Robert Ortenzio - Executive Chairman and Co-Founder Martin Jackson - Executive Vice President and CFO

Frank Morgan - RBC Capital Markets Peter Costa - Wells Fargo Securities Bill Sutherland - The Benchmark Company Kevin Fischbeck - Bank of America A.J. Rice - Credit Suisse Matthew Gilmore - Baird

Good morning. And thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the third quarter 2018 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 the 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 and 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. Please go ahead.

Thank you, Operator. Good morning, everyone. Thanks for joining us for Select Medical’s third quarter earnings conference call for 2018. Before I outline our operational metrics, I want to provide some summary comments and updates since we spoke last quarter. Once again we were generally pleased with the performance in the quarter with the 17.7% year-over-year growth in revenue, over 35% growth in adjusted EBITDA, including double-digit growth in all four of our business segments. Cash flow from operations was again very strong this quarter generating over $164 million and we repaid an additional $85 million of Select’s revolving debt this quarter and reduce net debt on a consolidated basis for just over $100 million. We’re reduced our credit facility leverage from over 5 times at the end of the first quarter of this year to 4.64 times at the end of this third quarter. We’re confident we will hit our previously stated year end credit facility leverage target of under 4.6 times. U.S. Healthworks integration continues to proceed as planned and our core Concentra business continues to exhibit strong growth in terms of both rate and volume with over 6% revenue growth in the core business alone. We realized nice topline growth in our core outpatient rehab business and continue to see improvement in the Physio markets. In our critical illness recovery hospital division, we had nice growth in adjusted EBITDA and margins driven by improvements in non-Medicare rates, while controlling operating costs. Our rehabilitation hospital business continues to achieve double-digit growth in both revenue and adjusted EBITDA as the maturation of the hospital portfolio continues. As I mentioned last quarter, we’re currently on track to open new joint venture rehabilitation hospital with the University of Florida. The chance expected open in the first quarter of next year. Also a joint venture rehab hospital with Dignity Health in Las Vegas is expected to open in the second quarter next year and a new joint venture rehab hospital with Riverside Health in Virginia expected sometime in the third quarter next year. We also plan to begin construction on two new rehabilitation hospitals in 2019 with Banner Health in Arizona, which would open sometime in 2020. Let me take you now through our operational metrics. Overall, our net revenue for the third quarter increased by $190 million to $1.27 billion, which included top line growth in each of our four business segments. Net revenue in our critical illness recovery hospital segment in the third quarter increased slightly to $420 million compared to $417 million in the same quarter last year. The increase was driven by a rate which increased 2.6% to $1,705 per patient day in the third quarter. Occupancy in our critical illness recovery hospital segment was 65% in both of third quarter this year and last year. Our outpatient days at admissions both declined compared to same quarter last year. The decline was driven by four hospitals we close since the third quarter of last year. Net revenue on a rehabilitation hospital segment of third quarter was 12.3% to $177 million, compared to $157 million in the same quarter last year. Patient days increased 16.2% to 79,000 patient days, compared to 68,000 days in the same quarter last year. Net revenue per patient day increased slightly to $1,582 in the third quarter compared to $1,573 per day in the same quarter last year. Net revenue on our outpatient rehab segment in the third quarter increased 7.8% to $266 