Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the fourth quarter and full year 2025 results in the company's business outlook. Presenting today are the company's chief executive officer, Thomas Mullen, and the company's executive vice president and chief financial officer, Michael Malatesta. Also on the conference line is the company's senior vice president, controller, and chief accounting officer, Christopher Wigel. management will give you an overview of the quarter and then open the call for your questions before we get started we would like to remind you that this conference call may contain forward-looking statements regarding future events for the future financial performance of the company including without limitation statements regarding operating results growth opportunities and other statements that refer to select medical 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. Thomas Mullen.

Thomas Mullen Thank you, operator, and good morning, everyone. Welcome to Select Medical. I'd like to begin our call by we received a nonbinding indication of this process, the company and all of our style transition to our – where we continue to focus on rehabilitation business. In the fourth quarter, we added 150 beds. These include a new 32-bed hospital, a 32-bed acute rehab unit in Orlando expansion at our rehab in Virginia, and finally, the acquisition of a 76-bed rehabilitation hospital in partnership with Vibra Healthcare in Southern Kentucky. We cleared two beds from three rehab units and we added 10 beds during the 99 beds We've added some in Temple, Texas, operating 45 and a 63-bed hospital in New Jersey in the fourth quarter of 2026, as well as two acute rehab units in Florida and two neurotransitional units scheduled to open throughout quarter two and quarter three of 2020. In quarter one, 2020, and plan to expand one of our banner rehabilitation opportunities are progressing through various stages of development and positioning us for long five cents per share, 26, did financial performance. All three divisions exceeded prior year revenue in the fourth quarter. A decline 10% to 116 million in the prior year. The decline in adjusted EBITDA was an increase in health insurance expense year-over-year. A patient of medical and pharmacy benefits from continuing operations versus a diluted loss per common share of 19 cents per share. Adjusted earnings per common share from continuing operations was $0.16 to $0.18 last year. Adjusted EPS in the prior year, compensation expense. Adjusted EBITDA was $0.4 and a 9.8% margin in 2024. From continuing operations was $1.16 year-over-year to $339.2 million, and adjusted EBITDA for a patient day. Daily census grew. Occupancy improved to 82% from 81%, with same store occupancy rising to 86% from 85%. The adjusted EBITDA margin was 20% to 21.2% in the process. In our critical illness, adjusted EBITDA grew 5% to 66.4 million from 63.1%. The adjusted EBITDA margin was 10.5%. Our occupancy rate was also rising with our admissions rising by three years. The rehab division was driven by nearly 5% to $98 compared to the same quarter level. An unfavorable shift in the payer mix and an increase. The adjusted EBITDA was $11.2 million compared to $26.6 million last year, with margin declining to three points. This decrease is primarily due as noted earlier.

Thank you, Tom. And hello, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding and $26.5 million of cash on the balance sheet. Our debt at quarter end includes $1.04 billion in term loans, $100 million in revolving loans, $550 million in 6.25% senior notes in 2032, and $155 million of other miscellaneous debt. We ended the quarter with net leverage of 3.67 under our senior secured credit agreement and $469.1 million of availability carries an interest rate of SOFR plus 200 basis points and matures on December 3, 2031. The interest expense for the quarter was $28.9 million compared to $28.6 million in the same quarter last year. For the quarter, cash flow from operating activities was $64.3 million. Our days sales expanding, or DSO from continuing operations, was 57 days at December 31st, 2025, compared to 58 days at December 31, 2024, and 56 days at September 30, 2025. Investing activities used $66.9 million, which includes $59.1 million used for purchases of property and equipment, and $9.1 million in acquisition and investment activity. Financing activities used $31 million, including $50 million in net repayments on a revolving line of credit, $38.1 million in net distributions to non-controlling interest, $7.8 million in dividends, and $2.6 million in term loan loans. We also received $51.3 million of net proceeds from other debt issuances during the quarter. We have a business outlook for 2026 and expect revenue to be in the range of $5.6 billion to $5.8 billion. Adjusted EBITDA is expected to be in the range of $520 million to $540 million. And fully diluted earnings per common share is expected to fall in the range of $122 to $1.32. Late capital expenditures are expected to be in the range of $200 million to $220 million. This concludes our prepared remarks. At this time, we would like to turn the call back to the operator.

