Robert Ortenzio - Executive Chairman & Co-Founder Martin Jackson - EVP & CFO

Frank Morgan - RBC Capital Markets Chris Rigg - Susquehanna Financial Group Gary Lieberman - Wells Fargo Kevin Fischbeck - Bank of America David Common - JPMorgan Whit Mayo - Robert W. Baird & Co A.J. Rice - UBS Financial Services

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 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.

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 drivers of Q3 shortfall, all of which we believe are one-time in nature. First start-up losses were $6.5 million higher than we 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 a swap transaction last quarter in line with select LTAC strategy of accepting LTAC compliant patients only. We incurred negative year-over-year variance of $6.5 million for Q3, we were starting to see improvement in these hospitals. We're also add the all four of Select LTAC in Cleveland including the two hospitals acquired in the Kindred swap are now part of an LTAC joint venture with the Cleveland clinic and we believe this joint venture is positioned to be a very successful partnership. Third, we closed three LTAC hospitals in the third quarter, incurred $1.7 million in adjusted EBITDA losses in those closed hospitals. In total, these three items which were one-time expenses represent a shortfall of $14.7 million. California rehab and the Cleveland LTAC 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 shortfall, we are pleased with the quarter from an operational perspective but in the quarter, all of our LTAC 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 represents an 8.7% reduction in our pre-criteria census compared to our post-criteria census. We also saw a 7.9% increase in our rate per patient day driven by our increasing case mix in our LTAC. 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 LTAC strategy to only taking client patients. In addition, based on our experience moving to LTAC 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 venture, 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 out-patient clinics had a good quarter and our integration of physiotherapy is proceeding according to plan. We have very seasoned management team in our out-patient 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 into 2017. I'll now provide you with some additional details and highlights for the quarter and then turn it over to Marty Jackson for additional financial details before we open the call 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 and patient rehab hospitals, 24% from our out-patient rehab segment to 25% from Concentra. Net revenue in our specialty hospitals decreased $3.2 million - 3.2% in the third quarter to $544.5 million compared to $562.3 million in the same quarter last year. The decline in net revenue was driven by decline in Medicare patient days. Overall, patients 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 LTAC hospitals that have now transitioned to patient criteria, as well as hospital closures in the effective hospitals we exchanged with Kindred. And that impact of reduced days due to hospital closures and the Kindred swap was over 18,000 days. The decline in Medicare patient days was offset in part by an increase and our Medicare net revenue per patient day, principally due to an increase in patient acuity at our LTAC 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 on our out-patient 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 clinic 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 out-patient clinics and other services. For the centers, patient business were over $1.9 million and net revenue per visit was $119 in the third quarter compared to 1.98 million visits and $114 per visit in the same quarter last year. While workers compensation and service visits were comparable in both periods, we saw a decline in consumer health visits in the third quarter of 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 startup losses, losses on newly acquired hospitals and specialty hospital closures. Startup 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 occurred approximately $14.7 million in non-occurring adjusted EBITDA losses in the quarter on our specialty hospital segment. Outpatient rehabilitation adjusted EBITDA for the third quarter increased 34.4% to $32 million compared to $23.8 million in the same quarter last year. The increase primarily resulted from our newly acquired clinics. Adjusted EBITDA margin 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 margin 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 for fully diluted share were $0.05 in the third quarter this year, compared to $0.22 from the same quarter last year. During the third quarter we had non-operating loss of $1 million and a pre-tax loss on early retirement debt of $10.9 million. Excluding the non-operating losses on early retirement of debt and the related tax FX, earnings for fully diluted share would have been $0.06 in the third quarter this year. During the third quarter of last year, we had a pre-tax non-operating gain of $29.6 million. Excluding the gain and its related tax FX, earnings per share would have been $0.08 in the third quarter of last year. I'll now turn it over to Martin Jackson to give some additional financial highlights for the quarter before we open it up for 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 expenses 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 the third quarter were 91.1%. This compares to 92.2% in the same quarter last year. The 110 basis point decrease as a percent of net revenue consist of 130 basis point reduction in cost of services, 10 basis point reduction in bad debt which is partially offset by 40 basis point increase in G&A. Cost of services increased to $915.7 million for the third quarter, compared to $900.9 million 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 expense relative to revenues in our Concentra segment as a result of cost-saving initiatives we've implemented. G&A expense was $27.1 million in the third quarter, which is a percent of revenue was 2.6%; this compares to $22.2 million or 2.2% of net revenue for the same quarter 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 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 in amortization expense was $37.2 million in the third quarter, compared to $31.5 million in the same quarter last year. The increase resulted primarily from the acquisitions of Concentra and Physiotherapy. We generated $5.3 million in equity and earnings of unconsolidated subsidiaries during the third quarter; this compares to $6.3 million in the same quarter last year. The decrease is primarily related to the sale of NaviHealth in which we owned the minority position last year in the third quarter. As Bob mentioned during the quarter, we had a pre-tax non-operating loss of $1 million and a pre-tax loss on early retirement of debt of $10.9 million. We refinanced the Concentra secondly in term loan during the quarter with proceeds from the incremental first lean term loan and the transaction result in the loss and early retirement of debt in the quarter. During the third quarter of last year, we had a pre-tax non-operating gain of $29.6 million, related to the sale of NaviHealth where we owned the minority position. Interest expense was $44.5 million in the third quarter; this compares to $33.1 million in the same quarter last year. The increase in 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 the interest rates related to amendments of Select's 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, 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 in 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 6.38% senior notes and $644 million in Concentra term loans. This was partially offset by $52.1 million in unamortized discounts, premiums and debt issuance cost to reduce the balance sheet debt liability. In addition, we had $28.9 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 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 the 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 in 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 of Select's revolving credit facility, net term loan payments and financing cost of $10 million; $3.8 million of 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 of hospital closures as well as expected effective tax rate for the full year. This concludes our prepared remarks and at this time, we'd like to turn it back over to the operator to open up the call for questions.

