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Select Medical Holdings Corp  (NYSE:SEM)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and thank you for joining us today for Select Medical Holdings Corporation Earnings Conference Call to discuss the Fourth Quarter and Full Year 2018 Results and the Company's 2019 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 your questions.

Before we get started, we will like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to the management of Select Medical today and the company assumes no obligation to update these statements as circumstances change.

At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's fourth quarter and full year earnings conference call for 2018. Before I outline our operational metrics, I want to provide you with some summary comments and some updates since we spoke last quarter. On an overall basis, 2018 was a year of nice growth for us in terms of net revenue and adjusted EBITDA.

Net revenue and adjusted EBITDA exceeded prior year by 16.4% and 19.9% respectively. We acquired U.S. Healthworks last February and our Concentra team is doing a great job of integrating this acquisition. We also signed or closed several new joint ventures, commenced construction on several new JV hospitals and expanded our service lines in some of our existing joint venture partnerships.

During 2018, we added two new rehab hospitals, one in partnership with Ochsner Health in New Orleans and one was an additional hospital on our Baylor joint venture in the Austin market. We also started up one new Critical Illness Recovery hospital while closing four Critical Illness Recovery hospitals throughout the year.

Our hospital in Panama City, Florida remains temporarily closed due to the devastation caused by Hurricane Michael. Also entered into a joint venture with Banner Health, which started with outpatient services in 2018 and currently includes two new rehabilitation hospitals on a construction, Arizona, scheduled to open in 2020. We also announced plans to expand our Ohio Health joint venture to include outpatient services and announced a partnership with UC San Diego Health to open both a Critical Illness Recovery hospital and a new rehab hospital in the San Diego market.

The UC San Diego Critical Illness Recovery Hospital joint venture opened earlier this year and we expect construction on the rehab hospital to commence later this year. Additionally, we expect to open our new 50-bed rehab hospital in partnership with University of Florida System in Gainesville later this quarter. We also have new rehabilitation hospitals under construction in Las Vegas in partnership with Dignity Health, scheduled to open in the second quarter and in Newport News Virginia in partnership with Riverside Health scheduled to open in the third quarter.

Our development pipeline remains robust. For the fourth quarter, we had a 15.6% year-over-year growth in revenue and an 18% growth in adjusted EBITDA, which included double-digit growth in both our outpatient rehab and Concentra business segments. Cash flow from operation was, again, very strong in this quarter, generating over $113 million and we repaid an additional $45 million of Select's revolving debt during the quarter and $210 million during the year.

I will now take you through our operational metrics for the fourth quarter and the full year. Overall, our net revenue for the fourth quarter increased by $170 million to $1.26 billion, which included top line growth in each of our four business segments. For the full year, net revenue increased 16.4% to almost $5.1 billion. Net revenue in our Critical Illness Recovery hospital segment in the fourth quarter increased slightly to $426 million. The increase was driven by a 1.5% improvement in rate to $1,717 per patient day in the fourth quarter.

Occupancy in our Critical Illness Recovery Hospital segment was 66% in the fourth quarter compared to 65% in the same quarter last year. Our patient days and admissions both declined slightly compared to the same quarter last year, driven by the four hospitals we closed during the year as well as our damaged hospital in Panama City. Excluding the hospitals that were closed, patient days would have increased 1.7% in the quarter.

For the year, net revenue on our Critical Illness Recovery Hospital segment increased $28.6 million to $1.75 billion compared to last year. Despite an increase in the number of facilities -- despite a decrease in the number of facilities we operated, patient days and admissions both increased slightly for the year with occupancy at 67% this year compared to 66% last year.

Net revenue per patient day was $1,716 for the year compared to $1,704 last year. Net revenue in our Rehab Hospital segment in the fourth quarter increased 7.9% to $182 million compared to $169 million in the same quarter last year. Patient days increased 10.9% to almost 82,000 patient days compared to 74,000 days in the same quarter last year.

