Select Medical Holdings Corp (SEM) 2016 Q3 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 third-quarter 2016 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, 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 the select medical plan, 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 Mr. Robert Ortenzio.

Thank you operator. Good morning everyone. Thanks for joining us for Select Medical's third-quarter earnings conference call.

Before I provide you with the specifics of the quarter let me address the reasons for the shortfall in both adjusted EBITDA and EPS for the third quarter. There were three drivers the Q3 shortfall all of which we believe are one-time in nature.

First, startup losses were $6.5 million higher than expected in our California rehab joint venture due to a delay in licensing approvals. As of September 20, we received all necessary licenses including Medicare deemed status at the California rehab and we're now seeing census grow nicely.

Second, we continue to bring the former kindred Hospitals in Cleveland we acquired in swap transaction last quarter in line with select teltec strategy of accepting LTACH compliant patients only. We incurred negative year-over-year variance of $6.5 million for Q3, but we're starting to see improvement in these hospitals. We'll also add that all four of select LTACHs in Cleveland, including the two hospitals acquired in the Kindred swap, are now part of an LTACH joint venture with the Cleveland clinic and we believe this joint venture is positioned to be a very successful partnership.

Third, we closed 3 LTACH hospitals in the third quarter and incurred $1.7 million in adjusted EBITDA losses in those closed hospitals. In total these three items which are one-time expenses represent a shortfall of $14.7 million. California rehab and Cleveland LTACH swap are moves that we made that we believe will create significant value for select in 2017.

I would like to say that despite our adjusted EBITDA and EPS shortfalls, we are pleased with the quarter from an operational perspective. But in the quarter all of our LTACHs have completed their transition to patient criteria and across all our hospitals we had a 99.9% compliant rate as of September 30. As expected, we saw a reduction of about 2.5 patients per hospital per day due to only taking compliant patients, which represented 8.7% reduction in our pre-criteria census compared to our post criteria census.

We also saw a 7.9% increase in our rate for patient day driven by our increase in case mix in our LTACHs. Our overall case mix index grew by 9.7% from 1.15 in Q3 of 2015 to 1.26 in the third quarter.

Our operational team has done a good job executing our LTACH strategy to only take compliant patients. In addition based on our experience moving to LTACH criteria over the past year, we are convinced that our strategy is the right one for select.

We're also very excited about our new rehab joint ventures and we expect them to be contributors to adjusted EBITDA in 2017. Our same-store rehab hospitals continue to do well and exceeded last year's revenue and adjusted EBITDA results. We're also pleased with the strength of our development pipeline for new joint ventures.

Our outpatient clinics had a good quarter and our integration of physiotherapy is proceeding according to plan. We have a very seasoned management team and our outpatient operations and we expect this business to continue to build on the platform we've established across the country.

Finally Concentra had another quarter of significant improvement and continues to meet or exceed our business plan. Concentra adjusted EBITDA exceeded performance in the same quarter prior-year by $15.3 million as we continue to see the benefits of our cost saving initiatives and focus on the Workers Compensation business. We continue to be very excited about the prospects for our Company as we move into 2017.

I will now provide you with some additional details and highlights for the quarter and then turn it over to Marty Jackson for some additional financial details before we open the call up for questions. Net revenue for the third quarter increased 3.2% to $1.05 billion compared to $1.02 billion in the same quarter last year. During the quarter we generated approximately 51% of our revenues from our specialty hospital segment which includes both our long-term acute care inpatient rehab hospitals, 24% from our outpatient rehab segment and 25% from Concentra.

Net revenue at our specialty hospitals decreased 3.2% in the third quarter to $544.5 million compared $562.3 million in the same quarter last year. The decline in net revenue was driven by a decline in Medicare patient days.

Overall patient days were 296,000 compared to 338,000 days in the same quarter last year. The decrease resulted from a decline in occupancy in our LTACH hospitals that have now transitioned to patient criteria as well as hospital closures and the effect of hospitals we exchanged with kindred.

The net impact of reduced days due to hospital closures in the Kindred swap was over 18,000 days. The decline in Medicare patient days was offset in part by an increase in our Medicare net revenue per patient day, principally due to an increase in patient acuity at our LTACHs now operating under patient criteria. Our average net revenue per patient day was $1,642 per day in the third quarter compared to $1,522 per patient day in the same quarter last year.

Net revenue at our outpatient rehabilitation segment for the third quarter increased 25.6% to $250.7 million compared to $199.6 million the same quarter last year. The increase is a result of additional volume from our physiotherapy clinics which we acquired during the first quarter this year as well as growth in our existing clinics. This was partially offset by the sale of our contract therapy business which also occurred in the first quarter.