million, compared to $247 million in the same quarter last year. Patient visits increased 2.7% to 2.04 million visits in the third quarter, compared to 199 -- 1.99 million visits in the same quarter last year. Our net revenue per visit was $103 in the third quarter compared to $102 per visit in the same quarter last year. Net revenue on our consensus segment for the third quarter increased 58.1% to $404 million, compared to $256 million in the same quarter last year, driven by both the contribution of U.S. Healthworks and over 6% growth in the legacy Concentra business. For the third quarter revenue from our centers was $369 million and the balance of approximately $35 million was generated from the on-site clinics, community-based outpatient clinics and other services. For the centers, we had patient visits of 2.98 million and net revenue per visit of $124 in the third quarter. This compares to 1.98 million visits and $113 per visit in the same quarter last year. Increases in our net revenue per visit related to both higher reimbursement rates at the U.S. Healthwork centers and improved workers’ comp and employer service payment rates at the existing Concentra centers. Total adjusted EBITDA for the third quarter increased 35.2% to 1.5 -- $156.6 million, compared to $115.8 million in the same quarter last year with consolidated adjusted EBITDA margin at 12.4% for the third quarter, compared to 10.8% for the same quarter last year. Our critical illness recovery hospital segment adjusted EBITDA was $53.3 million in the third quarter, compared to $46.9 million in the same quarter last year. Adjusted EBITDA margin for the segment was 12.7% in the third quarter, compared to 11.2% in the same quarter last year. The increase in our adjusted EBITDA and margin was primarily due to improvement in our net revenue per patient day rate as previously mentioned. Our rehabilitation hospital adjusted EBITDA increased 12.2% in the third quarter to $25.3 million, compared to $22.6 million in the same quarter last year. Adjusted EBITDA margin for the rehab hospital segment was 14.3% in both the third quarter this year and last year. The increase in adjusted EBITDA was primarily driven by an increase in patient volume at the new hospitals that we open in 2016 and 2017. Outpatient rehab adjusted EBITDA was $34.5 million in the third quarter of this year, compared to $29.3 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 13% in the third quarter, compared to 11.9% in the same quarter last year. We experienced improvement in both adjusted EBITDA and margin in both the Select and Physio clinics. Concentra, adjusted EBITDA was $68.8 million for the third quarter, compared to $40 million in the same quarter last year. Adjusted EBITDA margin was 17% in the third quarter, compared to 15.6% in the same quarter last year. The increase in adjusted EBITDA margin is primarily attributable to lower -- achieving lower relative operating costs across our combined business with U.S. Healthworks. Earnings per fully diluted share was $0.24 for the third quarter, compared to $0.14 for the same quarter last year. Adjusted earnings per fully diluted share was $0.23 per diluted share for the third quarter. Adjusted earnings for fully diluted share excludes the non-operating gains and the related tax effects in the third quarter. I am also pleased to announce the Marilyn Tavenner has joined the Select Medical Board. Ms. Tavenner is a former President and CEO of American Health Insurance Plans and former Administrator of the Centers for Medicare and Medicaid Services. She also served as the Secretary of Health and Human Resources in the State of Virginia. In addition from 1981 to 2005, she was employed by Hospital Corporation of America. We believe Marilyn’s proven skill through her experience in the State and Federal Health Care Government Operations, Senior Executive Level Health Care Administration and her nursing background will be a significant benefit to Select. I’ll now turn the call over to Martin Jackson for some additional financial details before we open the call for questions.