Net revenue per patient day was $1,610 in the fourth quarter compared to $1,639 per day in the same quarter last year. The decline in net revenue per patient day was primarily driven by reduction in our Medicare rate at our California Rehab hospital. For the year, net revenue in our Rehab Hospital segment increased 13.7% to $708 million compared to $622 million last year.

The primary driver of the revenue growth was the growth driven in our patient days, which increased 16.9% to over 315,000 patient days compared to 270,000 days last year. The increase in patient days was primarily driven by maturation of the hospitals we opened in 2016 and 2017. Our net revenue per patient day for the year was $1,606 compared to $1,577 last year. The increase in net revenue per patient day was primarily related to an increase in non-Medicare net revenue per patient day. Net revenue in our Outpatient Rehab segment in the fourth quarter increased 8% to $272 million compared to $252 million in the same quarter last year.

Patient visits increased 2% to 2.1 million visits in the fourth quarter compared to 2.06 million visits in the same quarter last year. During 2018, we sold several clinics to non-consolidating joint ventures with Banner Health and our Baylor joint venture. Excluding the effects of those clinic sales, visits would have increased 5.6% in the fourth quarter compared to the same quarter last year.

Our net revenue per visit was $103 in the fourth quarter compared to $102 per visit in the same quarter last year. For the year, net revenue in our Outpatient Rehab segment increased 5.8% to $1.06 billion compared to $1 billion last year. Net revenue per visit was $103 per visit this year compared to $101 last year. The increase in net revenue per visit is a result of improved contracted rate with some of our payers. Visits increased 1.5% to 8.36 million visits, compared to 8.23 million visits last year.

The overall increase in visits resulted from new start as well as acquired clinics. Again, excluding the effects of the clinics we sold to non-consolidated joint ventures, visits would have increased 5.1% compared to last year.

We also had an increase in revenues related to management fees and contracted labor services provided to our non-consolidated joint ventures in both the fourth quarter and the full year comparative periods.

Net revenue in our Concentra segment for the fourth quarter increased 53.8% to $384 million compared to $250 million in the same quarter last year, which was primarily driven by the contribution of U.S. Healthworks.

For the fourth quarter revenue from our centers was $349 million and the balance of approximately $35 million was generated from on-site clinics, community-based outpatient clinics and other services.

For the centers, we had patient visits of $2.82 million -- visits of 2.82 million and net revenue per visit of $124 in the fourth quarter. This compares to 1.86 million visits and $117 per visit in the same quarter last year.

For the year, net revenue in our Concentra segment increased 53.7% to $1.56 billion compared to $1.01 billion last year. The addition of U.S. Healthworks on February 1 of this year was the primary reason for the increase.

Visits in our centers increased 48.2% to 11.4 million visits compared to 7.7 million visits last year. Revenue per visit was $124 this year, compared to $115 per visit last year. The increase in revenue per visits is primarily related to U.S. Healthworks as well as an increase in worker's compensation, employer services reimbursement rates in our existing Concentra centers.

Total company-adjusted EBITDA for the fourth quarter increased 18% to $147.1 million compared to $124.6 million in the same quarter last year with consolidated adjusted EBITDA margin at 11.6% for the fourth quarter compared to 11.4% same quarter last year.

For the year, total adjusted EBITDA increased 19.9% to $645.2 million compared to $538 million last year with consolidated adjusted EBITDA margin at 12.7% for the year compared to 12.3% last year.

For our Critical Illness Recovery Hospital segment, adjusted EBITDA was $56 million in the fourth quarter compared to $58.4 million in the same quarter last year. Adjusted EBITDA margin for the segment was 13.1% in the fourth quarter, compared to 13.8% in the same quarter last year.

Our adjusted EBITDA and margin were impacted by changes in other operating expenses relative to our net operating revenues during the fourth quarter compared to the same quarter last year. For the year, Critical Illness Recovery Hospital segment adjusted EBITDA was $243 million compared to $252.7 million last year.

Adjusted EBITDA margin was 13.9% compared to 14.6% last year. Adjusted EBITDA and margin were both impacted by increases in employee costs and other operating expense this year compared to last year.