For our owned clinics patient visits increased to over 2 million visits compared to 1.3 million visits in the same quarter last year. Our net revenue per visit was $102 in the third quarter of this year compared to $103 per visit in the same quarter last year. The slight decrease in net revenue per visit was a result of the acquired Physio clinics having a lower average net revenue per visit.

Net revenue in our Concentra segment for the third quarter was $258.5 million compared to $259 million in the same quarter last year. For the third-quarter revenue from our medical centers was $226.3 million and the balance of the $32.2 million was generated from on-site clinics, community-based outpatient clinics and other services. For the centers patient visits were over 1.9 million and net revenue per visit was $119 in the third quarter compared to 1.98 million visits at $114 per visit in the same quarter last year.

While workers compensation service visits were comparable in both periods we saw a decline in consumer health visits in the third quarter this year which is the result of our decision to focus our efforts on Workers Compensation services. Additionally the increase in revenue per visit was primarily due to an increase per visit for Workers Compensation services.

Overall adjusted EBITDA for the third quarter was $98.1 million compared to $84.5 million in the same quarter last year. With overall adjusted EBITDA margins at 9.3% for the third quarter compared to an 8.3% margin in the same quarter last year.

Specialty hospital adjusted EBITDA for the third quarter was $48.3 million compared to $53.7 million in the same quarter last year. Adjusted EBITDA margins for the specialty hospital segment was 8.9% compared to 9.5% in the same quarter last year. The decline in adjusted EBITDA and adjusted EBITDA margin was primarily due to start-up losses, losses on newly acquired hospitals and specialty hospital closures.

Start-up losses in the third quarter were $9 million compared to $3.1 million in the same quarter last year. And as I mentioned in my opening comments we incurred approximately $14.7 million in nonrecurring adjusted EBITDA losses in the quarter in our specialty hospital segment.

Outpatient rehabilitation adjusted EBITDA for the third quarter increased 34.4% to $32 million compared to $23.8 in the same quarter last year. The increase primarily resulted from our newly acquired clinics.

Adjusted EBITDA margins for the outpatient segment was 12.8%, in the third quarter compared to 11.9% in the same quarter last year. The increase in adjusted EBITDA margin was primarily the result of the divestiture of our contract therapy business, which historically had lower adjusted EBITDA margins than our outpatient clinic business.

Concentra adjusted EBITDA in the third quarter was $40.9 million compared to $25.6 million in the same quarter last year. Adjusted EBITDA margin was 15.8% compared to 9.9% in the same quarter last year. The increase in adjusted EBITDA and adjusted EBITDA margin was primarily related to the implementation of cost reduction initiatives.

Our reported earnings per fully diluted share were $0.05 in the third quarter this year compared to $0.22 in the same quarter last year. During the third quarter we had nonoperating loss of $1 million and a pretax loss on our early retirement debt of $10.9 million. Excluding the nonoperating losses on early retirement of debt and the related tax effects, earnings per fully diluted share would've been $0.06 in the third quarter this year.

During the third quarter of last year we had a pretax nonoperating gain of $29.6 million. Excluding the gain and its related tax effects, earnings per share would of been $0.08 in the third quarter of last year.

I will now turn it over to Martin Jackson to give some additional financial highlights for the quarter before we open it up the questions.

Thanks Bob. For the third quarter our operating expenses which include our cost of services, general and administrative expense and bad debt expense were $960.5 million compared to $941.4 million in the same quarter last year. The increase in operating expense is primarily due to the acquisition of Physiotherapy, which we acquired in the first quarter of this year.

As a percentage of our net revenue operating expenses for third quarter were 91.1% as compared to 92.2% in the same quarter last year. The 110 basis points decrease is a percent of net revenue consists of a130 basis points reduction in cost of services, a 10 basis points reduction in bad debt, which was partially offset by a 40 basis point increase in G&A.

Cost of services increased to $915.7 million for the third quarter compared to $900.9 in the same quarter last year. As a percent of net revenue cost of services decreased 130 basis points to 86.9% in the third quarter, this compares to 88.2% in the same quarter last year. The decrease is primarily due to a decrease in expenses relative to revenues in our Concentra segment as a result of cost saving initiatives we have implemented.

G&A expense was $27.1 million in the third quarter, which as percent of net revenue was 2.6%. This compares to $22.2 million or 2.2% of net revenue for the same quarter of last year. Our G&A function includes our shared services activities which has expanded as a result of significant acquisitions we have completed both this year and last year.