Thanks, Bob. Good morning, everyone. For the third quarter, our operating expenses, which include our cost of services and general administrative expense, were $1.1 billion. This compares to $966 million in same quarter last year. As a percentage of our net revenue operating expense for the third quarter were 88.2%. This compares to 89.7% in the same quarter last year. Cost of services were $1.09 billion for the third quarter. This compares to $939 million in the same quarter last year. As a percentage of net revenue, cost of services were 85.8% for the third quarter. This compares to 87.2% in the same quarter last year. G&A expense was $30 million in the third quarter. This compared to $27.1 million in the same quarter last year. G&A as a percentage of debt revenue was 2.4% in the third quarter. This compares to 2.5% in net revenue for the same quarter last year. As Bob mentioned, total adjusted EBITDA was $156.6 million and the adjusted EBITDA margin was 12.4% for the third quarter. This compares to an adjusted EBITDA of $115.8 million and an adjusted EBITDA margin of 10.8% from the same quarter last year. Depreciation and amortization was $50.5 million from the third quarter. This compares to $38.8 million in the same quarter last year. The increase is primarily the result of the U.S. Healthworks acquisition. We generated $5.4 million in equity and earnings of unconsolidated subsidiaries in the third quarter. This compares to $4.4 million in the same quarter last year. In addition, we recognized the non-operating gain of $2.1 million during the third quarter which relates to the sale of our outpatient rehab clinics to our non-consolidating subsidiary. Interest expense was $50.7 million in the third quarter. This compares to $37.7 million in the same quarter last year. This increase in interest expense is primarily related to the financing in the U.S. Healthworks acquisition at Concentra. The company recorded an income tax expense of $14.1 million for the third quarter. This compares to the income tax of $40 million in the same quarter last year. This represents an effective tax rate of 24.8% and 36.1%, respectively. The lower effective tax rate this year is the result of federal tax reform legislation that was enacted in December of last year. Net income attributable to Select Medical Holdings was $32.9 million for the third quarter and fully diluted earnings per share of $0.24. Adjusted EPS excluding the non-operating gain and its related tax effects were $0.23 in the quarter. At the end of the quarter, we had $3.33 billion of debt outstanding and a $160.4 million of cash in the balance sheet. Our debt balance at the end of the quarter includes $1.13 billion in Select term loans, $65 million in Select revolving loans, $710 million in Select 6.375% senior notes, $1.17 billion in Concentra first-lien loans, $240 million in Concentra second lien term loans, $50 million in unamortized discounts premiums and debt issuance cost to reduce the overall balance sheet debt and liability and we also had $58 million of other miscellaneous debt. We had a very strong quarter of cash flows in the third quarter, with operating activities providing a $164 million of cash flow, compared to $89.6 million in the same quarter last year. Our days sales outstanding or DSO was 54 days at September 30, 2018. This compares to 54 days at June 30, 2018 and 58 days as of December 31, 2017. Investing activities used $50.6 million of cash in the third quarter. The use of cash was primarily related to $39.4 million in purchases of property and equipment, and up $11.2 million of acquisition and investment activity during the quarter. Financing activities used $94.1 million of cash in the quarter. We had net repayments of $85 million on the revolver loans, $5.2 million in distributions to non-controlling interests, and $2.9 million in term loan payments in the quarter. Additionally, in our earnings press release, we updated our business outlook for calendar year 2018. We now expect net operating revenue to be in the range of $5.05 billion to $5.1 billion, and adjusted EBITDA to be in the range of $640 million to $655 million. We now expect fully diluted earnings per share to be in the range of $1.02 to $1.08, and adjusted earnings per share to be in the range of $1.01 to $1.07. Adjusted earnings per share excludes non-operating gains, loss on early retirement of debt, and U.S. Healthworks acquisition costs, and the related tax effects. The updated business outlook does not include any negative impact from the expected loss on early retirement of debt incurred in the fourth quarter of 2018 resolving from the re-pricing amendments to both the Select credit facilities and the Concentra first-lien credit facilities that closed on October 26, 2018. We completed a re-pricing amendment to slightly term in revolving loans resolving in a 25 basis points reduction in our borrowing spreads. We also completed an amendment to Concentra’s first-lien credit facilities which resolved in the 50 basis points reduction in its revolving loan spread and the pricing grid on the first-lien internal loan that could result in the 25 basis points reduction should Concentra credit ratings improve. This concludes our prepared remarks. And at this time, I’d like to turn it back over to the operator to open up the call for questions.