Our Rehabilitation Hospital segment adjusted EBITDA increased slightly in the fourth quarter to $28.6 million compared to $28 million in the same quarter last year. Adjusted EBITDA margin for the Rehab Hospital segment was 15.7% in the fourth quarter compared to 16.6% in the same quarter last year. For the year, our rehab hospital adjusted EBITDA increased 21% to $108.9 million compared to $90 million last year.

Adjusted EBITDA margin was 15.4% compared to 14.5% last year. The increase in adjusted EBITDA and margin were primarily related to the maturation of the hospitals we opened in 2016 and 2017 as well as increase in net revenue per day I previously mentioned.

Adjusted EBITDA losses in our start-up hospitals were $4.7 million this year compared to $7.5 million last year.

Outpatient rehab adjusted EBITDA increased 16.8% to $35 million in the fourth quarter of this year compared to $30 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 12.9% in the fourth quarter compared to 11.9% in the same quarter last year.

For the year, outpatient rehab adjusted EBITDA increased 7.1% to $142 million compared to $132.5 million last year. Adjusted EBITDA margin was 13.4% compared to 13.2% last year. The growth in adjusted EBITDA and margin for both the fourth quarter and the full year was a result of increase in payment visits and the rate increase I previously mentioned.

Concentra adjusted EBITDA was $52.9 million for the fourth quarter compared to $31.9 million in the same quarter last year. Adjusted EBITDA margin was 13.8% in the fourth quarter compared to 12.8% in the same quarter last year.

For the year Concentra adjusted EBITDA was $252 million compared to $157.6 million last year. The increase in adjusted EBITDA is primarily the result of the acquisition of U.S. HealthWorks.

Adjusted EBITDA margin for the Concentra segment was 16.2% this year compared to 15.6% last year. The increase in adjusted EBITDA margin for both the fourth quarter and the full year was the result of lower relative operating costs across the combined Concentra/U.S. HealthWorks businesses.

Earnings per fully diluted share was $0.18 for the fourth quarter compared to $0.75 in the same quarter last year. Adjusted earnings per fully diluted share was $0.20 per fully diluted share for the fourth quarter compared to $0.32 in the same quarter last year.

Adjusted earnings per fully diluted share excludes the pre-tax losses on early retirement debt and its related tax effects in the fourth quarter this year. During the fourth quarter last year, adjusted earnings per share excluded U.S. HealthWorks acquisition costs and related tax effects as well as the income tax benefits resulting from federal tax reform legislation.

Earnings per fully diluted share was $1.02 for the year compared to $1.33 last year. Adjusted earnings per fully diluted share was $1.03 per fully diluted share for the year compared to $0.98 last year.

Adjusted earnings per fully diluted share excludes the pre-tax losses on our early retirement debt, non-operating gains, U.S. HealthWorks acquisition costs, and the related tax effects for the year.

Last year adjusted earnings per share excluded the loss on early retirement debt, U.S. HealthWorks acquisition costs, and related tax effects, as well as the income tax benefit resulting from the federal tax reform legislation.

I'll now turn it over to Marty Jackson for some additional financial details before opening the call up for questions.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Thank you, Bob. Good morning everyone. For the fourth quarter, our operating expenses, which include our cost of services and general and administrative expenses, were $1.1 billion. This compares to $978 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the fourth quarter were 88.9% as compared to 89.3% in the same quarter last year.

For the year, our operating expenses were $4.5 billion. This compared to $3.8 billion last year. As a percentage of our net revenue, operating expenses for the year were 87.8%. This compares to 88.2% in the same quarter last year. Cost of services were $1.09 billion for the fourth quarter. This compares to $947 million in the same quarter last year.

As a percent of net revenue, cost of services were 86.5% for both the fourth quarter of this year and last year. For the year cost of services were $4.3 billion. This compares to $3.7 billion last year. As a percent of net revenue, cost of services were 85.4% for the year. This compares to 85.6% last year.