Bad debt as a percent of net revenue was 1.7% in the third quarter, compared to 1.8% in the same quarter of last year. As Bob mentioned, total adjusted EBITDA was $98.1 million and adjusted EBITDA margins was 9.3% for the third quarter. This compares to adjusted EBITDA of $84.5 million and adjusted EBITDA margin of 8.3% in the same quarter last year.

Depreciation and amortization expense was $37.2 million in third quarter compared to $31.5 million in the same quarter last year. The increase resulted primarily from the acquisitions of Concentra in Physiotherapy.

We generated $5.3 million in equity and earnings on consolidated subsidiaries during the third quarter. This compares to $6.3 million in the same quarter last year. The decreases is primarily related to the sale of naviHealth in which we owned a minority position last year in the third quarter.

As Bob mentioned during the quarter we had a pretax nonoperating loss of $1 million and a pretax loss on early retirement of debt of $10.9 million. We refinanced the Concentra second lean term loan during the quarter with proceeds from the incremental first lien, term loan and the transaction resulted in loss in early retirement of debt in the quarter. During the third quarter of last year we had a pretax nonoperating gain of $29.6 million related to the sale of naviHealth where we owned a minority position.

Interest expense was $44.5 million in the third quarter. This compares to $33.1 million in the same quarter of last year. The increase in the interest expense in the third quarter is primarily the result of additional borrowings related to financing the Physiotherapy acquisition, as well as an increase in interest rates related to our maintenance of selects credit facility in the fourth quarter of last year as well as the first quarter of this year.

The Company recorded income tax expense of $1.1 million in the third quarter and the effective tax rate for the quarter was 21.2%. Net income attributable to Select medical holdings was $6.5 million in the third quarter and fully diluted earnings per share was $0.05.

At the end of the quarter we had $2.65 billion of debt outstanding and $68.2 million of cash on the balance sheet, which included $8.9 million of cash at Select and $59.3 million of cash at Concentra. Our debt balance at the end of the quarter included $1.15 billion in Select term loans, $175 million in Select revolving loans, $710 million in Select 6 3/8 senior notes, and $644 million in Concentra term loans. This was partially offset by $52.1 million in unamortized discounts, premiums and debt issuance costs that reduced the balance sheet debt liability. In addition we had $20.9 million consisting of miscellaneous debt.

Operating activities provided $102.3 million of cash flow in the third quarter, this compares to $128.4 million in the same quarter of last year. The provision of cash flow in the quarter was primarily driven by net income and other non-cash items of expense and increases in accrued expenses and decrease in accounts receivable offset by decreases in taxes payable. Our Day Sales Outstanding, our DSO, was 52 days at September 30, 2016, this compares to 51 days June 30, 2016 and 53 days as December 31, 2015.

Investing activities used $31 million of cash during the third quarter, the use of cash was related to $38 million of purchases of property and equipment, and $1.6 million of investment in businesses, which were offset in part by $8.6 million in net proceeds from sales and acquisition settlements during the quarter.

Financing activities used $81.5 million of cash in the third quarter. The use of cash primarily resulted from $65 million in net repayments o f Select's revolving credit facility, net term loan payments and financing costs of $10 million. $3.8 million in net payments of other debts, repayments of bank overdrafts of $6.3 million and $4.5 million in distributions to non-controlling interest. Additionally in our earnings press release we provided revised financial guidance for calendar year 2016 this includes net revenue in the range of $4.25 billion to $4.3 billion, adjusted EBITDA in the range of $460 million to $480 million, and fully diluted earnings per share to be in the range of $0.80 to $0.90.

The update to our guidance for 2016 includes revised expectations in our inpatient rehabilitation joint venture hospital openings, the effects of the long-term acute care hospital swap transaction and long-term acute care hospital closures as well as expected affective tax rate for the full year.

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

(Operator Instructions)

Our first question comes from Frank Morgan of RBC Capital Markets.

Good morning. Now that the entire portfolio is under Criteria. I'm just curious if you could give us sort of an assessment of your observations about what you still see as opportunities out there or if you learned anything through this process that really gives you pause, and maybe where is sort of the same store growth rate potential that you see here going forward on an organic basis per census. I will start their.

Thanks Frank. This is Bob. A couple of observations. First, your first question what's the opportunity? The opportunity now is just to grow volume.

I mean I think the move into Criteria given various markets, various individual hospitals certainly had its challenges. I'm very pleased with where we are today having gotten all the hospitals in and the biggest opportunity is truly volume.

