those services on a cost basis and consequently that has a negative impact on the margin.

Okay. So that number though should continue to rise as you do more joint ventures?

Yes, as we do more joint ventures, that will continue to rise.

Okay. It is a good thing (Inaudible) JVs. Last question can you give us a status on the JV opportunity out there?

We are pretty pleased with where we are in our pipeline and our prospect for getting to our goals this year. I think we said we would get another one to three new deals this year, and I feel pretty good about where we are in terms of being able to get this.

Okay, great. Thanks.

Your next question comes from the line of Chris Rigg with Susquehanna Financial Group. Please proceed.

Good morning. Thanks for taking my questions. Just wanted to follow up to A.J.'s first question on the CapEx spending. And I understand sort of big picture the acceleration with regard to the moratorium but does that continue at that level because you have jumped from 150 to 300 beds? And secondarily, can you give us a timing of when those beds will be coming online?

Chris, to answer the first part of your question the expenditures were really accelerated to make sure we made the dead line.

Okay.

We certainly don't think it will continue at that pace.

Okay.

And the timing of the time those beds we have had some beds come on this quarter and it will actually go through probably the first or second quarter of 2015 until we have those beds on board.

Is there any income statement impact in terms of a drag on earnings while you bring them up to speed?

There certainly will be an impact on earnings, but we have taken that into consideration in the guidance we provided to you.

Okay. I know, Bob, you talk the about the impact bill and it is still way out there, but does it all, the post acute bundling you have been focused on LTAC and in-patient rehab, outpatient rehab but at all broaden your horizons or are you fixated on the business you are in for the time being.

Yes, we are fixated on the businesses we are in, so it does not broaden our horizons in terms of looking at other business lines if that is the question. I think we feel as though we know with the LTAC criteria legislation we have good visibility on our LTAC division, our rehab hospital group we feel good about allocating capital there and growing and same with our outpatient rehab. The impact bill legislation really has not changed our focus nor is it likely to in the near to midterm.

Understood. One last one here, are you able to quantify the weather impact in the quarter at all?

Yes, we are, Chris. It was around $3.3 million.

Okay, great. And that would go straight to EBITDA?

That is correct.

All right. Thanks a lot.

Sure.

Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed.

Good morning. Thanks for taking my question. I think the stated update in the LTAC rule was about 0.8% would you expect that to be similar for Select or because of your patient mix would you expect it to be materially different from that?

Gary, we are evaluating that right now. There is a whole host of variables that go into that calculation. We have typically or historically been under that, whatever number they give we have been under that. You have wage rate index, you have rewaiting that takes place, so there is a whole host of variables. And we are going through that right now and we will give an indication over time as we come up with those answers.

CMS always gives that headline of what they think it is going to be and I have never experience it to be that. It is usually less.

That is helpful. And then any initial thoughts on the in-patient rehab role if you have had a chance to look at it?

No, not really. I don't really feel as though we can comment on that yet. It came out last night and rather than give a sound bite we really need to look at that. On its face it doesn't look like there is anything earth shattering to it but we really need to take a little bit closer look at it.

Okay. And then finally could you give some more color on some of the expanded services you mentioned in the contract therapy business?

Expanded services we continue to provide the same type of services. The only expanded service is more therapy per patient.

Okay.

So there has been no change in that business but just incremental service per patient

Got it , understood. All right. Thank you very much.

Your next question comes from the line of Whit Mayo with Robert W. Baird. Please proceed.

Marty, can you remind us do you have a restricted basket in your facility, and if so, where is it? I am trying to think about capital restrictions.

Sure, Whit. Currently we are at on the bank side we are at $32 million on the bond side we are about $72 million, but as you know that gets refurbished every quarter. So depending on certain assumptions you make you can take a look all the way up to 2016. At the end of 2016 it is going to be over $300 million.

Got it. My other question the LTAC world is relatively small, and I am sure, Bob, you have had several conversations with what you have called the low acuity providers I have, and I am curious what you are hearing from the industry. And one small public company has announced that they are going to be exiting that business. And I am just curious if you have anecdotes that you can share that gives us a sense of what others in the market are sort of thinking about these regulatory changes coming over the next two years? Thanks.

I don't know that I can add a lot to what you may have heard out there. As I said earlier, just looking at the data and looking at the information it is going to be an uneven impact. Everybody is I think going to have their own strategy about the way they are going to approach it. I don't really want to speak for the strategy that others are using or how they feel about their prospects because it is a year, two years out. So there is ample time for people to adjust. But I think the providers that have higher acuity now have a pretty significant head start on the process.

That is fair. I thought I would give it a shot. Thanks a lot, guys.

And we have no further questions. At this time, I will now turn the call back over to Mr. Ortenzio,for any closing remarks.

Thank you all for joining us, and we look forward to updating you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.