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

Good morning. Bob, I’d love to get just a little more color on that sort of the state of the movement with patient criteria. Obviously, you’ve made a lot of progress there and you’ve elaborated. But now that you’ve this opportunity that really get it behind you. Do you see or still see much of an opportunity for upside on occupancies and is there any LTACH pruning left to be done, I know you, I think you may have pruned up one in the last quarter and four over the last year but any color there?

Yeah. Thanks, Frank. Yeah. You know generally you know we’re extremely pleased about the way we came through the criteria, as I’ve said previously you know the LTACH criteria is probably the biggest change to the LTACH segment in the last you know 20 years and it’s really changed this industry, which was the reason why we -- you see that we started referring to our hospital more descriptively as critical on this recovery hospitals. I think the answer to your question that we see upside from the 65% or the kind of sense that we’re seeing is, yeah, of course, we do it. It’s really more of an education. It is a narrower group of patients that we can take where virtually all of our patients or ICU patients, or patients that are dependent on mechanical ventilation. So that is a smaller subset of patients. They are highly acute patients, so making sure that our referral sources feel comfortable with us in terms of the safety of the patients and the things that we can do for them. But, yeah, I do think we’ve said that we think that there is upside and it will take time. The occupancy numbers move around a bit. As we pointed out, we did have four hospitals that closed. Unfortunately, we also lost our hospital in Panama City from the most recent hurricane, and we don’t think that that hospital may not be back in service at least for another year. We hope or wish will be sooner. So we continue to see a lot of traction and feel good about it and do feel that there’s upside. As far as additional closures, I don’t think that we’ll see additional closings of our critical illness hospitals as a result of their inability to compete for the high acuity patients, if there’s any closures it will be or what I would call more ordinary course of business.

Got you. How the good drag with the loss of Panama City be, and how will you account for that?

Frank, the drag going into 2019, our expectation is that was about $4.8 million of EBITDA.

Okay.

And that will be reflected in the guidance we provide at the end of December, beginning of January.

Got you. Switching gears on the reimbursement changes having weathered through the patient criteria. Just curious about some initial thoughts on the new changes that are coming over on the ERF side, specifically over it, I think in 2020 with a new patient assessment tool and all those changes, just any kind of initial thoughts on how that looks and how do you would be prepared for that?

No. I really don’t have any details for you on that Frank. I mean it is as you said 2020 we will adapt to it. We don’t see that as any kind of -- those as any kind of game changers. Our -- with the model that we have in the operations of our hospitals that I think that we feel we’ll be okay with it.

Got you. Okay. And the last one, I’ll hop, obviously, appreciate the color on the rollout of the ERFs coming over the next year, when you think about these geographies, where these hospitals are open does it really matter in terms of the process time to get these certified. I know in California it’s like everything takes a little bit longer. But will the certification cycle be a little shorter in some of these other geographies here, area and so that you don’t have these protracted start-up losses in that here.

Unfortunately, we can’t count on it. We can’t count on it being shorter in some regions than others it is, the regulatory environment and as you point out in California it does tend to be a little bit more rigorous and time consuming than other markets. But we saw some delays in getting our Medicare provider number in the Louisiana, when we opened our hospital with Ochsner and some places it’s quicker, some places are a little longer. I wish we could predict it better, but that’s -- I think that’s the nature of opening these hospitals And if the company gets larger, the impact of the delay against our projections or our budgets of when we would receive our provider numbers in order to bill I think it will become less and less overall. So it won’t be as big of impact as you saw particularly when we had the opening of California rehab and some others on a smaller base. As the base gets larger, I don’t think it will be as big of impact.

Okay. Thank you.

You’re welcome.

Our next question comes from the line of Peter Costa from Wells Fargo Securities. Your line is open.

Good morning, guys. Thanks. Good job on the quarter. My first question is on the outpatient rehab segment. You had a nice pickup in EBITDA margin there and I kind of forgot, is that all tied to the rebound from Physiotherapy associates or is that some core stuff going on in there. And how much of that do you think is sort of what we should project going into the future…

Yeah.

… for running this business.

It is actually a combination of both. We’ve seen improvements on the Physio clinics. But our legacy business continues to improve and drive additional volumes, and therefore, have additional efficiencies because of that. The operators have done -- they did great job this past quarter.

So do you think that that the pickup from the Physiotherapy associates purchase is still going to add to EBITDA going forward in a more accelerated way, so I should consider thinking about that? And where do you think those EBITDA margins will settle out.