The second part of I think the opportunity set in the LTACHs is the what I will call the rippling through of competitors and others in the markets going into Criteria and trying to navigate perhaps the LTACH compliant population with the site neutral.

We continue to believe and see in some of our markets that this is going to be a very difficult environment, and Marty and I have said in the past that we think a year from now this is going to be an industry that looks very different and it's going be considerably smaller. I think that's the opportunity as well.

I think the other observations that take away from the work that we've done, is that the LTACH compliant patients are there in the market. It's one thing to do an assessment and believe that you see it through data analytics, it's another thing when you're operationally hearing from the operators and the patients are there. We need to continue to refine and put forth and market the quality high level, high acuity, programs, pulmonary programs, and get that word out and as we do that, I think that there's a place for us in this very specialty high end, high acuity, niche where we can be very successful.

So we're optimistic there. And also I think the calling of the portfolio, we've had some closures. We think that's pretty much to an end although over the next year you may see one or two and that's just going to be refining the portfolio. I think it's also an opportunity for us.

Going forward I think I would say that there's lots of reasons why hospitals will do well financially or not do well financially. And I think we're going to gradually move away from Criteria as being the driving force. As Marty and I look at the portfolio of LTACHs over the last couple of years, the top financial performers are not the same year in and year out over the last 20 years of the Company's history.

They change. They change for all kinds of reasons that don't really have anything to do with Criteria. I appreciate and understand the obsession with the Criteria and we've obsessed about it as well, but I think we're rapidly moving away from that to more normalized operations where we are just trying to drive volume.

Okay. Thanks for that answer, and then the decline in census that you referenced, the average decline per census per hospital. Was that inclusive of the results of those assets that were swapped, the Cleveland and Atlanta? And do you think you have an impact if they were included?

Yes, they did. They were included and yes they did.

And in terms of just the volume recovery there really what gives you confidence around kind of the timing and the speed of which you can see that senses rebuild?

You mean in the Cleveland area?

Yes, Cleveland and I guess Atlanta too.

Let me address Cleveland because I think that's unique thing, there's a couple of elements I like people to be aware of. When we did the swap, at closing it's a change of control. For Medicare purposes.

So under that scenario, you have an acceleration to Criteria and any change of control. So we were really faced with the facility's there in Cleveland that were not in any preparatory mode at all to go to a LTACH Criteria compliant patient population only. Because that's generally not a Kindred strategy.

We had the challenge of having Criteria be in place the day we closed and in a facility where we weren't able to do literally any preparation to move to our model, and that's what really caused I think the particularly difficult challenge there because as you know, for our hospitals, we had been doing planning a year in advance with a very specific protocol for preparation to move into Criteria and in those hospitals, the impact was not as great in Atlanta that it was, it was pretty significant in Cleveland.

Now let's say on the other side of that, would we have done it differently? The answer is probably no because we were able to turn around and immediately put those two LTACHs and the two LTACHs that Select owned into a joint venture with Cleveland Clinic. So now with one of the most prestigious health systems in the country, we have a joint venture that includes four LTACHs and a rehab hospital and potential growth from there. So you know we still feel pretty good about where we are there.

Any color on like where you are today there? Have you already started to see the census build back on the compliance side?

I will say it's better than it was for the third quarter.

It is growing, Frank.

And a lot of concern that Kindred is coming in -- going under Criteria. There is this fear that there will be some confusion the marketplace but would you just remind us what percentage of market over that you really have with Kindred in your overall LTACH portfolio? And then give me a comment on the 25% rule legislation and I'll hop off.

Regards to the overlap of Kindred, it's less than 25%.

And I think the risk of market confusion will not be great because, and I have no other information other than just my observation, what I hear as you guys do, those hospitals may be operating pretty much under the same model as they have with a combination of taking the LTACH compliant patients as well as the site-neutral patients. It's possible that even those markets we won't really see a dramatic difference.

The difference was really in our hospitals where we stopped taking site neutral patients at the time we went in so that's really the change and I think we've seen where we've come through on that.

Your last question Frank, which was the 25% rule, I don't want to say I'm optimistic but I will say that there is at least the prospect of 25% rule relief in lame-duck session. There is a lot of factors that are not in our control. What we do have is a legislation in the House that has been approved, and a companion bill in the Senate. So I feel that if there is legislation in lame duck that is something other than just a clean CR, we have a chance of being included.

There is not opposition to relief on the 25% rule. But it's a relatively short time frame in lame duck for things to get done and we will have to see, so I certainly wouldn't say that our prospects are greater than 50/50.