Thank you. If you'd like to ask a question, please press star 11. If your question hasn't answered and you'd like to move yourself in the queue, please press star 11 again. Our first question comes from Ben Hendricks with RBC Capital Markets. Your line is open.

Great. Thank you very much. I was wondering if we could parse through some of the income statement items, you know, particularly the higher health costs that you saw, just the total amount of that, that, and then just kind of the impact on the OP rehab business in particular, looking at 3.4% margin and the weakness you saw. I just want to kind of parse that out between the variable discount, the Medicare rate, mixed pressure, and the health costs.

Hi, Ben. It's Mike. In regards to health insurance expense, for the outpatient division, the impact was approximately $5 million for the quarter. And the impact for variable discount was approximately $6 million. So both added together is around $11 million. And the remainder of the delta is related to, as we noted, shift and pair mix and softness in some markets.

Thank you. And as we think about the guidance going forward, can you kind of talk about the puts and takes and how you're thinking about forecasting? Do we have this mixed pressure continuing in the outlook? And then kind of what are the – kind of what are your base assumptions for some of the other segments?

Well, I think we're very, very confident and pleased with the performance of our inpatient rehab division. As Tom commented earlier, we have a very robust pipeline, so we're set up well for 2026. We did – you know, we're cautiously optimistic on outpatient for improvement. You know, we believe that the $11 million that we just alluded to were truly one-timers. And then for critical illness, you know, the fourth quarter, you know, we basically were kind of right in plan or maybe even a little better than we expected. And for critical illness, you know, again, I would say cautiously optimistic for next year. But, again, there's always just with all the puts and takes in that division, it is, you know, a little more subject to variability. Thank you.

Our next question comes from Justin Bowers with D.B. Your line is open.

Hi, good morning. Appreciate the update on the special committee and was curious if you're able to expand upon that maybe around some of the other potential strategic alternatives and then any timing goalposts to the extent that you can.

Hey, Justin. Again, it's Mike. We're really not able to really comment on the process that's taking place right now, other than what we commented on at the beginning of the call.

Okay. Understood. And then just, you know, there's been some weather in the first quarter, like, you know, across the country. Is that, you know, presuming that the guy does incorporate that, but is there any call-outs there in any of the segments? And then any differences in, like, days this year, 1Q versus 1Q 25 of last year that we should consider?

There really wasn't a large impact or any impact at all of material on our inpatient divisions for critical illness and inpatient rehab. There was an impact, though, for outpatient. And again, some of that you're able to recover, you know, through the course of the quarter. But there was an impact in, you know, in some areas and states related to the weather that we experienced in the beginning of 2026.

Okay. Thank you, Mike.

Thank you. Our next question comes from Anne Hines with Mizuho. Your line is open.

Thanks. Just a little bit more detail on the outpatient issues. Why would the health insurance only impact the outpatient division? I'm assuming you're self-funded for your entire company. Is it just the population? I'm just kind of confused why it would impact just that division. And can we just have a little bit more detail on what you mean by the $6 million available discounts? You're taking higher managed care discounts than you assumed in guidance?

Hi, Ann. In regards to health insurance, that impacted the entire company. But it's just because of the size, it's about paid in some certain areas. So, you know, overall, it was approximately a $15 million impact in the fourth quarter than it anticipated coming into the fourth quarter. In regards to variable discount, you know, that is related to some of our, you know, older receivables that we made the decision to write off after we thought all collection efforts were exhausted. And when we're talking older receivables, I would say they're falling over, you know, over the two-year period of receivables so I don't know if that answers your question yeah and then you mentioned some softness in some markets is that due to competitive issues are they big markets like any more detail you can provide on that that'd be great just because the myth on outpatient was much bigger than you know obviously people thought yeah I mean there are some certain markets that you know we're evaluating we're gonna put a focus on in in 2026 that, you know, we're investigating, well, I was a little softer than we anticipated. Tom, I don't know if you want to kind of add any color to that.

I think that we're looking at rate in some of these markets, and then some of the markets where we're having some challenges right now revolve around staffing. And we're really focusing in on the recruitment of therapists in those markets.

