Good morning, and thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the second quarter 2025 results and the company's business outlook. Presenting today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; the company's Executive Vice President and Chief Financial Officer, Michael Malatesta. Also on the conference line is the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or 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. Welcome to Select Medical's Earnings Call for the Second Quarter of 2025. I'd like to begin today's call by sharing that U.S. News & World Report recently released its list of the nation's best rehabilitation hospitals. And I'm pleased to report that eight of our hospitals, which operate across 15 locations, were recognized among the country's best. Kessler Institute for Rehabilitation at #4 was once again ranked as one of the top five rehab hospitals in the nation, earning a spot on the list for the 33rd consecutive year. Our other ranked hospitals include Baylor Scott & White Institute for Rehabilitation, Dallas at #8; Cleveland Clinic Rehab Hospital at #20; California Rehab Institute at #24; Banner Rehabilitation Hospital at #26; and OhioHealth Rehabilitation Hospital at #31. This year also marked the first recognition for Baylor Scott & White Institute for Rehabilitation hospitals at Frisco at #36 and Penn State Health Rehabilitation Hospital at #47. These rankings underscore the strength and consistency of our services and reflect our ongoing commitment to delivering high-quality care to patients and the communities we serve. I'm also pleased to report that we have continued success in executing our development strategy this past quarter. In our rehab division, we recently opened our second hospital with UPMC in Central Pennsylvania, adding a 12-bed acute rehab unit in Tallahassee, Florida, and expanding our acute rehab hospital in Pensacola, Florida, with eight additional beds. In addition, we launched a 12-bed neuro transitional care unit with SSM Health in Missouri. Within our outpatient rehab division, we continue to expand our footprint and grew our clinic count by eight this past quarter. Looking ahead, we remain focused on advancing our development pipeline and growing our presence in key markets, particularly within the inpatient rehab division, where we continue to see a growing demand for our services. We expect to add 382 rehab beds, of which 294 will be consolidating, 88 non-consolidating, and 30 critical illness beds between now and the end of the first half of 2027. This expansion will be achieved through a combination of new openings and bed additions in markets with strong volume and occupancy rates. In Q3, we plan to open a 45-bed hospital in Temple, Texas, and add a 30-bed critical illness recovery hospital in Memphis, Tennessee. Later this year, we plan to open our fourth Cleveland Clinic Rehab Hospital as well as a 32-bed acute rehab unit in Orlando, Florida, and complete a 10-bed expansion in one of our existing rehab hospitals. We anticipate opening an additional three rehab hospitals during 2026, including our fourth in partnership with Banner Health in Tucson, Arizona, with 58 beds, and a new freestanding 63-bed rehab hospital in Ozark, Missouri, with Cox Health Systems, and a 60-bed rehab hospital branded as AtlantiCare Rehabilitation Hospital in New Jersey. We also intend to add another acute rehab unit and two neuro transitional units in 2026. And in 2027, we plan to open a 76-bed facility in Jersey City, which will operate under the Kessler brand and expand one of our existing hospitals. We expect to continue to fill our pipeline with additional growth opportunities as our inpatient rehab pipeline remains very strong with many opportunities currently under evaluation. In parallel with our growth initiatives, we remain committed to delivering value to our shareholders. This quarter, we repurchased over 5.7 million shares of our stock at an average price per share of $14.86 under our Board authorized stock repurchase program for a total purchase price of $85.1 million. In addition, our Board of Directors has also declared a cash dividend of $0.0625 per share, payable on August 28, 2025, to stockholders of record as of close of business on August 13, 2025. Looking forward, we will continue to evaluate the most effective uses of capital to support strong operational performance and shareholder value, including strategic investments for growth, debt reduction, additional share repurchases, and cash dividends. Turning to our second quarter financial results. On a consolidated basis, our revenue grew nearly 5% to $1.3 billion, and our adjusted EBITDA increased to $125.4 million from $124.7 million in the prior year. Earnings per common share from continuing operations rose 88% to $0.32 from $0.17 per share in the same quarter last year. I'd now like to highlight key financial results by segment, starting with our inpatient rehab hospital division, which delivered another exceptional quarter. Revenue rose 17% year-over-year to $313.8 million, with adjusted EBITDA increasing nearly 15% to $71 million, and our adjusted EBITDA margin declining slightly to 22.6% from 23.1% in the prior year. Our occupancy rate was lower than the prior year at 82% and is reflective of the early-stage operations of our new hospitals. Our same-store occupancy rate remained stable at 86%. In April, CMS issued their proposed rule and if adopted, would see an increase of 2.4% in the standard federal payment rate. We expect the final rule to be posted in early August. In our outpatient rehabilitation division, revenue increased 3.8%, which was driven by a corresponding 3.8% in patient volume when compared to the prior year. Our net revenue per visit remained stable at $100. And while we continue to see improvements in our commercial managed care rates, these improvements are offset by a 3.2% reduction in Medicare physician fee schedule rates. The reduction in Medicare rates caused a $3 million decrease in our revenue during the quarter, and adjusted EBITDA increased 6.1% year-over-year, with the division's adjusted EBITDA margin increasing to 9.3% from 9.1%. Before speaking to the performance of the critical illness recovery hospital division, I wanted to address the headwinds we are continuing to face with the LTAC reimbursement system. The goals of the 2013 LTAC criteria policy, which we supported, focused on caring for high-acuity patients, those with a minimum three-day ICU stay, with lower acuity patients being treated in lower cost settings. Since the enactment of the criteria, the LTAC industry has seen a 56% reduction in Medicare spend. The enactment of criteria and additional regulatory changes has resulted in the closure of over 100 LTAC hospitals, which represents a 24% closure rate. The high-cost outlier threshold targets established more than 20 years ago at 8%, preceded the implementation of LTAC criteria and was developed using a significantly different and less acute patient population than the industry is caring for today. This has resulted in a significant reduction in reimbursement for the higher acuity patients, and the high-cost outlier status has been further magnified by the 20% transmittal. We are committed to engaging in dialogue with regulators regarding potential short- and long-term policy reforms. We're hopeful these discussions will lead to positive changes that will enable us to continue to provide excellent care to high-acuity patients with complex medical needs. Moving on to the financial results for the critical illness recovery hospitals division. Revenue was $601.1 million this quarter, which is a decline of 1% from the same quarter last year. The decrease continues to reflect the impact of the increase in high-cost outlier threshold and the implementation of the 20% transmittal rule. Patient volumes remained relatively stable year-over-year, with our occupancy rate improved to 69% from 67% in the prior year. Our salary, wage, and benefits to revenue ratio rose slightly to 58%, and our adjusted EBITDA declined 22% year-over-year, which was primarily due to the regulatory changes I mentioned earlier. Our adjusted EBITDA margin was 9.4% for the quarter compared to 11.9% in the prior year. Yesterday afternoon, CMS issued the final LTAC rules for fiscal year 2026. These rules, which become effective October 1, include an increase in the standard federal rate of 2.9%, which is higher than the 2.7% that was within the proposed rule in April. The high-cost outlier threshold increased by $1,188 from $77,048 to $78,936, which is less than the $14,199 increase in the proposed rule. The MS-LTAC-DRG relative weight and expected lengths of stays were also updated in the final rule. This concludes my remarks, and I'll now turn it over to Mike Malatesta for some additional financial details before we open the call up for questions.