G&A expenses were $30.3 million in the fourth quarter. This compares to $30.6 million in the same quarter last year. G&A expense in the fourth quarter last year included $2.8 million in U.S. HealthWorks acquisition costs. G&A as a percent of net revenue was 2.4% in the fourth quarter. This compares to 2.8% of net revenue for the same quarter last year.

For the year G&A expense was $121.3 million. This compares to of $114 million last year. G&A as a percent of revenue was 2.4% this year. This compares to 2.6% last year.

As Bob mentioned, total adjusted EBITDA was $147.1 million and adjusted EBITDA margin was 11.6% for the fourth quarter. This compares to adjusted EBITDA of $124.6 million and adjusted EBITDA margin of 11.4% in the same quarter last year.

Total adjusted EBITDA for the year was $645.2 million. This compares to $538 million last year. Adjusted EBITDA margin was 12.7% this year. This compares to 12.3% last year.

Depreciation and amortization was $52.6 million in the fourth quarter. This compares to $40.4 million in the same quarter last year. For the year, depreciation and amortization expense was $201.7 million. This compares to $160 million last year. The increase in depreciation and amortization expense in both fourth quarter and the full year is primarily the result of the U.S. HealthWorks acquisition.

We generated $7 million in equity and earnings of unconsolidated subsidiaries during the fourth quarter. This compares to $5.4 million in the same quarter last year. For the year, we generated $21.9 million in equity and earnings of unconsolidated subsidiaries. This compares to $21.1 million last year.

We had several one-time items both this year and last year. We recognized a loss of early retirement of debt in the fourth quarter of $3.9 million. For the year, we recognized $14.2 million of losses on early retirement of debt.

We also recognized non-operating gains of $9 million during the year, primarily -- this was primarily related to the sale of outpatient clinics to Banner and Baylor JV that Bob mentioned. Last year we recognized a loss on early retirement of debt $19.7 million.

Interest expense was $50.5 million in the fourth quarter. This compares to $38.5 million in the same quarter last year. Interest expense for the year was $198.5 million. This compares to $154.7 million last year. The increase in interest expense is primarily related to the financing of the U.S. HealthWorks acquisition at Concentra.

We recorded income tax expense of $58.6 million this year. This compares to an income tax benefit of $18.2 million last year. The tax benefit in 2017 includes the effects resulting from the federal tax reform legislation which caused us to revalue our tax reserves upon the enactment of the legislation.

Net income attributable to Select Medical Holdings was $137.8 million for the year, fully diluted earnings per share was $1.02, excluding the pre-tax losses on early retirement of debt, non-operating gains, U.S. HealthWorks acquisition costs and the related tax effects. This year our adjusted earnings per share was $1.03.

At the end of the year we had $3.29 billion of debt outstanding and $175.2 million of cash on the balance sheet. Our debt balance at the end of the year includes $1.13 billion in select-term loans; $20 million in Select revolving loans, $710 million in Select 6.38 senior notes; $1.17 billion in Concentra first-lien term loans, $240 million in Concentra second-lien term loans; $44.5 million in unamortized discounts premiums and debt issuance costs to reduce the overall balance sheet debt liability and we had $63.8 million of other miscellaneous debt.

Operating activities provided $113.2 million of cash flow in the fourth quarter. This compares to $108.2 million in the same quarter last year. For the year, operating activities provided $494.2 million compared to $238.1 million last year. Our day sales outstanding or DSO was 51 days at December 31, 2018. This compares to 54 days at September 30, 2018 and 58 days at December 31, 2017.

Investing activities used $50.6 million of cash in the fourth quarter. The use of cash was primarily related to $46.2 million in purchases of property and equipment and $4.4 million of acquisition and investment activity during the quarter. Investing activity used $697.1 million for the year. The use of cash was primarily related to $536.6 million in acquisition and investment activity, primarily related to the acquisition of U.S. HealthWorks and $167.3 million of purchases of property and equipment during the year.

Financing activities used $47.9 million of cash in the quarter. We had net repayments of $45 million on Select's revolving loans, $5.1 million in distributions to non-controlling interests and $2.9 million in term loan payments in the quarter. This was offset in part by net borrowings of other debt of $4.8 million.