And that's some of the softness that we're experiencing currently that we expect to overcome in the coming months great and just directionally your EBITDA guidance can you just provide detail from a segment level like an outpatient I'm sure that weakness in the second half has the anniversary in the early 2026 can you expect that segment to rebound to growth and then any additional detail you can give on expectations for growth for critical illness and inpatient rehab that would be helpful.

Yeah. So, Anne, we historically have not provided guidance at the segment level, but some color that I could add is, for critical illness, we were, I would say, kind of, again, cautiously optimistic, but it's, I would say, somewhat in line with where we performed our projection for 2025, kind of kept it relatively flat. For inpatient rehab, that's where we, you know, again, as we experienced over the last few years, that's where we're seeing the majority of our growth. And for outpatient, we do expect it to improve and, you know, what we saw in Q3 and Q4 the last half of the year, we did kind of taper those expectations within our guidance.

Thank you.

Thank you. Our next question comes from Joanna Gudzik with Bank of America. Your line is open.

Hi, good morning. So a couple of follow-ups. Maybe first on the outpatient rehab segment commentary. So I appreciate quantifying the cost and discounts, what is receivable, I guess, right off. And then pay your mix. So last quarter you talked about it. So I just want to check whether the same issues or different issues, the pop-up. because it's, you know, I guess the pricing sounds like it was impacted by the discount, but I was just trying to assess, like, the payer mix situation or the headwind, because you still call it out.

I guess on the variable discount, I didn't understand your first part of the question. Can you repeat that?

So I was just asking about the payer mix issues, because on the third quarter call, when you called it out, you kind of said you think this is temporary in nature, And I guess with fourth quarter now, you're saying that, you know, there's obviously the bigger issue around the cost and discounts. But the payer mix is also mentioned there. So I just want to check whether you had the same payer mix issues you had in third quarter, or there's something new.

So we've seen within the outpatient division in the fourth quarter, we did have an uptick on our managed Medicare population. So that caused some headwinds. And that's something that we've been dealing with throughout this fiscal year. workers' comp was slightly down when I compare it year over year. And so, you know, with a company our size, too, it's not sometimes just within the classifications, it also sometimes can be the mix within the mix within certain payers within a market within managed care commercial. And with our volume, those dollars can add up easily. So again, what we saw was just, you know, a slight deterioration in our payer mix, which impact on NetRev per visit. I'd say that's probably about a dollar of the impact, the variable discount was approximately two dollars of the impact on the year-over-year NetRev per visit.

And Joanna, just Tom, I would add that going into 2026 with the regulatory changes that we have, we're seeing a two percent increase on Medicare for the first time in many years. So we're going to see somewhat regulatory change on Medicare and Medicare Advantage for 2026.

Yeah, I was going to ask you a second question. So I know you don't give specific guidance by segment for the year, because my question was around, yeah, like the Medicare rate increase in 26, how much I guess it's going to help, and should we assume the margins will, you know, improve? It was 7% for the full year, but I guess second half of the year was much worse. So just trying to figure out how to think about just directionally the progression of margin in that segment.

Yeah, you should expect the margins to improve year-over-year in the outpatient division.

All right. And if I may, on the consolidated numbers, when we look at the fourth quarter, I guess the EBITDA of 105 is about, call it, almost 30 million below what was implied by your original guidance at the midpoint. So you quantify a couple of these things, so 15, I guess, is the number for the cost, and there's the discounts in the outpatient, but there's still something missing, so I assume that's got to be the payer mix. Anything else to call out? Sounds like the critical illness was in line, and maybe the IRFs were better, so I wonder what else was, I guess, a part of the shortfall.

Joanne, I think we're probably a little off of what you said, the midpoint of our guidance was heading into the fourth quarter. I think our midpoint heading in was probably 520. So we're right around 25. I mean, it's still a significant miss, but 15 million of it's health insurance right off the bat. We did have some timing issues with inpatient rehab. We were expecting inpatient to even do that much better year over year. But again, these are just timing issues of when certain Certain of our development activities have taken place, so in the long run, we're still very bullish on the inpatient rehab division. And then just, again, on top of the health insurance, and maybe a few million dollars in inpatient rehab, but we thought we needed to exceed it a little bit more, it was just, again, the softest we had in the outpatient division in the fourth quarter.