We think the EBITDA margins should be in that 14% range and we do think there is still upside on the Physio acquisition.

Okay.

There is still some more room to grow there. Now, I wouldn’t say accelerate I would say they are still upside that will happen over a period of time.

All right. And then on the negative side, you actually see in the LTACH business as a critical illness recovery hospital business that stayed sort of flat year-over-year 65% and do you believe that’s going to move forward in the near-term and why do you think it didn’t move forward over this past year?

Yeah. We certainly think to that occupancy we will be in a position to get back to where we are historically. Now third quarter is typically lighter than first quarter and second quarter and actually in the fourth quarter. So, historically, 65% for both periods, we do believe that we’ll see increases as we continue to educate our overall sources.

And then why do you think it didn’t pick up from third quarter of last year?

I think it’s a combination of a couple of different factors, there is we had four closures, management was spending time on some of these closures and in addition to that we’ve had some changes in management in some of our hospitals. In some hospitals we’ve seen a nice pick-ups and other hospitals, we’ve seen some decreases.

Okay. So it still going through the transition. Did the Panama City hospital effect that the occupancy at all in the quarter?

It did not.

Okay. I’ll stop there. Thank you.

Thanks, Pete.

The next question comes from the line of Bill Sutherland from The Benchmark Company. Your line is open.

Thanks. Good morning. Thanks for taking the questions. The final rule from CMS, I think the impact for your ERP side is going to be around 1.2%, correct me if I am wrong. And also what how is it going to net out for you on the critical illness recovery side?

Bill, could you repeat that question, we’re trying to figure out. Are you talking about -- you’re talking about the market basket increase?

Yeah. And these things are always specific I know the numbers that CMS put out with the update, but the impact to use specifically because there’s always specific issues of how it applies to?

Yeah. There was -- it’s a good question. The way that we take a look at it, I’ll walk you through how we take a look at it. CMS announced 2.7% market basket increase. But, as you know, that you also have to back out some of the negative adjustments that are recovering. There is a 75-basis point adjustment, negative adjustment that will occur as a 0.8 negative investment an additional 0.8% negative adjustment and then there’s a 0.947% negative reduction due to the elimination of the 25% threshold policy. And then, finally there is a 0.0287% negative reduction, due to the area of wage level budget neutrality factor. Totaling all those up, we actually have seen a 16 basis point increase for Medicare starting October 1st.

Okay. That’s pretty close to zero. How about the -- I also asked about LTACH.

Hey, Bill. The other things you should note is these -- all other things I just said those are outlined in the 10-Q, just so you have that too.

Okay. All right.

I know I stated pretty quickly, writing it down there could be tough.

And the other side, is that in the Q as well, the other hospitals?

Yeah. The ERPs, yes.

ERPs. Yeah. Okay.

Yeah.

Thank you for that. So the outpatient rehab growth was nice, very nice lift. What -- how should we think about these sort of sustainable, as you look at your expansion plans and what’s going on with rates, et cetera, what do you feel is a sustainable level that you guys can target?

We think that on the outpatient side, you know, probably, 2% -- 2% to 3% volume growth on visits and what we pencil down for next year is zero, 1% increases on the pricing side.

Okay. And the -- let see what else I have -- and then, finally on the LTAC capacity, I think, you had mentioned you might be expanding or adding a few beds with one of your JVs. Is there anything in the works as far as adding the LTAC capacity?

Yeah. We -- I think we did mention that in the last call and if we -- I think we would respond to a question if we saw growth in the LTAC. So I said that we weren’t likely to be in the acquisition mode but that we would consider of opening some new LTACHs. As you probably know, since criteria I mentioned it being such a big change, the number of hospitals is going down very rapidly as is the Medicare spend as the lower acuity LTAC hospitals that weren’t really able to make the conversion to the higher acuity requirements are closing, but we that we do see some opportunities perhaps in some of our joint venture markets. As you know, our rehab joint ventures are with some extremely large systems. We do have LTAC or our critical owners’ recovery hospital partnerships with the Cleveland Clinic and some other markets. So we do have some of those in the pipeline and would consider a joint venture, and perhaps, those with some of our partners.