For the year, financing activities provided $255.6 million of cash. We had net proceeds from term loans of $768.3 million and net borrowings of other debt of $17 million during the year. This was offset in part by net repayments of $210 million on Select's revolving loans and $311.5 million in distributions and purchases of non-controlling interests during the year.

Additionally, in our earnings press release, we reaffirmed our business outlook for calendar year 2019 provided earlier this year. We expect debt revenue to be in the range of $5.2 billion to $5.4 billion, adjusted EBITDA is expected to be in the range of $660 million to $700 million, and fully diluted earnings per share is expected to be in the range of $0.97 to $1.13 in 2019.

This concludes our prepared remarks. And at this time, we'd like to turn it back to the operator to open up the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Frank Morgan with RBC Capital Markets. Your line is open.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. Thanks for the clarification there on the LTACH volumes when you pulled out those divestitures. But I'm curious 1.7% growth which is effective for that same-store number if I understood you correctly. So just wanted to get a little more color on how you see growth going into the year? And maybe talk a little bit about what's implied in your guidance there? So, I guess, a two-part question.

How is the uptake in those local markets going with patient criteria and the ability to attract those patients? And then what's the implied growth in your guidance with regard to the LTACH segment?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Thanks for the question Frank. The guidance moving forward is we assume we have 96 LTACHs and we'll continue to have 96 LTACHs through the -- through all of 2019. There is no -- we did not increase any LTACHs during 2019.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

In terms of what our prospect is Frank in terms of how we're doing, I think that when you have as many hospitals as we do across as many states and local communities. I think we're generally pleased. I mean, we have some hospitals that are just going phenomenally well and are at the very high-end of our expectations. And then we obviously have a group that because of the nuances of the local market driving the census to back up to pre-criteria levels is we take a little bit more time, it's a little bit more difficult. So I think the biggest takeaway I can give you is that it's not even across our portfolio of critical illness hospitals. It's decidedly uneven when we have some hospitals that are doing phenomenally well and some of our hospitals that were great are just now good, and some of the ones that we were struggling with are doing much better. So it's a little bit of uneven. But we're still pretty optimistic that the portfolio of hospitals that we have is the right one and that over time we'll be able to drive the occupancies back up to pre-criteria levels.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. And Marty I think you called out in terms of your discussions about margins at some other operating expense line items that was one of the factors in the margin pressure there, could you give us any color there?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes, Frank. Actually, I think the -- with the volume decline, I think, the operators did a very good job controlling expenses. If you take a look at expenses on a year-over-year basis they were up about 1.4% or $5 million for the quarter. The issue was really the line being down.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. And I'm guessing that other operating expenses are probably more semi-fixed, so you probably couldn't change as much as but -- OK. Just, since we're talking about the guidance, just any other general assumptions that you're baking in there? Whether it's timing of openings of LTACs or start-up losses and tax rate?

And then finally just on Concentra, I think, I know this, but I just want to hear you say it, in terms of any seasonality you're seeing in that business on a sequential basis that's up?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes. Let me address your last question first and that is the seasonality associated with Concentra. I mean, Concentra, the fourth quarter is always a down quarter for them and you can go back over the years and you'll see that first, second quarters are -- the margins are north of -- since we've had it, north of 15%. And you'll always see in that fourth quarter a drop. So we should make sure that all the analysts kind of build that into their model moving forward. Now, Frank, remind me of the first question you asked?

Frank Morgan -- RBC Capital Markets -- Analyst

Yes. Just some more general assumptions around your guidance in areas like openings or maybe timing of openings, amount of start-up losses you expect and the same tax rate in the year? That's it.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes. The tax rates, we anticipate it's about 25% for the year. Openings, we do not anticipate any openings on the LTAC side. And with regards to the inpatient rehab, we should have one hospital opening, our Dignity Hospital should be opening in second quarter of the year. And then Shands, which is the University of Florida, will be opening by the end of this quarter.