Okay. Thank you.

Chris Rigg of Susquehanna Financial Group.

Good morning guys. I guess it's still not 100% clear to me. You spike out the $15 million of sort of transient costs in the quarter, but the midpoint to midpoint guidance reduction is $45 million. What is going to persist into the fourth quarter in terms of charges that were not assumed in the old guidance? Thanks.

Chris, what we've done is we've sat down to talk to the operators, took a look at where we thought fourth quarter would be, and when we put the guidance out there we were surprised by some of the startup losses, the size of the startup losses and the size of the Kindred swap and we put some of that into the fourth quarter. I would guide from the midpoint to the high end of the guidance, but we put that out there basically from a conservative perspective.

And just one to get a little more granular on that, I went back and looked at some of your comments, I think this is on a fourth-quarter call, you guys initially coming into the year said you thought that, yes there would be some startup costs but that some of the JVs that came online last year would neutralize that.

So your initial guidance for the year assumed a net zero impact or roughly zero. Your had about $19.5 million through the third quarter. What is that number going to end the year at because I know you're not going to be running near sort of normalized occupancy at least at CRI. I'm just trying to get a sense for what the drag is specifically on the startups?

It's a good question, Chris. Let me answer your last question first. We anticipate the full year startup losses to be probably somewhere in the $22 million to $22.5 million range, so a couple million dollars more in the fourth quarter.

And the other point to remember is CRI is a very unique rehab hospital for us. It's about triple the size of our typical rehab hospital. That was supposed to open up in January/February timeframe. And because of regulatory issues and getting the necessary deemed status that we did not get until September 20, that was one of the major reasons why you saw the types of losses you've seen.

Okay. And then one other clarification here on the swap impact, is that the impact entirely for 3Q and then you'll have some more into the fourth quarter or is that impact relative to the old guidance?

No. The impact is really taking a look at Q3 and there will be some impact in Q4. It will not be nearly the size that you saw in Q3 but we anticipate that you still going to see some negative impact going into Q4.

And then just one last one here. I apologize if I missed that. We look at the occupancy stats as we could calculate them, based on what you provide and what you disclose in the 10-Q, that includes these ERPS that have very low census at the beginning. Can you give us the LTACH occupancy year to year and the compliance rate? I think you said 99% but I'm not sure.

Yes. The compliance is 99.93%. And the LTACH occupancy rate for the quarter was 61%.

And that's the average for the quarter or where you ended the quarter once you had at least some of the facilities phased into the new reimbursed catalog?

That was the average for the quarter. So yes, and to your point I think I know are you going. To your point, yes it actually got better. Later on in the quarter. What we typically see as we see July and August census be down and start to grow in September and then really starts to grow in the fourth quarter.

Okay. Thanks. I'll leave it there.

Gary Lieberman of Wells Fargo.

Good morning and thanks for taking my questions. A couple of questions. The revenue-per-patient day came down in the LTACHs.

Can you talk about that? The acuity I assume was higher because you had all the hospitals being compliant. Can you talk about what happened in the quarter and then can you maybe talk about what your expectations would be for revenue-per-patient day in the fourth quarter and maybe even the first quarter.

Gary, the revenue-per-patient day on a sequential basis did come down but remember that's not per-patient day for LTACHs. That's revenue-per-patient day for specialty hospitals.

And the other thing that we typically see in the third quarter, we see case mix index come down a little bit just because you're not seeing the pulmonary patients that we typically see first and second quarter and fourth quarter for that matter.

And then in addition to that, you'll see as a mix in a specialty-hospital segment you'll see additional patients on the rehab side. And the rehab-per-patient day rate is lower.

Okay. That's helpful. And then in the past you've talked about a difference in the reduction in the average daily census for the large hospitals versus the small hospitals. I think you differentiated between the hospitals above 50 beds and below 50 beds. Do you have any data points on how that trended?

What we saw is we saw a reduction, I think last quarter we talked about a 1.4 ADC reduction in those hospitals under 50 beds. Today it looks like it's about 0.9 and in essence on the larger hospitals we haven't really seen that much of an impact yet.

Do you think you'll start seeing an impact in the fourth quarter or are there additional operational changes that you need to make or additional marketing or any other additional changes that you need in order for that to start to come down?

Yes, I think in the fourth quarter you'll see it will be a little bit better but I think what you'll do is you'll really see it over the next couple of quarters.