Thank you, Bob, and good morning, everyone. At the end of the quarter, we had $1.9 billion of debt outstanding and $52.3 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.04 billion in term loans, $250 million in revolving loans, $550 million in 6.25% senior notes due 2032, and $33 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 3.57. As of June 30, we had $319.1 million of availability on our revolving loans. The interest rate on our term loan is SOFR plus 200 basis points and matures on December 3, 2031. Interest expense was $30 million in the second quarter compared to $28 million in the same quarter last year. For the second quarter, operating activities generated $110.3 million of cash flow. Our days sales outstanding, or DSO, for continuing operations was 62 days at June 30, 2025, compared to 60 days at June 30, 2024, and 58 days at December 31, 2024. Investing activities used $64.7 million of cash in the second quarter for purchases of property and equipment. Financing activities used $46.5 million of cash in the second quarter, which includes the $85.1 million of shares repurchased under our stock repurchase program, $7.9 million in dividends paid on our common stock, $12 million in net distributions and purchases of non-controlling interests, and a $2.6 million payment on our term loan. This was offset by $70 million in net borrowings on our revolving line of credit. We are reaffirming our business outlook for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion, adjusted EBITDA to be in the range of $510 million to $530 million, and adjusted earnings per common share to be in the range of $1.09 to $1.19. We are narrowing our expectation of capital expenditures, which we now project to be in the range of $180 million to $200 million. This concludes our prepared remarks. And at this time, we would like to turn it back to the operator to open up the call for questions.

Our first question comes from the line of Ann Hynes with Mizuho.