Frank Morgan -- RBC Capital Markets -- Analyst

And start -- your implied start-up losses, you're about $900,000 in this pretty good quarter?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes. There's going to probably be -- for those hospitals, I would anticipate somewhere in the neighborhood of $2 million to $3 million of start-up losses per hospital.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. Thanks. I'll hop back in the queue.

Operator

Thank you. Our next question is from Peter Costa with Wells Fargo Securities. Your line is open.

Peter Costa -- Wells Fargo Securities -- Analyst

Good morning, Bob and Marty. So many things going well. The only thing that's been a little slower seems to be the improvement in the LTACs and you did get the occupancy up 1% year-over-year. But how much of more can you do in a year? Is it going to be something that's going to be sort of 1% per year? Or do you think you can do better than that? And what is it that's holding you back in those markets that you talked about being a little bit slower? Is it competition or is it an education process of either the clinical staff or the administrators?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yes. Pete, thanks for the question. I think you hit the nail on the hand. It really is an educational process. Remember that, as you go after these compliant patients, the complaint patients are actually in the short-term acute-term hospitals. And it's really just modifying their discharge, their historical discharging patterns.

We've got a -- our people continue to do a great job, I think, educating our referral sources and that's just going to take time. So, I think in terms of occupancy rate increases, I think, the 1% a year is probably a good assumption.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes, I would say that it would be definitely not competition. I mean as a general statement. I mean with the change over to the new criteria which as you know we're taking the LTACH-compliant patients exclusively. The high acuity of these patients and the fact that they're coming out of the intensive care units of the general acute care hospitals just makes the process in some markets slower.

The -- you have to demonstrate that you have the clinical wherewithal to take care of some really involved acute patients. And in most of our markets, we have all those relationships and the transition of patients is very smooth.

In others, we have work to do. We get some group of those patients and others, we have to work harder through education and providing the clinical programs that enable physicians and discharge planners to be -- feel comfortable that it's a good, safe environment for their high acuity patients. And so that's the process. And in many of our hospitals, we're there and we have a cohort that we just need keep working on.

Peter Costa -- Wells Fargo Securities -- Analyst

And is it educating the clinical staff more or is it educating the administrators to get the referrals?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

I think it's -- I think for these patients, it's more of the clinical staff.

Peter Costa -- Wells Fargo Securities -- Analyst

And you spiked out the employee cost on the critical illness recovery hospital as being one of the contributors to some of the weakness. How much of that is just raises -- pay raises versus having more staff on board trying to get ready for more patient volume?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

It really -- Pete, it really is a question of the annual increases to the staff.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yes, it's more of the former. The latter that you've mentioned is really did and done and we prepared for that going into criteria. So, it's very much the former. I mean this is just -- the critical illness hospitals is just a difficult venue for clinicians to work taking care of this population of patients. It's very tough work and it's hard to recruit into that area, it's hard to retain in an area in a time when there's nursing shortages. So, it's very competitive for staff out there and I think that's what's driving it.

Peter Costa -- Wells Fargo Securities -- Analyst

And do you think that's getting worse or getting better as we go forward?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

I would say the same. Although it is different depending on the geography and depending on the market that you're in. But I don't think we see it getting worse. I think we see it kind of -- I don't know that we would characterize it as getting better at this point, but certainly probably not getting worse.

Peter Costa -- Wells Fargo Securities -- Analyst

Thanks. Appreciate the time.

Operator

Thank you. Our next question is from A.J. Rice with Credit Suisse. Your line is open.

A.J. Rice -- Credit Suisse -- Analyst

Hi thanks. First of all let me ask about the Concentra U.S. HealthWorks business. As you anniversary that I think in the first quarter of this year, what is sort of the combined organic growth that you would look for that business to generate on the topline if you don't have?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes A.J. as -- I think you've got it correctly that the acquisition took place February 1 of last year. So first quarter you'll see a little bit of a -- you'll see January of 2019 really be that -- we won't anniversary I guess. What I'm trying to say is we won't anniversary until the second quarter, because it was acquired in February 1 of 2018. The top line organic growth that we see is probably in the 2% to 3% range.