Okay. Nothing specific at the moment. Last one from me. You mentioned, on Concentra, the revenue, the net revenue per visit improving on both sides. There was better workers’ comp at Concentra. What led a little bit of an increase at U.S. Health? I didn’t catch that.

Yeah. The rate increase, some of that had to do with the integration of U.S. Healthworks. A significant number of centers that U.S. Healthworks cater in California and their rates are typically higher than the rest of the country.

So we’re talking about mix issue then?

Well, we’re talking about it wouldn’t necessarily be a mix, it -- if, well, if you want to put it in terms of geographical mix, yes.

I mean in terms of how USH coming in has improved -- is -- as to the it’s a mix -- positive mix impact on your …

On the rates.

Yeah.

Yeah.

Okay. I got it.

Yeah.

Thanks guys. Appreciate it.

Okay.

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

Great. Thanks. I wanted to ask about the seasonality of the business, it looks like your guidance implies that Q4 is going to be below Q3, and usually we’d expect at least the hospital business to be up from Q3 into Q4. Can you talk a little bit about what’s going on with Q4 this year and that’s the way to think about things going forward relative to this mix changes?

Yeah. Kevin, good question. As you know we provide annual guidance and so consequently and we understand you guys you know do it on a yearly basis, which is exactly what you should be doing. There’s -- in particular on critical wellness recovery hospitals, there is fluctuations in those rates as you saw in the second quarter. We’re comfortable with the guidance that we provided out there and we -- to a certain extent quite candidly when we take a look at the fourth quarter that some of the analysts have provided, I think they historically I think they have done that right, but the third quarter was good for us but at the end of the day here we’re very comfortable with the guidance that we provide.

Okay. So it is -- I guess, maybe then thinking about how to think about 2019, 2020 going forward as we do this, I mean just maybe help us through or remind us what quarter you think are going to be strongest from a companywide perspective, I wasn’t sure Q4 being higher or being lower than Q3 in terms of recently few remodeling going forward as well or there just Q3 being maybe little bit better?

Yeah. I think Q3 was little bit better. So I think that’s the best place to leave it right now.

All right.

With regards to what’s the best quarter for us, the best quarter for us has always been Q1.

Okay. Great. And then I guess Concentra’s revenue declined sequentially by about 2%. Does that -- is there seasonality in that business? Last year it was kind of more flattish despite the hurricane. So I wasn’t sure how to think about that.

Yeah. Normally for Concentra what you have is typically in that business, first quarter is, first and fourth quarters are typically down. That’s what we’ve had historically although the past two years, first quarter has been up a lot higher than we’ve normally seen in the industry, but fourth quarter is always down. Second quarter and third quarter are always typically pretty close to one another.

Okay. So down two is not that far off of flat. Okay. And then going to the ERP side, obviously 16% volume growth it’s a huge number, but the margins were flat with that and why don’t you able to get a more leverage I would have thought to that that kind of patient day growth there might bring more leverage on the margin?

Yeah. I think that is again good question. We have start-ups. So we have the Ochsner startup, we called, Ochsner, it was probably a little bit, just about $800,000 of losses in the quarter because that startup. And then we have, we have some hospitals that only go around for a year, year and a half and what we’ve said is some of the --it takes typically two to three years for those hospitals to mature. So I think Bob mentioned Kevin that as we continue to open up new hospitals, the base gets larger, and these types of openings will become a smaller and small percentage of the total ERP business.

Yeah. I thought the startup losses were higher last year than they were this year? That was like a bit little over $1 million last year? I could be wrong on about that, but you’re just saying recently open hospitals a little bit and even as far as the margin performance, but nothing…

Yes.