All right, thank you, Kasia. That was my other follow-up on the IRF segment. So the margins there, declining over here in a quarter of a quarter. So it sounds like there's some timing issue, so maybe also you can help us quantify some of the startup losses in this segment, and how should we think about that for 26?

So the margin, the same store margin, was still in excess of 23%, Joanne. So we still feel very comfortable. So the deterioration of the margin down to, you know, it's a little – we're still a little north of the 20% is related to startup losses. So, again, these are just timing issues, nothing with the long-term viability of that segment.

Thank you so much.

Thank you. And our next question comes from AJ Rice with UBS. Your line is open.

Thanks, everyone. Just a couple questions. One thing that's created a little bit of volatility in the LTAC business over the last few years has been the high-cost outlier threshold movement. I know it's still early in the year, but are you seeing anything there that gives you pause that maybe it's going to be more or less impactful, the year-to-year change, than you thought?

Year over year, AJ, this is Tom. We're seeing increased patients in our shared markets, and that's starting to help us see any major head. We'll be looking for what to expect from 2026.

Okay. There's certainly been some questions, mainly around the IRFs, but broadly I'll ask it. On this CMS team demo, what are you guys' thoughts on that and how that might impact your business, if at all?

We have – will be impacted by the team implementation. The only – we've been talking to our partners about this new initiative and the bundling, And we think that it's going to be a minor adjustment in those markets at best.

And then my last question on the share repurchase. There wasn't much done in the fourth quarter when we think about 2026. Any comments on capital deployment, any changes in priority, any thoughts on share repurchases for 2026? I know you've got the review, so maybe that puts everything on hold, but I just wondered what your thoughts were about share repurchases.

AJ, your last comment when you said we're under the review or evaluate the process, so you're correct. That puts everything on hold. All right.

And then on capital, does it make any changes on CapEx and thoughts around that?

No. I mean, right now it's business as usual as we're running our business where, you know, Again, I think we've been very open that our focus is growing inpatient – our primary focus is growing our inpatient rehab division.

Yes, I think you'll see rehab units as well continuing to grow over the course.

It doesn't jump off the page to me, but we are sort of asking this for almost all the provider companies. Any applications for AI that you find particularly useful that you're focused on?

We're evaluating employing AI. I mean, one thing that we're evaluating is our, you know, back end, some of our back end processes in our billing office where we think there's opportunity. I'll let Tom speak a little more because we're evaluating across all lines.

We have engaged a group initiatives.

Thanks a lot.

Thank you. Our next question comes from Bill Sutherland with Benchmark Stonex. Your line is open.

Oh, thank you. Actually, AJ took care of most of my questions. I'm thinking of the only labor question we didn't, I think, really address was in critical illness, which I know you focused on a lot in the past couple of years, is that settling in and kind of like a good mix, and any – seeing all the union activity in the health systems with – on the acute care side, any issue there for you guys going forward?

In regards to the labor bill, you know, again, we're very pleasantly surprised where the agency rate has settled into post the difficulties we, you know, experienced with agency costs in 2022, you know, really the fourth quarter of 2021 through the early part of 2023. So that's kind of come into line, and we're really focused in settling more on an allocation of 70% full-time, 15% PRN, and 15% agency. And it's really hovered right around that percentage of 15%. So I think it's just continued improvement. We've kind of reached kind of where I think we're at. We're a little improvement year over year on our margin for SW&B, so I don't know if you have anything to add to that.

Our labor margin is running just above 56 percent, and that's in line with where we're projecting to be and want to be. And then as far as labor union activity, there's always systems that are dealing with labor union activity. We have not in the past year had any significant threats that we've had to – there's nothing on the horizon.

That's good to hear. Tom, did you address, or Mike, the startup expense for IRF? Will it be in line this year and not impact margins?

Yeah, it's going to be relatively consistent year over year. There's a little timing, but for total spend, I'd expect in that around $15 million, a little south of $15 million, a losses for 2026.

Okay.

Thank you, I'm showing no further questions at this time. I'd like to turn the call back over to Tom Mullen for closing remarks.

We have no further comments.

Thank you for your participation. This does include the program and you may now disconnect. Everyone, have a great day.