A.J. Rice -- Credit Suisse -- Analyst

Okay. When I look at -- I guess also for this year in your guidance you have one quarter of this new care tool that the IRF business is going to have to be impacted by. I know it's not a huge business in your overall mix, but I wondered are you assuming sort of status quo with that transition or is that a headwind? How would you describe, what your view is on that at this point?

Robert A. Ortenzio -- Executive Chairman & Co-Founder

We're assuming status quo. We are not anticipating that as a headwind.

A.J. Rice -- Credit Suisse -- Analyst

Okay. And then on the interest expense guidance I guess in the fourth quarter you're running about $50.5 million of interest as you mentioned in your prepared remarks Martin. And you've got I thinking a guidance of $200 million. I know there's various things going on in there. But I wondered how much of your debt at this point -- I know you mentioned the trenches I don't know if you got any of that hedged I'm assuming you probably do. How much of your debt is floating-rate or what are you assuming about that? And then is there any assumption about the ability to call or refinance anything that might impact the interest calculation to go behind that $200 million?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes A.J. We're good with the $200 million. The expectation is that we will pay down some debt over the next year. With regards to what the composition of our debt is, we have our senior notes at 6.38 which are fixed and the balance of our debt is floating. In our guidance, we assumed that LIBOR would be in that 2.75% -- we're going a 1-month LIBOR we assumed it would be 2.75% to 3%.

A.J. Rice -- Credit Suisse -- Analyst

Okay I might just slip one last one in. You mentioned the Panama City's situation in your prepared remarks was that immaterial to consolidated results or did that -- was that a drag in the fourth quarter in any way and will it be a drag in the early part of 2019?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

It was certainly a drag in the fourth quarter. The Panama City on an annualized basis on EBITDA does around $5 million. And I think we incurred a loss in the fourth quarter of about $700,000, $800,000.

A.J. Rice -- Credit Suisse -- Analyst

And are you just assuming that persists for 2019? Or are you assuming that some point you get it up and running?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yeah. We don't think that Panama City will come back on board probably until the fourth quarter of 2019.

A.J. Rice -- Credit Suisse -- Analyst

All right. Thanks a lot.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Thanks, A.J.

Operator

Thank you. Our next question is from Patrick Feeley with Barclays. Your line is open.

Patrick Feeley -- Barclays -- Analyst

Hey, good morning everyone. Just a follow-up on that question. Do you expect any insurance recoveries for Panama City to come in?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes, we do. Yeah, I mean under the business interruption, portion of our insurance policy, we expect that to come in play. We probably won't realize that, again until the third or fourth quarter of 2019.

Patrick Feeley -- Barclays -- Analyst

Okay. And just my other question on the outpatient rehab side. First on some of the issues in Physio you experienced in the past. Can you just give us an update on where you stand with replacing some of those therapists you lost post-acquisition? Has that stabilized by now? And the other question -- I'll let you answer that and come back with the follow-up.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Sure. The Physio integration, we think that the -- our operators have done a great job, and you can see that in the past couple of quarters. You can see the improvement that's been made, and for all intents and purposes, yes the Physio been fully integrated and we're comfortable with where we are right now.

Patrick Feeley -- Barclays -- Analyst

Great. And the other question on the outpatient rehab. The other revenue bucket, while it's not terribly material, it's been up pretty materially 20% or so. Can you just comment on what's driving that? What's in that bucket? Is that primarily management fee revenue from the non-consolidated JVs driving that? Just any color there? And how to think about that for 2019? Thanks.

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yeah, there is -- you're absolutely right. That is going up as we continue to do more JVs and some of those JVs are non-consolidating. There's two primary components that are in that. That is as you pointed out the management fees, but there is also a line item called -- we do a labor pass-through. And both of those categories as we can -- as -- actually we did the Banner and the Ohio health deal, and also the Baylor. Those are all non-consolidating for us. So that's why you see the big increase on that line item.