… worried about at this point.

We’re not.

Okay. And the last question you guys have done a good job knocking down the rates on these refinancing, but obviously interest rates are rising is there any thought about terming out the loans at these points or how do you think about that?

When you say terming out the loans, do you mean fixing?

Yeah. Exactly, putting, putting bonds into term out some of the floating rate debt.

Yeah. We’re, we’re always

Yeah, exactly, putting bonds into term out some of the floating rate debt?

Yeah. We were -- we’re always evaluating whether that make sense or not. We’ve gone from -- we’re constantly paying attention to, which going on there. We’ve gone from a three month LIBOR to a one month LIBOR and yeah we’ll continue to keep with the one month LIBOR. From our perspective, taking a look at you know all the banks e-commerce and what they anticipate, we’re going to see, probably going to be 3% over the next couple of years. So if it makes sense to fix, we will do that and I think that the vehicle, we would probably use to do that will be a cap, but is got to be from our perspective -- we’ve got to buy something which is economically opportunistic for us. At this point in time we’ve been over the past couple of years, we’ve been in that 5% to 6% range on our floating. We continue to be there and even if LIBOR gets 3%, we will still be in that 5% to 6% range.

Okay. Makes sense. Thank you.

Our next question comes from the line of A.J. Rice from Credit Suisse. Your line is open. A.J. Rice: Thanks. Hi, everyone. Just a couple of questions, Concentra up 6%, ex-U.S. Healthworks this quarter, it looks like it’s now been a handful of quarters where it’s been growing in that mid-single digits sort of organically. I know at one point early days, the discussion was well long-term that sort of run rate for Concentra’s about 3%. Do you think the normalized run rate is somehow now higher and what sort of evolved that would -- has driven that higher rate of growth.

A.J., first of all it’s good to have you back. A.J. Rice: Yeah. Yeah. I’ll be back. I will be back.

Good. Good. With regards to growth listen the operators are concerned they have just done an absolutely fabulous job with that growth. I believe and then I think both and Bob and I believe that over the next year to year and a half that’s probably going to moderate a little bit as we integrate U.S. Healthworks… A.J. Rice: Okay.

… as far as the legacy business is concerned, but then subsequent to full for successful integration I think we could potentially return to those types of levels. A.J. Rice: Okay. All right. And then just a follow-up to that in U.S. Healthworks, I think, the stated synergy target is $38 million. Can you update us on whether that’s moved around at all, what is the timing expectation, when you’re going to realize that any update on that and generally just how U.S. Healthworks is works doing?

Yeah. U.S. Healthworks integration is going very well. The $38 million is a very good number. We’re very comfortable with that. There may be some upside to that. As far as timing on that we anticipate the majority of that will be realized in 2019 and certainly $38 million on annual basis will be obtained in 2020. A.J. Rice: Okay. And then my last question was, obviously, a lot of the businesses have shown nice margin improvement. Your biggest cost item is labor across those segments. What are you seeing in the major segments in terms of cost trends with respect to labor, any metrics that you can reference to turnover, productivity and it’s a mature tracking, just general wage increases maybe that you are seeing?

Yeah. What we are seeing A.J. is the labor price is really on the clinical side, the nursing side, and what we’re seeing is wage increases annually of about 3%. A.J. Rice: Okay. That’s pretty consistent with what you saw last year.

Yes. A.J. Rice: Okay. And when you think about therapies on the similar dynamic, not a lot of wage pressure there I am assuming?

Well, it depends on the geographic location that you are talking about is with the therapist, there is always different pockets where you’ve got some increases, but nothing that we haven’t seen over the past five years to six years. A.J. Rice: Okay. All right. Thanks a lot.

Thank you, A.J.

Our next question comes from the line of Peter Costa from Wells Fargo Securities. Your line is open.