I want to discuss how the EBITDA per segment aligned with your internal expectations. Specifically regarding critical illness, I anticipated an improvement in the year-over-year decline in EBITDA. Did that match your expectations or fall short? Additionally, regarding guidance, I know you reaffirmed your adjusted EBITDA guidance, but any updates within that guidance would be appreciated.

Ann, critical illness came in for our internal expectations, slightly lower. But then again, we continue to see inpatient rehab exceed our expectations. And then going forward, that's kind of built into our guidance. So overall, we're comfortable with our reaffirmed guidance.

All right. Okay. And then with inpatient rehab, I know there's a few states that might lift the inpatient rehab CON, hopefully, over the next year North Carolina being a big one. What is your strategy going forward in those states that will have a more favorable CON environment for inpatient rehab?

Yes. As you point out, there are a few states that continue to have CON law. You recall that a year or so ago, Florida sunsetted theirs, which was really a big one, and you saw more growth. And we would expect the same thing to happen in North Carolina or other states that may remove their CON requirements. For us, it really won't change our strategy. We would spend more time in North Carolina, but we would continue to stay true to our joint venture strategy. So while if you see a sunset, for example, in North Carolina, you wouldn't expect us to see us go in, tie up land and immediately start construction. We would probably follow our model of engaging with some of the major systems in that state that would be interested in growing their post-acute network with rehab potentially critical illness and outpatient.

Our next question coming from the line of Justin Bowers with Deutsche Bank.

So an outpatient rehab making some progress there, EBITDA up 6% year-over-year. Can you talk about how you expect that business to evolve throughout the rest of the year? And then in the midterm, where you think EBITDA margins can settle for that business?

Justin, we continue to expect outpatient to improve. And I think as we communicated before, that improvement will continue throughout the year. And our initiative with scheduling really should take off towards the end of the year and the early part of next year. And we should start exceeding that or approach that 10% EBITDA margin because right now, we're slightly below. I think a slight improvement from 9.1% to 9.3% this last quarter, but we should continue to see improvement.

Justin, it's Bob. I continue to be very bullish on the prospects for our outpatient division on a go-forward basis. We have been working on implementing some really good system upgrades in that platform. And with a platform that spans as many states as we're in with 2,000-plus clinics, the incremental improvement that we can put over that platform through systems efficiencies can really drive performance, margin, and EBITDA growth. So I'm pretty bullish about our prospects there on a go-forward for the balance of this year and particularly through 2026, even with the Medicare headwinds that we're seeing on the Medicare fee schedule.

Understood. And then with the outlier threshold, can you help us understand the impact there in 2Q or maybe throughout the year? And then what some of those policy initiatives are that you think could maybe impact the CMS' approach to this longer term?

Yes. I'll address the policy initiatives. The final rule for LTACs was released yesterday, and we observed a slight improvement in the rate, which is encouraging, along with a significant increase in the high-cost outlier threshold that had been previously indicated to rise above $90,000. The final rule sets it around $70,000. I appreciate the current CMS administration's openness to feedback from providers, including our engagements, and we have submitted several comment letters. I have found them to be more open and transparent in discussions compared to the prior administration. They are receptive to dialogue, which is the best outcome we can hope for. While success in our policy initiatives isn’t guaranteed, I am encouraged by the improved opportunity for dialogue.

And Justin, the impact on the quarter was around 60% of the impact it was in Q1. So as we expected, we're still going to face these headwinds throughout the year, but it wouldn't be as significant as it was in Q1 when we had higher volume and higher acuity.

Our next question coming from the line of Ben Hendrix with RBC Capital Markets.

Just to touch a little more on that last point there. If we could just get your take on kind of how we should think about seasonality with LTAC margins knowing that we did enter a lower acuity quarter, and we saw a sequential decrease in margin? And now that we've got kind of a more stable high-cost outlier backdrop going forward, any way that we should just generally think about margin seasonality going forward under the current rule?

Well, I don't think there's a change in when we say margin seasonality, I mean Q1 is always going to be our strongest quarter, and the great thing is, last year, I think in 2024, we were around 17% margin. We finished this year at over 13%. Q2, we started seeing weakening as the quarter progressed. Then in Q3, that's normally our most challenging quarter, and we started seeing census grow through the back end of that quarter. And in Q4, we started seeing a ramp back up during the colder months. So while we're going to have margin suppression from 2024, the seasonality aspect is relatively the same.

