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Operator: Good morning, and thank you for joining us today for Select Medical Holdings Corporation’s earnings conference call to discuss the fourth quarter and full year 2024 results and the company’s business outlook. Speaking today are the company’s Executive Chairman and Co-founder, Robert Ortenzio, the company’s Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson, and Executive Vice President and CFO, Michael Malatesta. 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 Select Medical’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 Mr. Robert Ortenzio.

Robert Ortenzio: Thank you, operator. Good morning, everyone. Welcome to Select Medical’s earnings call for the fourth quarter 2024. The fourth quarter concluded a very busy year at Select. On November 25th, we completed the spin-off of Concentra via special stock distribution to Select Medical shareholders. I would like to thank all of our colleagues at Select and Concentra for their tremendous dedication and hard work to complete this transaction. The historical results of Concentra are now reflected as discontinued operations in Select’s consolidated financial statements. We will focus our results for the fourth quarter on the remaining three lines of business, which exclude Concentra. Also, during the quarter on December 3rd, we completed a refinancing of $1.6 billion of Select Medical’s outstanding debt.

We issued $1.05 billion in new seven-year term loans and $550 million in six and a quarter senior notes due 2032. We used the proceeds together with cash on hand to repay our then-existing $373 million in term loans and $1.225 billion in senior notes due August 2026. We also paid related fees and expenses associated with the financing. The interest rate on the new term loans is SOFR plus 2%. In addition, we extended the maturity of our revolving credit facility to 2029 and increased the availability on the revolver from $550 million to $600 million. A credit agreement leverage was 3.18 times at December 31st, 2024. On the development front, we added 94 inpatient rehabilitation beds in the fourth quarter. We acquired a 50-bed inpatient rehab hospital in Oklahoma City on December 10th with our joint venture partner SSM.

We also opened two neuro transitional units with 12 beds each, one in Dallas with our joint venture partner, Baylor Scott and White, and the other in Dublin, Ohio with our joint venture partner, OhioHealth. Currently, with the opening of the Dublin Neurotransitional Center, we also added 20 rehab beds to the Dublin Rehab Hospital, which is also part of our joint venture with OhioHealth. As mentioned on our last call, we have additional development projects in various stages for the inpatient rehab division, which I will summarize again. In January, we opened an acute rehab unit in Madison, Wisconsin with 18 beds. In Q2, we plan on opening a 45-bed rehab hospital in Temple, Texas, as well as our second hospital with UPMC, 20 beds, in Central Pennsylvania.

In Q3, we will open our fourth rehab hospital with the Cleveland Clinic in Fairhill, Ohio with 32 beds. In Q1 of 2026, we plan to open our fourth rehab hospital as part of our joint venture with Banner, in Tucson, Arizona, which will be 58 beds, and a new freestanding 63-bed rehab hospital in Ozark, Missouri with Cox Health Systems. In Q4, 2026, our new 60-bed rehab hospital in Southern New Jersey, the Baccarat Institute for Rehab, in partnership with AtlantiCare, is scheduled to open as well as a new 68-bed facility in Jersey City, New Jersey branded as CATFLOR. Between the specific projects just mentioned as well as some other smaller expansions and new acute rehab units in existing hospitals, we plan to add 481 additional beds to our operations in 2025 and 2026.

The additional beds will consist of 455 inpatient rehab beds, which includes 68 non-consolidating beds and 26 long-term acute care hospital beds. There are also a number of other opportunities under evaluation that would further increase our Select Specialty Hospital footprint. This quarter, our outpatient rehab division added three de novo clinics and four clinics through acquisition. This was offset by the strategic closure or consolidation of 18 locations with limited growth potential. This provides an opportunity to optimize resources when serving our patient population and targeted demographics. Now I’ll turn to our financial results. Overall, we had another strong quarter with all three lines of our divisions exceeding prior year revenue in the fourth quarter, with a combined revenue increase of 8%.