Thanks for letting me back in the queue here. It’s one of the follow-up on the last quarter’s issues with the threshold days. We saw the revenue per patient day continue to drift a little bit lower here, while it’s up year-over-year, it’s lower sequentially and then length of stay is up a little bit. Can you tell us did you have like the -- the threshold day problem again this quarter or did that marginally go away or did you manage through it with the kind of labor cost, can you talk about that a little bit?

Sure, Peter. Yeah. Threshold days were, they bounced back this quarter, so we were in good shape with regards to threshold days. You had talked about the length of stay. On a same quarter year-over-year basis, the -- it’s actually down.

Down year-over-year of it, up sequentially.

Yes. Yeah. It’s about the same sequentially.

Looks like there are 20 bps -- 10 bps.

Okay.

So I am just, how did you get the improvement or are we just having it easier comp with the third quarter of last year, so threshold days are down. I guess it helps, but your revenue per patient is still a bit down from where it was in Q2?

I just tell you. I think the rate per patient day in second quarter I’ll have to go back take a look at ‘17, you’re talking about ‘17, $35.

‘17.

We are talking about supply.

Its’ a small amount, but I am just trying to figure out just want to…

You are looking -- nothing.

I understand. But it was such a topic last quarter. I am just trying to make sure that we have resolved in this quarter.

Yeah. Like again I mean, the point that we made last quarter is -- there is fluctuations in those rates and they will continue to be fluctuation so it’s not a problem, it’s that part of the Medicare reimbursement system, it’s based on averages.

Yeah. When we had the threshold day issue, I think, that when we talked about it last quarter, we didn’t say there was a problem. We just said it was what it was and that nothing is sort of a remedial action. Those are critical patients that are they said -- we said I think what we said at that time it would tend to average out, over the year and we had a quarter with a higher threshold days were there. I don’t want to give anybody the impression that we had to take remedial action of this threshold day because they are what they are and they will be down and they will be up across the course of a full year. So we actually can’t manage that.

As we said last quarter, it’s really based on the physician’s determination as to when you are going to discharge the patient.

Perfect. Solved or not solved because this is normal. Thank you very much.

Yeah.

Exactly. Exactly. And that’s a good clarification because I do think that when we started calling it out, I mean, people, the first half they heard about threshold days are now I think it’s natural for people wanted to track one more indicator but it’s not a good indicator to track, I mean it shows up in the rate, right, and so that’s just the way it’s going to be.

Sounds good. Thank you, guys.

Yeah. Thank you.

Thanks, Steve.

Our next question comes from the line of Matthew Gilmore from Baird. Your line is open.

Hey. Thanks. I had another reimbursement question, now those are -- those are most popular. For the 2020 changes with the, on the growth side moving from the FEM to the care tool measure, you’ve got one of your peers, I think most people think that’ll create a little bit of a pressure in terms of their rates in 2020. But just curious in terms of how you are thinking about that change and what impact it might have.

Yeah. I mean I just think the way we’ve looked at it, we just don’t see it as being a big game changer for us so I…

And Matt, as we get close to the 2020 and we see some more specifics we’ll be able to comment little bit borrowing, usually what we, what we don’t do is we don’t comment on proposed rigs.

Yeah. But I think the comment we have made is we’re, we’re not alarmed by it, I mean, yeah, look, any time we go through these changes. So the rehab industry has been stable for so many years and maybe we just have -- we live in with post-traumatic stress, because we’re always going to LTAC changes all the time that one in the grand scheme of our last 10 years it doesn’t it will be an adjustment. But it’s not we don’t see it as, it’s not going to be like LTAC criteria. So hope that it will, will sort of throw it.

Got it. Fair enough. Thank you.

We have no further question at this time. I will now turn the call back to management for closing remarks.

No. That’s all. Thanks everybody for joining us and we’ll look forward to updating you next quarter or when our guidance come out, comes out for ‘19 at the end of the fourth quarter the beginning of next year.

Ladies and gentlemen, this concludes today’s conference. Thank you for participation. You have a wonderful day. You may disconnect.