I think the thing that Bob had mentioned early on is we're confident that the patients are there and it's really making sure that we are working with the case managers, discharge planners, discharging physicians at all the short-term acute-care hospitals to make sure they understand exactly the types of care, the types of high acuity care that we provide to their discharge patients.

And then maybe finally you've talked about in prior quarters keeping the staff at 100% because of the labor issues and not wanting to have to go back and rehire staff once you're at full capacity. I assume you're still doing that. Can you maybe quantify the impact there and what kind of operating leverage we might see in the fourth quarter or first quarter from that?

Yes, I mean it's a great question and yes you're correct, we continue to do that. If you take a look at the cost-per-patient day, the S, W and B cost-per-patient day, it's little bit north of 10%.

The actual annual increases to wages, for nurses is about a little bit higher than 3% so the balance of that almost 7 points is associated with not flexing down the staffing. So as we talked about in the past, once we you know over the next couple of quarters we will determine what we think is the long term census rate in each of the hospitals and once we make that determination, we will hopefully either see census grow, or we will see a flexing of staff down.

Got it. That's very helpful. Thank you.

Kevin Fischbeck of Bank of America.

Okay. Great. Thanks. Of the three issues, could you provide a little more color on the third one? We see you've closed three LTACHs and it was $1.7 million of losses. Is that because they were earning money last year and you got rid of those but not earning money this year or there was closing costs associated with that? It wasn't clear to me exactly what that was.

Actually closing costs, Kevin, it's like $1.678 million, and it was really accruing up some potential lease payments too, and then also on the termination of employees we're paying out additional compensation to them. In many cases you're paying out money, so that's actual costs.

Okay. So you weren't planning on closing these LTACHs until after Q2 you decided to do that, so what was the reason for that?

Because we're --

General evaluation of where they were in the marketplace and their prospects, their earning power you know, the normal things that you would consider to discontinue operations.

Okay. I still am -- come back with another question about the items in the quarter and then the reduction of guidance.

If I hear you correctly, you saying that $15 million of what you do is a one-time item in the quarter if the startup losses in California go away, but the Kindred asset [lot] is still going to be a drag into next year. I guess these closing costs probably go away, but that only puts you at $15 million -- sorry, $20 million hit between Q3 and Q4 for these three items and if you did that, you're saying hey, we feel better about the midpoint of guidance to the higher end of the guidance so the reduction looks like $45 million, but it's really more kind of like $20 million or $25 million. Is that basically how you think about it? Is that the right way to think about it?

I think that's a fair assessment.

Okay. So you put a range around a number but you feel better about the high end of the range but that's not really $45 million, it's closer to these one-time items. That makes sense.

So when we think about -- kind of the thing that's surprised us so far this year is Concentra. Is what you've done at Concentra so far sustainable. Should we expect another good year of growth? You just get there faster or there's still a lot of runway for Concentra to show improvement?

From a Concentra perspective, I think the operators down at Concentra have done a terrific job getting to the point where they are today. I would not -- right now we're sitting at for the full year we could expect something north of 14% margins.

I think that's what the margins are going to be moving forward. They may inch up to 14.5%, maybe even 15% but I wouldn't expect much growth after that. We have to grow the top line now. And that's what the focus of the operators are.

And what do you think a long-term top-line growth outlook would be for that?

Well, top-line growth I think from a buying perspective you're probably looking at 1% to 2% and then pricing is probably in the 2.5% to 3% range.

And then going back to the Criteria for a second, you mentioned that over the next two or three quarters you're going to evaluate kind of where the census is and whether you think census is going to be able to ramp or whether you need to flex down staffing. I guess what is that two- to three-quarter period based on? Do feel like at that point anyone who will have closed will have closed by then?

And so the competitive landscape will be settled or how do you think about that drawing out, because I guess you've got some hospitals, so competitors are saying look were going to keep doing what we're doing affects almost take more non-compliant patients during this half-year phase, and then we'll deal with when that second half of the rate cut happens in 2018 then. So I guess there's always the potential that there will be even more disruption in 2018, so how do you kind of balance the 2018 opportunity versus what you expect to see developing during 2017?

This is Bob. At this point I think all of the above. I mean, we try to lay out that now that we've gotten through Criteria, which was the big risk, now it's just operation. When you have 103 hospitals across 40 states, it's always a mixed bag.

This is the tough part about the business. You're running each hospital and you're looking at what's going on in that market, and you've got obviously all of the factors that can contribute to whether that hospital is more or less successful, staffing issues are certainly there, physician concerns, marketing, shifting in acute-care discharges, where they come from, remember these are for all very dynamic markets.