[Operator Instructions] Our first question comes from Frank Morgan of RBC Capital Markets. Your line is open.

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've learned anything to this process that really gives you pause, and maybe where is the same-store growth rate potential that you see here going forward on an organic basis per census? I'll start there.

Thanks, Frank. Yes, this is Bob. A couple of observations. To your first question, what's the opportunity? The opportunity now is just to grow volume. I think the move in the criteria given various markets, various individual hospital, 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 LTAC is what I'll call the rippling through of competitors and others in the markets going into criteria and trying to navigate perhaps the LTAC-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 Martin and I have said in the past that we think a year from now, the industry looks very different and it's probably going to be considerably smaller. I think that's the opportunity as well. I think the other observations to take away from the work that we've done is that the LTAC-compliant patients are there in the market. It's one thing to do an assessment and believe that you see it through data analytics; that's another thing when you're operationally hearing from the operators. 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. As we do that, I think that there's a place for us in this very specially high-end, high-acuity niche where we can be very successful. We're optimistic there. And also I think the calling of the portfolio, we've had some closures. We think that that's pretty much to an end, although over the next year you may see a little one or two. That's just going to be refining the portfolio. I think that's also an opportunity for us. Going forward, I would say that there are 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 Martin and I look at the portfolio of LTACs 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. So I appreciate and understand the obsession with the criteria, we've obsessed about it as well. But I think we're rapidly moving away from that to a more normalized operations where we're 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 via Cleveland and Atlanta? And do you think [indiscernible] 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 census rebuild?

You mean in the Cleveland area?

Yes, Cleveland and I guess Atlanta, too.

Let me address Cleveland because I think that's a unique thing and there's a couple of elements there that I'd like people to be aware of. When we did the swap, at closing it's a change of control for Medicare purposes. Under that scenario, you have an acceleration to criteria on any change of control. So we were really faced with the facilities there in Cleveland that were not in any preparatory mode at all to go to a LTAC criteria compliant patient population only because that's generally not the Kindred strategy. We had the challenge of having criteria being placed the day we closed and in the facility where we weren't able to do literally any preparation to move to our model. That's what really caused the particularly difficult challenge there, because as you know for our hospitals, we have been doing planning a year in advance with a very specific protocol for preparation of moving the criteria and in those hospitals, the impact was not as great in Atlanta that it was pretty significant in Cleveland. Now on the other side of that, would we have done differently? The answer is probably no because we were able to turn around and immediately put those two LTACs and the two LTACs that's Select on into a joint venture with Cleveland Clinic. Now with one of the most prestigious health systems in the country, we have a joint venture that includes four LTACs and rehab hospital and potential growth from there. We still feel pretty good about where we are there.

And any color on where you are today there? Have you already started to see the census feel that on the compliant side?

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

Yes, it is growing, Frank.