Patrick Feeley -- Barclays -- Analyst

Got it. Thanks very much.

Operator

Thank you. Our next question is from Kevin Fischbeck with Bank of America. Your line is open,

Kevin Fischbeck -- Bank of America -- Analyst

Great. Thanks. I wanted to go back to the LTAC margins. I guess, you guys closed four sites year-over-year. I would have thought that might have helped boost the margin profile for some of their underperforming sites? Many of the margins were down year-over-year, I don't know if there is any other color you can provide there?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yeah, Kevin. The four hospitals that we closed those were hospitals where the lease was coming up and when you take a look at the marketplaces there wasn't -- when we take a look at five years out, we thought that there just wasn't a sufficient EBITDA increases to continue the five-year lease. All four of -- I think at least three of those four were actually generating positive EBITDA. But it was moderate EBITDA.

Kevin Fischbeck -- Bank of America -- Analyst

Yeah, so but I guess still that we're probably implied that your margins were benefited year-over-year by not having them in the same-store number, or in the consolidated number, I should say?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yeah, it's -- if we want to talk basis points, I'll have to get back to you on that. I don't -- it's immaterial actually.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And then, I guess your margins were down year-over-year even though on a same-store basis, you were growing volumes 1.7% and you said that going forward you expect 1% to be the right number as a starting point. And if the labor environment is not getting better, does your guidance assume that LTAC margins were down again in 2019?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

I want to make sure, we're talking about the same thing. The 1% that we were talking about was 1% occupancy rate, right? So I want to make sure that the percentages that we're talking about are -- it's an apples-to-apples comparison.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. But I guess in this quarter your occupancy was up at 1% right?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes.

Kevin Fischbeck -- Bank of America -- Analyst

And as for you talking about going forward and I guess, I'm just trying to figure out if it sounds like, you're saying, it's a bit similar volume growth in the future is what you saw here similar to wage growth as you saw here? And obviously margins were down so I just was trying to understand if you're assuming the margin will be down in 2019 or if this somewhat offset on rates or something else, costs?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Well I think if you like at the -- well the rate was up in the fourth quarter, the rate was up $26 what was down was Case Mix Index. And Case Mix Index represents about a $26 differential. We think we should be in that 1.25 to 1.26 range. We're at 1.22. That comes back to 1.25, 1.26, we'll be fine.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And then I guess with -- on the IRF side, the margins were down even though start-up losses were down. I guess I think if you take out the start-up losses and EBITDA, wouldn't have grown at all, it actually would've been down a little bit. So what is the -- is something going on there to which we think...

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Well I think Bob had mentioned we had an impact from the California Rehab Institute where the Medicare rate was down. We had an interim -- we had Interim Medicare rate in Q4 of 2017 that was because of the start-up nature of that hospital that -- the rate actually in -- Q4 of 2018 was lower than what it was in 2017. So that had a negative impact, as well as two hospitals we had, we had some softness in volume. And that really -- the two hospitals that were same store.

Kevin Fischbeck -- Bank of America -- Analyst

And how do we think about that California rate dynamic? Is that something that was -- still going to be a headwind year-over-year for the next couple of quarters or was that just a onetime thing in Q4 and the comps are normal going forward?

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Yes. No, we're -- it was the fourth quarter rate impact. So we will be fine going forward.

Kevin Fischbeck -- Bank of America -- Analyst

Okay, all right. Great, thank you.

Operator

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Robert Ortenzio for any closing remarks.

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Yes, thank you everybody for joining us and we look forward to updating you again next quarter.

Operator

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

Duration: 48 minutes

Call participants:

Robert A. Ortenzio -- Executive Chairman & Co-Founder

Martin F. Jackson -- Executive Vice President & Chief Financial Officer

Frank Morgan -- RBC Capital Markets -- Analyst

Peter Costa -- Wells Fargo Securities -- Analyst

A.J. Rice -- Credit Suisse -- Analyst

Patrick Feeley -- Barclays -- Analyst

Kevin Fischbeck -- Bank of America -- Analyst

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