Great. And then can you remind us how much startup cost you have included in the guidance for the IRF segment through the back of the year?

It's probably slightly around or a little less than $10 million for the back of the year. I think year-over-year for Select Specialty Hospitals, we're pretty consistent from '25 through '24 around our per annum basis, that $20 million level.

Our next question coming from the line of Joanna Gajuk from Bank of America.

This is Joaquin Eduardo on for Joanna. So with Q1, you flagged the 20% rule impact. The rule was issued as a surprise to the industry and there was some traction in Congress to pull back. What's been the progress on this? And what should we expect moving forward?

I'm not sure I can agree that there was momentum in Congress to reconsider the 20% transmittal, if that's what you were asking. Initially, yes, the 20% transmittal originated from what they refer to as a sub-regulatory measure during the last administration. It wasn't established through formal rulemaking but came through a transmittal, which surprised and disappointed many of us in the industry since it didn’t allow for any feedback. Typically, it would be quite challenging for Congress to amend that. Up to now, there has not been much opportunity, even though you had the reconciliation bill, which was relatively straightforward. Therefore, we will likely have to continue working with CMS on this matter. This situation has been in effect for nearly six months. While we can remain hopeful, hope alone is not enough. This is our current position, and we have incorporated the transmittal's impact into our guidance while exploring all options to influence policy. I want to emphasize that the 20% transmittal is just one aspect of a broader challenge related to high-cost outliers in the industry. As I've mentioned, the overall number of cases in the LTAC industry has declined, and those cases generally have a higher CMI case mix index and greater acuity, making the 8% outlier pool a persistent challenge in the reimbursement system. I hope that provides clarity without going too deep into specifics.

No, yes, definitely. And then kind of changing it up though, on the final LTAC reg, you only called for the 2% increase in the outlier threshold. So it should be easier to manage than the 30% increase in full year '25. So are we assuming better margins in the critical illness business in Q4 '25?

Well, the reduction from the proposed $91,000 to $70,000 was certainly welcome, but I'm not sure I could agree with the characterization that it will make it easier in 2025, 2026. That's still a challenging number on the fixed loss threshold.

We didn't include the proposed rule in our guidance, nor do we typically factor in proposed rules. While we're pleased that it's not as harsh as the proposed rule, it still indicates a slight increase from our current threshold limit.

Our next question coming from the line of A.J. Rice with USB.

I want to clarify the dynamics in the critical access hospital LTAC business. It seems that less severe patients are no longer being referred to LTACs, suggesting a possible reduction in the number of providers in this space. Can you discuss the impact of recent outlier changes on these dynamics? More broadly, what is the current supply-demand situation in this sector? Is there a significant decrease in capacity? Are you experiencing a consistent flow of patients, particularly the type you prefer? Has the situation improved for you compared to others? I'd appreciate any insights you may have.

Let me address that, A.J. Please let me know if I'm answering your question. The supply-demand dynamics for the critical illness recovery hospitals are very strong, and we believe they will become even stronger. This is driven by demographics, advances in medical technology, and the need to alleviate pressure on increasingly crowded ICUs, especially during peak respiratory case months. There is certainly strong patient demand for our services. However, we do face challenges that everyone encounters, such as the inappropriate denials or preauthorizations that can delay or block admissions, particularly as more Medicare patients transition to Medicare Advantage. This is not a new issue, and we manage it. Currently, over 24% to 25% of our patient population in our critical illness recovery hospitals are Medicare Advantage, with about 30% under Medicare fee-for-service. Therefore, we see that demand continuing forward. Our main challenge lies in the reimbursement structure, as our company has one of the highest case mix indexes and typically treats higher acuity patients who are more likely to incur significant costs, leading to high-cost outlier status. If that answers your question, great. If not, feel free to ask a follow-up.

A.J., from the perspective of employee rates, we are seeing continuous improvement. Coming out of or during the peak of COVID, our inpatient division was experiencing annual increases of 5% for full-time employees. This has now decreased to 3% and is even slightly below that. So, in that regard, things are getting better. We no longer face the same headwinds or elevated costs from agency staffing that we had in 2022 and part of 2023. However, we did notice a slight decline in our critical illness labor margin this quarter compared to last year, mainly due to revenue pressures associated with the HCO threshold. That’s where you noticed a modest increase of 1%.

I'm showing no further questions in queue. I will now turn the call back over to Mr. Ortenzio for any closing remarks.

Great. Thank you, operator. Thanks, everybody, for joining us for the call. We look forward to updating you next quarter.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.