Got you. Okay and then I know a lot of concern now that Kindred is coming in, going under criteria, there is this fear that there will be some confusion in the marketplace, but would you just remind us, what percentage of market over that you really have with Kindred in your overall LTAC portfolio? And then give me a comment on the 25% ruled legislation and then I'll hop off. Thanks.

Sure. With regards the overlap of Kindred, it's less than 25%.

And I think the risk of market confusion will not be great because I think that - and I have no other information other than just my observation, what I hear as you guys do, is that those hospitals may be operating pretty much under the same model as they have with the combination of taking the LTAC compliant patients as well as the site neutral patients. It's possible that even in those markets, we won't really see a dramatic difference. The difference was really in our hospitals where we stop taking site neutral patients at the time we went in. That's really the change and I think we've seen where we've come through on that. On 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 laying the 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 laying [ph] doc, that is something under 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 laying doc for things to get done and we'll have to see. I certainly wouldn't say that our prospects are greater than 50-50.

Okay, thank you.

Our next question comes from Chris Rigg of Susquehanna Financial. Your line is open.

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

Yes. Chris, what we've done is we've sat down, talked to the operators, took a look at where we thought fourth quarter would be. 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. We've 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 to get a little more granular on that. I went back and looked at some of your comments. I think this is on the fourth quarter call. You guys initially coming into the year said you thought that yes, there would be some startup cost, but some of the JVs that came online last year would neutralize that. I believe your initial guidance for the year assumed a net zero impact or roughly zero. You 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 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. A couple of 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 time frame and because of regulatory issues and getting necessary dean 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 the 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 won't be nearly the size that you saw in Q3, but we anticipate you're still going to see some negative impact going into Q4.

Okay, great. Then just one last one here and I apologize if I missed that, but when you look at the occupancy stats, as we could calculate them based on what you provide or actually what you disclosed on the 10-Q, that includes these ERFs [ph] that have obviously very low census in the beginning. Can you give us the LTAC 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 LTAC occupancy rate for the quarter was 61%.

Okay. That's the average for the quarter or where you ended the quarter once you had at least some of the facilities phase into the new reimbursement law?

That was the average for the quarter. Yes. I think I know where you're going. To your point is, yes, it actually got better later on in the quarter. What we typically see is that we see July and August census to be down and starts to grow in September and then really starts to grow in the fourth quarter.

Okay, great. I'll leave it there. Thanks, guys.

Thanks, Chris.

Our next question comes from Gary Lieberman of Wells Fargo. Your line is open.

Good morning. Thanks for taking my question. A couple of questions. The revenue for patient's day came down in the LTACs. 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 for patient day in the fourth quarter and maybe even the first quarter?

Yes. Gary, the revenue for patient day on a sequential basis did come down, but remember that's not per patient day for LTACs, that's revenue for patient day for specialty hospitals. Okay? The other thing that we typically see - in the third quarter we see case mixed index come down a little bit. Just because you're not seeing the pulmonary patients that we typically see in first and second quarter and fourth quarter for that matter. And then in addition to that, as a mix in the specialty hospital segment, you'll see additional patients on the rehab side and the rehab for 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 was we saw a reduction. I think last quarter we talked about 1.4 ADC reduction in those hospitals under 50 beds. Today it looks like it's about 0.9. In essence on the larger hospitals, we haven't really seen that much of an impact yet.

Okay. Do you think you'll start to see 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.

Got it.

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

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

Yes, 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 SWMV cost per patient day, it's a little bit north of 10%. The actual annual increases to wages for nurses is about a little bit higher than 3%, so that balancer that's almost 7 points is associated with not flexing down the staffing. As we talked about in the past, 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'll see a flexing of staff down.

Got it. Okay, that's very helpful. Thank you.

Thanks, Gary.

Our next question comes from Kevin Fischbeck of Bank of America. Your line is open.

Okay, great. Thanks. I guess of the three issues, can you put a little more color on the third one? When you see it closed three LTACs and it was $1.7 million of losses. Is that because they were earning money last year and you got rid of those earning money this year or there was closing cost associated with that? It wasn't clear to me exactly what that was.

Actually, closing cost, Kevin. The $1.6 million, $1.7 million, $1.8 million, it was really accruing up some potential lease payments due and then also on the termination of employees, we're paying out additional compensation to that. In many cases you have the [indiscernible]. You're paying out money. That actual cost.