Adjusted EBITDA also grew by 4% from $111.8 million to $116 million. The three remaining divisions returned impressive growth year over year. For the full year, revenue grew from continuing operations with 7% and adjusted EBITDA growth was 14%. Adjusted EBITDA from continuing operations was $510.4 million with a 9.8% adjusted EBITDA margin compared to $446.1 million and a 9.2% margin in 2023. We are very pleased with Q4 performance of our critical illness recovery hospital division with a 6% increase in revenue, a 10% increase in adjusted EBITDA, and a 4% increase in adjusted EBITDA margin compared to the same quarter prior year. Our occupancy rate increased from 66% to 67% compared to prior year Q4. The rate per day increased by 7%. Our adjusted EBITDA margin was 10.5% for the quarter compared to 10.1% in prior year Q4.

Critical owner’s salary, wages, and benefits to revenue ratio was 57%, an improvement of 1.2% compared to prior year Q4. As we have mentioned previously, we have seen nursing agency rates stabilize and utilization return to pre-COVID levels. Our utilization of agency nurses remained the same as prior year Q4 at 14%. Nursing sign-on incentive bonus dollars are again lower than prior year, showing a 15% reduction for the fourth quarter and a 20% reduction year over year. We continue to expand our inpatient rehab hospital division with three additional facilities and a 13% increase in revenue when compared to prior year Q4. Adjusted EBITDA declined by 6% and adjusted EBITDA margin was 21.2%, which is lower than the prior period margin of 25.5%.

The primary reason for the reduction of EBITDA compared to prior year is related to startup losses at our new facilities, integration costs related to our acquisition in Oklahoma City, and a drop in referrals from one of our key partners that was impacted by Hurricane Helene. Thus far in Q1 of 2025, referrals from this partner are back to normal. Average daily census for the entire rehab division increased 3% and our rate per patient day increased 6%. Our occupancy of 81% was 4% lower than prior year of 85%, which is primarily a result of our new hospitals. Our outpatient rehab division continues to improve from prior year, with increases in all areas for the final quarter of 2024. The division saw an increase of 7% in revenue, 4% in patient volume, 2% in net revenue per visit, and 18% in adjusted EBITDA from prior year Q4.

Net revenue per visit increased from $100 prior year Q4 to $102 in Q4 this year. With the continued improvements in commercial rates despite declines in Medicare reimbursement, the outpatient division’s adjusted EBITDA margin increased from 7.5% to 8.3% as the team continues to focus on improving patient access, productivity, and staffing. We were able to see positive results despite two hurricanes, Helene and Milton, in the fourth quarter of this year impacting a number of our southern outpatient markets. We believe the negative EBITDA impact to be slightly over a million dollars with, thankfully, no material property damage or extended clinic closures. Our dilution loss per common share from continuing operations was $0.19 for the fourth quarter compared to earnings per common share from continuing operations of $0.12 in the same quarter prior year.

Adjusted EBITDA adjusted EPS from continuing operations was $0.18 compared to adjusted EPS of $0.12 for the same quarter prior year. Adjusted EPS excludes the loss on early retirement of debt, the one-time acceleration of stock comp expense, and cost related to the Concentra transaction. For the full year, earnings per share from continuing operations was $0.51 compared to $0.46 per share in the prior year. And adjusted earnings per share from continuing operations was $0.94 compared to adjusted EPS of $0.54 in the prior year. In regards to our allocation of deployment of capital, our board has declared a cash dividend of $0.0625 per share payable on March 13th, 2025, to stockholders of record as of the close of business on March 3rd, 2025.

This past quarter, we did not repurchase shares under our board-authorized share repurchase program. We will continue to evaluate stock repurchases, reduction of debt, and development opportunities. At this point, I’ll turn it over to Marty Jackson, who will continue to provide some details.