So it's difficult to predict, so we say we think that we have good operating teams that have gotten us through Criteria and now it's just a question of building the census and actually running the hospitals. You can overlay upon that what's going on is disruption in the broader LTACH industry. To me I think that's likely to be more I think that's more likely to be positive than negative.

So you're saying is going to be based upon getting that volume that you're always thought was out there is not really predicated on taking market share, taking market share would be above and beyond that. Or competitors closing would be above and beyond that?

I'm sorry, say that again?

Your view about what your census can be over the next year is more about you capturing on the market opportunity of LTACH volume in the market. That's for whatever reason you're saying they're coming to LTACH before? It's not really predicated on competitors closing and you having to get their volume to make it all work?

We're not really counting on that. I'm saying that's an opportunity. We're not saying to be successful we need to have this disruption. I've given commentary on what I think is going to happen in the industry. I honestly don't know.

Maybe some of the smaller competitors and nonprofits will adapt to Criteria much better than I think they will. So that's been generally my response to people asking me what I think is going to happen in the industry.

But we're certainly not counting on that to be the reason that our hospitals are more successful. Although my personal view is I think that's likely to be more positive than negative, what's happening in the industry.

You guys had to close some sites, makes me think that the industry is going to be closing at least that many. All right. Thanks for your help.

David Common of JPMorgan.

Yes, good morning all. Thank you. I was really interested that you mentioned the ADC was actually higher in than last months of the quarter.

Even though I guess there were more LTACHs on the Criteria system. To the extent do you see comfortable if you can just share with us what the occupancy and ADC might be for the month of September, and if I'm not pushing my luck, October.

Yes, David you are pushing your luck.

How about just qualitatively, are we up in October versus the third quarter?

Historically you've always seen an increase in the fourth quarter as far as occupancy rates over the third quarter. We don't see anything that will change that.

Fourth quarter versus third quarter to be up.

That's correct.

And then two other questions. Could you just I'm sure you haven't set your budget yet for next year point could you just remind me with your new size of Company, what would maintenance CapEx be and should we think of growth CapEx next year? If you'd just say it's $10 million, $20 million, $30 million. Just a rough sense of non-maintenance CapEx for next year?

I think maintenance CapEx for next year including Concentra will probably be in the $100-million range.

$100 million. And are you looking to have more projects like big growth CapEx?

We're looking down the pipeline that we have on the JV development is very strong. Now having said that, we do not anticipate another CRI JV, that's a once-in-a-decade type of JV. We think on a project-by-project basis the CapEx is going to be lower.

Down year to year on CapEx?

I hesitate to say. We think that the returns that we're able to achieve on the joint ventures are very significant and to the extent that we're getting more than two and to the extent that we're getting five or six, we are going to do those. If we're doing those types of JVs and they require CapEx, we're going to put that in.

Fair enough. And then just one more budgeting item on the cash line. If you can give us a sense of rough timing and amount to the extent that you can on your next planned installment payment of the 49.9% Concentra that you did not initially acquire?

Sure. You're basically talking about the put and call with WCAS?

Right.

The way that was structured, David, is that the first put comes due at on the end of the third year anniversary of the acquisition.

The acquisition was June 1, 2015 so that would be June 1, 2018, and then the mechanics are such that WCAS would request an evaluation be done. We would go through those mechanics I would anticipate that the earliest you would see any type of payment would be the fourth quarter of 2018, so that's a third of the 49.9% in 2018, a third in 2019, and then one-third in 2020.

And also in 2020 Select has the ability at that point to call the outstanding balance so that's the way the mechanism works.

Fair enough. I was a year ahead of myself. So thank you for that.

Whit Mayo, Robert Baird.

Might just stay on cash flow for a second. This year's been a particularly strong 4Q, seasonally is softer I believe. Is there good range to think about for this year just in terms of cash flow from ops and then anything unusual in this year that may not recur next year?

No. I mean fourth quarter typically pretty good. It's really the first quarter from a seasonality perspective that we see a dip.

Typically first quarter is negative. I think this year it wasn't because we had the proceeds from the acquisition of Contract Therapy but normally that's a down quarter. Fourth quarter is typically pretty good.

Non-controlling interest went over this quarter I'm presuming that's just losses on the joint venture is running through that line. Is there anything else that's impacting that?

That's correct. It really is just a loss. You can see that coming through on -- it's really a function of the startup losses.

Maybe one on just the LTACHs. When you look at your top maybe 10 to 15 markets and if you draw a big circle around the service area and then look at the other LTACHs that are drawing referrals within that area. What is the vent in ICU, ICU mix look like with your competitors?