Okay. And you were primary closing this LTACs until I guess after Q2 you decided to do that? What was the reason for that?

Just the general evaluation of where they were in the marketplace and their prospects, their earning power, the normal things that you would consider to discontinue an operation.

Okay. I'm just going back to the other question about the items in the quarter and then reduction in guidance. If I hear you correctly, you're saying that $15 million of what you knew as a one-time item in the quarter, the startup losses in California go away, but the Kindred asset's loss will still going to be a drag into next year, I guess these cost probably go away, but that maybe puts you $40 million hit between Q3 and Q4 for the three items and if you did that, you're saying, 'Hey, we feel better about the midpoint of the guidance to the higher end of the guidance and so the reduction looks like 45, but it's really more like 20 or 25.' Is that - how you think about it? Is that the right way you think about it, or is there...

I think that's a fair assessment.

Okay. So you feel better - so you kind of - just put some - you put a range around the number, but you feel better about the high-end of the range, but the guidance isn't really 45, it's closer to this one-time item. All right, that makes sense. When we think about - your surprise so far this year, it's Concentra. It is what you've done in Concentra so far sustainable? Should we expect another good year of growth? Do you just get there faster, or there's still a lot of runway for Concentra to show improvement?

Well, from a Concentra perspective, I think the operators down in Concentra have done a terrific job getting to the point where they are today. For the full year we would 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. What we've got to do is we've got to grow the top line now and that's what the focus of the operators are.

And what do you say kind of a long-term top line growth outlook would be for that business?

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

Okay. And then just going back to the criteria for a second. You mentioned that over the next two or three quarters, you're going to evaluate where census is and where do 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 you feel like at that point, anyone who will have closed will have closed by then, so the competitive landscape will be settled? How do you think about that drawing out? Because I guess you got some hospitals excited. They're saying, 'Hey, look, we're going to keep doing. In fact let's take more of the non-compliant patients during this half year season and then we'll be able to win that second half of the way, kind of half of 2018 then.' I guess there's always the potential that there will be the more disruption in 2018. So how do you balance the 2018 opportunity versus what you expect to see developing during 2017?

This is Bob. At this point, I think it's all of the above. We try to lay out that now that we've gotten through criteria which was the big risk, now it's just operations. 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. 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 all very dynamic markets. It's difficult to predict. So 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 hospital. You can overlay upon that. What's going on at disruption in a broader LTAC industry, to me, I think that that's more likely to be positive than negative.

Yes. Okay. So your view is that it's going to be based upon getting that volume that you always thought was out there? It's not really predicated on taking market share? You think your market share would be above and beyond that? Great. 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 some market opportunity of LTAC volume in the market, that whatever reason just there coming to LTAC before. It's not really predicated on competitor's closing and you having to get their volume to make it all work?

Yes. We're not counting on that. I'm saying that 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 obviously don't know. Maybe some of the smaller competitors and nonprofits will adapt to criteria much better than I think they will. That's really been generally my response to people asking me what I think is going to happen in the industry. I'm not necessarily 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 mean positive than negative what's happening in the industry.

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

Our next question comes from David Common of JPMorgan. Your line is open.

Yes. Good morning, all. Thank you. I was really interested that you mentioned to see ADC was actually higher in the last month of the quarter. Even though I guess there were more LTACs on the criteria systems. To the extent that you'd be comfortable, if you could just share with us what the occupancy in 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 and we don't see anything that's going to change that trend.

...change that trend.

Fourth quarter versus third quarter to be up?

That's correct.

Okay. And then two other questions. I'm sure you haven't done your budget yet for next year, but just conceptually, remind me with your new size of company. What would maintenance CapEx be and should we think of broad CapEx next year if you just say, $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.

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

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 by-project basis, the CapEx is going to be lower.

Do you think it will be down in your 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're going to do those. So 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 other sort of budgeting item on the cash line. It will be helpful if you just give us a sense of rough timing and amount, to the sense that you can on your next planned installments, payment of the 49.9%? I'm sure that you did not initially acquire.

Sure. You're basically talking about the put [ph] call with WCAS?

Right.

Yes. The way that that was structured, David, is that the first put comes due 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 evaluation be done. We would go through those mechanics, so I would anticipate that the earliest you would see any type of payment would be the fourth quarter of 2018. That's the third of the 49.9% in '18, third in '19 and then third in 2020. Then also in 2020, select has the ability at that point in time to call the outstanding balance. That's the way the mechanism works.