Martin Jackson: Thanks, Bob. Good morning, everyone. I will begin by providing additional details on the progress we continue to make regarding labor costs with the critical illness recovery hospital. As mentioned above, we believe that the cost and utilization of agency nurses has normalized. Overall, our SW and B as a percentage of revenue was 56.9% this quarter, which has decreased from 57.6% in Q4 of the prior year. The improvement in the margin was driven by controlling internal labor costs and an increase in the net revenue per patient day. Nursing sign-on and incentive bonus dollars decreased by 15% from Q4 of the prior year, from $7.4 million to $6.3 million. We are pleased with the continued progress we have made in regards to labor costs, and critical illness finished the year with SW and B as a percentage of revenue at 55.9% compared to 57.2% in 2023.

Moving on to our financials, at the end of the quarter, we had $1.7 billion of debt outstanding and $59.7 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.05 billion in term loans, $105 million in revolving loans, $550 million in six and a quarter senior notes, which are due 2032, and $26.3 million of other miscellaneous debt. As previously mentioned, we ended the quarter with net leverage for our senior secured credit agreement at 3.18 times. As of December 31st, we had $453.3 million of availability on a revolving loan. The interest rate on our term loan is SOFR plus 200 basis points, and this matures December 3rd, 2031. Interest expense was $28.6 million in the fourth quarter. This compares to $40.3 million in the same quarter prior year.

The decrease in interest expense was due to the reduction of Select’s debt resulting from the Concentra IPO and related debt transaction in the third quarter of this year. Using the proceeds of these transactions, we were able to prepay $1.6 billion on the existing term loan and pay down the revolver balance. For the fourth quarter, operating activities provided $125.4 million in cash flow. Our day sales outstanding, or DSO, for continued operations excluding Concentra, was 58 days at December 31st, 2024. This compares to 55 days at December 31st, 2023, 60 days at September 30th, 2024, and 62 days at March 31st, 2024. We continue to see improvement in our DSO every quarter as the claims processing backlog that resulted from the Change Healthcare cyber incident earlier in 2024 resolved itself.

Investing activities used $74.2 million of cash in the fourth quarter. This includes $63.4 million in purchases of property and equipment, and $10.8 million in acquisition and investment activity. Financing activities used $183 million of cash in the fourth quarter. The use of cash included all the net financing transactions described above, as well as cash transferred to Concentra at separation. Additional activity included $16 million in dividends of our common stock, $20 million in repurchases of common stock, $25 million in net repayments on other debt, and $18 million in net distributions in purchases of non-controlling interest. As stated previously, we did not repurchase any shares under our board-authorized repurchase program this quarter.

The board-approved share repurchase program remains in effect until December 31st, 2025, unless further extended or earlier terminated by the board. We are issuing our business outlook for 2025 and expect revenue to be in the range of $5.4 billion to $5.6 billion. Adjusted EBITDA is expected to be in the range of $520 million to $540 million. And finally, adjusted earnings per common share is expected to fall in the range of $1.09 to $1.19. Capital expenditures are expected to be in the range of $160 million to $200 million. This concludes our prepared remarks. At this time, we would like to turn it back to the operator to open up the call for questions.

Operator: And wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Justin Bowers with Deutsche Bank.

Justin Bowers: Hey. Good morning, everyone. So I think there’s a little confusion out there in the market because of what’s in and out of consensus and Concentra’s, you know, partially still in the numbers. Just to level set for 2025, I’m arriving at the midpoint of revenue growth of, call it, 6%, EBITDA growth of 4%, and then EPS growth of 6%, and a Q4 exit at, call it, 3.18 turns net leverage. Is that, are those sort of the right metrics here?

Robert Ortenzio: Yeah. Justin, hold on just for a second. We’ll go through the calculations to make sure that your numbers are correct. But as we do that, let me address you. I’m glad you brought it up. We do believe that there’s some significant confusion in the marketplace at this time. And I think what the issue is, I think a number of people have not removed Concentra from consensus. So, I mean, if you take a look at, as you know, Concentra had announced pre-announced their numbers. If you take a look at those numbers on an annual basis, you would have, on a revenue basis, north of $7 billion, $7 billion and $87 million, which exceeds consensus by 8%. On an EBITDA basis, you would have $887.4 million, which exceeds consensus by 6%.