We all presumes it's a little shakeout in your favor, but is there any data you have within the market that supports the thesis? And I recognize it's all very dynamic and really a moving target so maybe this is not even a relevant question but I just thought I'd throw it out there and see what observations you made.

It's a great question. We don't specifically have detailed data on high DRG.

What we can do is we can really take a look at the industry case-mix index which is in that $103 million, $104 million range and we take a look at if you take a look at Select and then also Kindred which represents about 50% of the LTACH beds, our case-mix index is in that north of $1.2 billion which gives you a good idea. Most of the other players are below $1 billion, which tells you they're not really focused on those higher acuity types of DRGs.

Okay. That's helpful. And then one last one just on Concentra, it certainly sounds like it's tracking well above your plan. What you attribute the majority of the upside relative to your budget?

It really is expediting the synergies, it's what has really occurred. And again, I can't give enough credit to our operators down at Concentra. They've done a fantastic job. Executing on those synergies.

And in essence, that's what you're seeing. On the top line the revenue was flat and it's really coming from expense reductions. I know that the operators are really focused on growing the top line, making sure that their on all the appropriate panels and then funneling the visits through those panels.

Awesome. Thanks.

A.J. Rice of UBS.

Hello everybody. Just a couple of things.

Just following up on the non-controlling interest question. So the fact that you got the startup losses this year that swings back you mitigate some of that next year so that non-controlling interest you expect that to swing back commensurate with whatever happens on the startup losses, is that right?

That's correct, A.J.

The $22 million to $22.5 million of startup losses this year is there anyway to size what that looks like next year. Is there any spillover at all into next year from the current projects?

Is there sort of a run rate on startup losses in the normal year that you would think we should consider? How do we think about the drag this year versus what it could look like next year. And then also, I guess to the extent that the big project swings positive, any early thought about how much of a swing you can see on that?

Yes. We certainly have A.J. There's basically four startup projects we have going on right now and have incurred startup losses which are CRI, Cleveland Clinic, TriHealth, and Ochsner and what we anticipate is we're going to see a swing in pretty short order on CRI, I would anticipate probably by first quarter next year you would see breakeven there. I think you'll see breakeven on the Cleveland Clinic side, TriHealth maybe a little bit of a drag and I think you'll see some additional drag associated with Ochsner.

Now, having said that, there is also as we talked about on the CapEx there's a number of development projects that are in hand and we think that we'll see some additional ones next year and there will probably be some losses associated with those. At this point in time you can't predict that.

Since the CRI one is so big is there, I know it's early but, is there any thought about what it might contribute next year?

We have a pretty good idea of what it can contribute. And it's at a minimum we're going to see a flip from -- it will be a positive contributor and I think that their contribution to that $22 million was probably in that $15 million, $16 million range. Just by that alone you're going to see that flip.

And then just I just want to make sure on the Kindred comments, I know you made a comment that the impact was less favorable than you thought so some of that is going to sustain.

I just wonder is there any swing on that? Is it sort of sustain at the run rate right now or is there something about it that you say will carry into the fourth quarter, how about into next year? Will there be any -- ?

We think it will be positive come next year. And again, I think the way you ought to think about both the Kindred swap as well as the startup losses that we've occurred this quarter. You ought to think about those in terms of investments. When Bob and I take a look at these projects, these are very good projects, that we would do all over again.

To the extent that they exceeded again in the case of this quarter. $6.5 million in startup losses associated with CRI and then $6.5 million on the Kindred swaps. Those are projects that we would do all over again.

Marty raises a good point. The losses on CRI and the Cleveland ones are disappointing but what kind of investment would you make to be in with UCLA, and Cedar Sinai in the LA market. Or Cleveland Clinic in the Cleveland market where you really put yourself in a position to have very significant market share in the businesses that we're in, that's the LTACH and the rehab. And the answer is we would make these investments.

We got a little whipsawed by the regulatory environment in California and in the change of ownership and acceleration in Cleveland but those things washout after a period with those partners. That's where we want to be. That's where we think our future is is being with these very large systems and it's proven out if you look at Baylor and SSM and Penn State and Emory, I think we have a track record that suggests that these are very good investments.

That's great. Thanks a lot.

There are no further questions. I will turn the call back over to Robert Ortenzio for any closing remarks.

No closing comments. Just thanks for joining us and we will update you in the next quarter.

Ladies and gentlemen thank you for participating in today's program. You may now disconnect.