Thank you for that.

Sure.

Our next question comes from Whit Mayo of Robert Baird. Your line is open.

Hey, thank. I might just stay on cash flow for a second. This year has been particularly strong 4Q. It easily is softer, I believe. Is there a good range to think about for this year just in terms of cash flow from up [ph] and then anything unusual in this year that may not recur next year?

Fourth quarter is typically pretty good. It's really the first quarter from a seasonality perspective that we see it dip. Typically first quarter is negative. I think this year wasn't, I think because we had the proceeds from the acquisition of Contract Therapy. But normally, that's the down quarter. Fourth quarter is typically pretty good.

Okay. Non-controlling interest, left over of this quarter, I presume that's just the lawsuits on the joint ventures running through that line. Is there anything else that's impacting that?

That's correct. It really is just the loss. You kind of see that coming through. It's really a function to startup losses.

Yes. Maybe one on just the LTACs, when you look at your top 10 to 15 markets and if you draw away a big circle around the service area and then look at the other LTACs that are drawing referrals within that area, what is the vent in ICU - ICU mix look like with your competitors? We all presume that's a little shake out in your favor, but is there any data that you have within your markets that supports the thesis and I recognize this is all very dynamic and really a moving target, so maybe this isn't even a relevant question, but just thought I'd throw it out there and see what observations you've made.

Yes. It's a great question. We don't specifically have detailed data on YDRG [ph], but what we can do is we really can take a look at the industry case mix index, which is in that 103-104 range. If you take a look at Select and then also Kindred, which represents about 50% of the LTAC beds, our case mixed index is in that north of 1.2, which gives you a good idea. Most of the other players are well-below one, which tells you that they're not really focused on those higher acuity types of DRGs.

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

It really is expediting the synergies. It's what 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. In essence, that's what you're seeing. On top line, the revenues are flat. It's really coming from expense reductions. I know that the operators are really focused on growing the top line, making sure that they're on all the appropriate panels and then funneling the visits through those panels.

Okay, awesome. Thanks.

Okay. Thanks, Whit.

Our next question comes from A.J. Rice of UBS. Your line is open. A.J. Rice: Hey, everybody. Just a couple of things. Just following up on a non-controlling interest question. The fact that you got the startup losses this year, that swings back - you mitigate some of that for next year, so that non-controlling interest, you would expect that to swing back commensurate with whatever happens on the startup losses. Is that right?

That's correct, AJ. A.J. Rice: Okay. The $22 million to $22.5 million of startup losses this year, is there any way to size what that looks like next year? Is there any spill over at all into next year from the current projects? Is there sort of a run rate on startup losses in a normal year that you wish you'd consider? How do we think about the drag this year versus what it can look like next year? And then also I guess to the extent the big project swings positive. Any early thought about how much of a swing you could see on that?

Yes. We certainly have, AJ. There's basically four startup projects that we have going on right now that have incurred startup losses which are CRI, Cleveland Clinic, TriHealth and Ochsner. What we anticipate is you're going to see a swing in pretty short order on CRI. I would anticipate that probably by first quarter next year you would see breakeven there. I think you'll see breakeven on the Cleveland Clinic side. TriHealth may be a little bit of a drag and I think you'll see some additional drag associated with Ochsner. Now having said that, as we've talked about on the CapEx, there's a number of JV 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, but at this point in time, you can't predict that. A.J. Rice: Since the CRI one is so big, 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. At a minimum, it will be a positive contributor and I think that their contribution to that $22 million was probably in that $15 million to $16 million range. So just by that alone, you're going to see that flip. A.J. Rice: Okay. I just want to make sure. On the Kindred comments, I know you've made comments that drag or the impact was less favorable and you thought that some of that's going to sustain. I just wonder, is there any swing on that? Does it sort of sustain at the run rate right now, or is there something about it that you say that it will carry in 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 that you ought to think about both the Kindred swap as well as the startup losses that were incurred 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.

Yes. Martin raises a good point. The losses at CRI and at the Cleveland ones are disappointing, but what kind of investment would you make to be in UCLA, Cedars-Sinai and 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 LTAC and the rehab. 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 wash out 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, Penn State and Emory, I think we have a track record that suggest that these are very good investments. A.J. Rice: Okay. All right, that's great. Thanks a lot.

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

No closing arguments. Just thanks for joining us. And we'll update you on the next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.