And I’ll also point out that it exceeds our, if you recall, we gave annual estimates. It exceeds those estimates on both revenue and EBITDA, the top of the revenue and the EBITDA line. So from that perspective, yes, there is some confusion.

Justin Bowers: Alright. So on a consolidated basis, go ahead.

Robert Ortenzio: Yeah. The combined revenue increase that we have is about, oh no, we’re talking about 2025. Yeah. We’re talking about 2025, so we’re gonna have to get this calculation. So go ahead with your question.

Justin Bowers: Okay. So it’s just going back to all the development. I mean, this is the most active that Select has been, and company history, frankly, with all the development activity. You’re increasing your IRF bed count by, you know, north of 30% over the next two years. Can you remind us how those facilities sort of mature? And, you know, also ballpark for us, sort of the number of startup costs maybe in the fourth quarter and 2025 as well?

Robert Ortenzio: Yeah. That’s a very good point. And you’re right. I mean, we’re north of 30% increase in beds over the next 18 months. And by January, that’s really having a dampening effect in particular on the inpatient rehab margins for 2025. In which you’ll see is that they actually, because of the model that we have, the joint venture model, they mature pretty quickly. So you can expect to see those turnaround and see some very significant double-digit EBITDA growth in 2026 and 2027.

Justin Bowers: Okay. That’s helpful. And then, you know, with Romainco, I’m just doing some math here on the development activity. I’m sort of arriving at, like, a new growth algo of, you know, top-line growth, you know, mid-single digit plus, you know, EBITDA growth probably up in that, you know, high singles. And then, you know, EPS and free cash flow growth well into per share, you know, well into the double digits before, you know, really deploying any of the excess free cash flow. Is that the right neighborhood?

Robert Ortenzio: Yeah. I think that sounds good. Model over the next three years or so? I was, you know, the way I like to take a look at adjustment, I’d like to take a look at, you know, off of 2025, I would expect to see, you know, double-digit EBITDA growth, you know, in, you know, I think in the teens range because of all the new beds coming on board.

Justin Bowers: Okay. And that’s consolidated?

Robert Ortenzio: That’s just for the inpatient rehab side. And your segment.

Justin Bowers: Okay. Alright. Okay. Yep. Yep. Got it. You know, we also expect, you know, I would think on the in pay or on the LTACH side, you should expect some pretty slow growth there. I mean, I wouldn’t expect low single-digit growth. And then on the outpatient side, I would also expect to see some double-digit growth on EBITDA in 2025 and 2026. Alright. That is helpful. I will jump back in queue. Thank you.

Robert Ortenzio: Thanks, Justin.

Operator: Our next question will come from the line of Ben Hendrix with RBC Capital Markets.

Ben Hendrix: Hey. Thank you very much. I appreciate the color on your refinancing and year-end leverage. But acknowledging that there’s been some confusion and kind of post-spin, but maybe you can give us an idea of your kind of go-forward post-separation leverage targets, how you’re thinking about the gearing for this, kind of where we are versus the kind of the optimal debt load. Thanks.

Robert Ortenzio: Yeah, Ben. Thanks for the question. Our expectation is, given the high activity in particular in the inpatient rehab side, I mean, we expect to remain in that 3 to 3.1 times for 2025 as far as leverage is concerned. But we would expect to be well below that come 2026 and beyond.

Ben Hendrix: Appreciate that. And just a follow-up, a question on the inpatient. You know, it looks like margins were a little lower this quarter. It sounds like there, you know, there were some development costs in there. And maybe, were there any other kind of headwinds transitory or otherwise, that may have kind of caused a little bit of a depression on the IRF side this quarter versus the last several? Thanks.

Robert Ortenzio: Yes. At one of our hospitals, one of our referral sources was impacted by Hurricane Helene. And their census was suppressed. So, well, you know, correspondingly, our census was suppressed at that facility. What we’ve seen in 2025 is census is back to normal, so we believe that was an anomaly. But that along with the startup losses and the integration cost for our acquisition, that’s what contributed to the decrease in margin year over year for the inpatient rehab.

Ben Hendrix: Great. Thank you for that clarification.

Robert Ortenzio: Thanks, Ben.

Operator: Our next question comes from the line of Joanna Gashnik with Bank of America.

Joanna Gashnik: Good morning. Thanks so much for taking the question. So just, I guess, a little bit of follow-up to that last comment about the IRF margins. And as it relates to the 2025 outlook, your guidance implies margins would decline about 20 basis points or so versus comparable, again, excluding conventional margin in 2024. So is that also what’s driving EBITDA, consolidated EBITDA margin outlook, you know, for the slight decline because the IRF margins, I guess, are gonna be still, you know, kind of constrained because of the startup losses. Is that the reason now for the consolidated margin to be lower, or is there something else to be said about other segment margins for 2025?

Robert Ortenzio: No. That’s the primary driver, Joanna. You’re correct.

Joanna Gashnik: Okay. So it’s pretty much the IRFs because of startup losses. And then for the LTACHs, should we think about those margins relatively stable or how we should think about 2025 versus 2024?

Robert Ortenzio: Yeah. I think relatively stable is really the way to think about it.

Joanna Gashnik: Because I guess in that segment, can you talk about the reimbursement change? You know, the change that Fresco’s for the, you know, in Medicare, how you, I guess, seeing this progress through the year, the impact of that change?

Robert Ortenzio: Yeah. You’re talking about the high-cost outlier threshold?

Joanna Gashnik: Yes. Yeah. Exactly. Yep.

Robert Ortenzio: Yeah. I mean, our operators have done a tremendous job on managing through the significant increases we’ve seen in that threshold. And, you know, so if you take a look at transpired between 2023 to 2024, there was about a $20,000 increase per patient, and they’ve really been able to manage through that. And, you know, as we take a look at it, I think it went into that the increase from 2024 to 2025 was also in that same magnitude. And that started October 1st. Looks like they’re doing a very good job managing that too.

Joanna Gashnik: Okay. So that’s great. But I guess with those changes, you think margins should be relatively flat for the segment.

Robert Ortenzio: Yes.

Joanna Gashnik: Okay. And then last segment, the outpatient rehab. So these margins showed nice improvement in Q4. And it sounds like, you know, to your, when you were asked your question about kind of the long-term outlook, you know, you expect the outpatient rehab EBITDA to also grow double digits. So can you talk about, you know, your, I guess, activity there in terms of, is it just, you know, kind of sounds like you’re streamlining the portfolio, exiting some markets, maybe they don’t make sense. Anything else to kind of flag in terms of, like, you know, what’s driving the expected growth in that segment EBITDA and also how to think about 2025?

Robert Ortenzio: Yeah. I think there’s really two primary things that are driving that. Number one, we’ve mentioned there was an increase in the rate from $100 net revenue per visit up to $102. I think that’s a function of some negotiations going on with the commercial contracts. So that’s been very helpful despite what we’re seeing on Medicare cuts. So that’s been very good. I think the other thing is that clinical productivity. We had mentioned, I think, in the last earnings call, we’ve been doing a lot of work on our technology. And we had a rollout in January that we think has been very good. And would anticipate seeing additional improvement in our therapist productivity.

Joanna Gashnik: Alright. Thank you so much for taking the questions.

Robert Ortenzio: Thank you.

Operator: That concludes today’s question and answer session. I’d like to turn the call back to management for closing remarks.

Robert Ortenzio: No closing remarks. Thanks, everybody, for your attention and focus on the quarter as we kind of unravel, unwind, and with Concentra so that we have a clearer picture on what’s going on here at Select, and we appreciate your efforts. Look forward to updating you next quarter.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.