Ladies and gentlemen, thank you for standing by and welcome to the U.S. Physical Therapy Third Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Chris Reading, President and Chief Executive Officer. Sir, you may begin your conference.

Thanks, Paula. Good morning, everyone. Thank you for joining us to U.S. Physical Therapy’s third quarter earnings call. With me on the call today include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Rick Binstein, our Vice President and General Counsel; Jon Bates, our Vice President and Controller. Before we begin, management’s discussion and financial review of the quarter as well as the year, we will review a brief disclosure. Jon, if you would, please?

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. And these forward-looking statements are based on the company’s current views and assumptions, and the company’s actual results can vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Thanks, Jon. Before we review the financials in detail, I would like to provide some color on the quarter as well as to discuss our plan for the remainder of the year. For starters, business overall for the quarter, look pretty good. On a business per clinic basis, we averaged 24.3 visits for the quarter, which is usually a vacation heavy period for us in this year. We held our clinic volume numbers very steady through the summer months. We saw a sequential improvement from July to September, which was nice to see. Net rate improved slightly from Q2 to $105.04, up about $0.19 quarter-to-quarter. We are able to make some operational adjustments within the quarter that had a positive rate effect. Offsetting that somewhat was a mix shift that we saw. Our Medicare business grow at a higher rate than we produce in our work comp business, which also grew but at a slower comparative rate. Larry will likely cover that in his comments, so we will speak to that further during Q&A. Same-store volume was also positive for the quarter as well as the year-to-date period, up 3.3% for the quarter, which was a 90-basis-point bump, up from Q2 and a 4% same-store visits rate for the year so far, which is an improvement over our six-month trend. In the quarter, we worked to right-size some individual partnership staffing, which have gotten a little out of shape, and we were able to get a good portion of that done in the quarter. Accompanying that was about $0.01 worth of severance-related costs, which affected this quarter. Having now completed a couple of rounds of 2016 budget work, in detail, a couple of things are clear to me. This year, we allowed ourselves to get a little out of shape.…

Thanks, Chris. First, I will talk about the quarter and then the results for the nine months. In the third quarter of 2015, net revenue increased by 8.1% to $84 million due to an increase in patient visits of 8.7%, offset by a decrease in the average net rate per visit of less than 1%. Total clinic operating costs were $65.2 million or 77.5% for the third quarter this year as compared to $59 million or 75.9% in the 2014 period. The increase in cost was primarily attributable to $5.1 million operating cost of new clinics opened or acquired in the past 12 months. Total clinics salaries and related costs were 55.4% in the recent quarter versus 53.8% a year earlier. Included in salaries and related costs from the 2015 quarter, is $230,000 of compensation and severance costs for employee terminations as part of the company’s previously announced cost cutting plan. Rent and other costs, as a percentage of revenue was 20.7% for both periods. Our provision for doubtful accounts was 1.3% in the recent quarters compared to 1.4% a year ago. The gross margin for the third quarter was $18.9 million or 22.5% as compared to $18.8 million or 24.1% last year. Corporate costs were $6.9 million in the third quarter this year as compared to $7.5 million in the third quarter in 2014. Corporate costs were 8.2% of revenue in the 2015 period as compared to 9.6%. As Chris alluded to, we’ve made some – our costs were lower this year, primarily because our included incentive comp for executives and management in the quarter of the year is down significantly from the 2014 period. Operating income for the recent quarter increased 5.3% to $11.9 million as compared to $11.3 million in the 2014 third quarter. After taxes and…

Thanks Larry. With that, we have concluded our prepared comments. So, operator, if you would go ahead and open the lines for questions.

The floor is now open for your questions. [Operator Instructions] Your first question comes from Brooks O'Neil of Dougherty & Company.

Good morning guys. I have a couple of questions. So Chris alluded to a slightly faster growth in Medicare relative to the Fit2WRK business, just give us a little more color on what you are seeing, particularly on the Fit2WRK side, but I am also curious about what you are seeing on the Medicare side?

Yes. So let’s first, we will tell you the percentages and then I can give you a little color.

Alright. So if you compare the third quarter of this year to the third quarter last year, our private and managed care, which is basically the commercial insurance business has increased year-over-year about 5.4%. During that same comparable periods, workers’ comp increased by 4.3% and Medicare and Medicaid combined increased by 11.8%. So we have grown the Fit2WRK business, but not at the same pace as commercial insurance or Medicare.

Yes. So on what we consider the commercial insurance business, I think the way that we have that classified, probably a good bulk of that is Blue Cross, which is a pretty darn good payer for us and so it’s not a bad thing. The growth in Medicare business plus some [ph] business that we are absolutely focused on growing, particularly in conjunction or in I guess in balance with the work comp business. So we are continuing to increase our client base on the Fit2WRK side. We recently did a big national pilot and we are just beginning to see the results of that that will be evident more in the current quarter. And we think that that will continue to help us. So I am not worried about it, but we are focused on – we will get back with our sales team. We will make sure that we have the appropriate local focus. We are out calling on docs and I am hopeful that we can move the needle as we have in the past.

Sure, that’s great. So second question, if I remember correctly, in the second quarter, you had a couple of what I might call episodic may – I guess I would call them pricing issues and I am curious – sort of take us forward a quarter, what’s happened with those and have you had any reversal or have you been able to offset those pricing actions in other markets?

Yes. So the pricing was up very slightly, not a lot, but a little bit over Q2. It was $0.19, so it’s not a big needle mover. We had some operational things that we needed to do. I think offsetting that was a little bit of the mix shift that Larry just mentioned. So we continue to work on that. That’s not a static situation, that’s a dynamic situation that we had some influence over and we continue to work on it.

Okay. So you are not seeing more markets where somebody wants to trim your prices back a little?

Yes. Brooks, right now I mean in today’s world, we have got some pricing pressure. I wouldn’t consider it to be significant, but there is some. Offsetting that, there are some things that we can do and have been doing for a number of years now. And so the environment remains about the same. We are not seeing anything dramatic change.

Sure. Okay. Last question and let me try to phrase it in a palatable sort of a way, so can you give us any color on the partnership outlook?

Yes. In terms of deals or development?

Yes.

Yes. We continue to be active. We didn’t announce anything in the quarter, but we are working on some things and we are going to have a good development year. So it will be a good acquisition year. It will be good organic development year. We opened – or I guess we opened eight or nine for the quarter. I don’t remember whether it’s eight or nine and I think it’s eight de novos and we acquired since the end of the second quarter, we inquired – acquired two tuck-in practices. One is a really nice practice in a market that helps to fill in there. It was a practice of some size. And we are able to do that very efficiently and cost effectively. So we are working on some good things and we will get some things done here in the next few quarters, I am sure.

Great. Congratulations. Thanks a lot.

Thanks Brooks.

Your next question will come from Larry Solow of CJS Securities.

Just piggyback on the good de novo openings, you – I assume you are still somewhat offset with that, but in terms of closings some of these less efficient clinics or were they cannibalizing other ones, is that – and I guess, you just closed a few of those this past quarter, is that right?

So we – July we closed one, August – between August and September, we closed three. So four for the quarter.

Okay. And I imagine these are still underperforming or smaller clinics?

Yes, always underperforming. Usually, the ones that we are shutting down have been a little bit of a bleed for a while.

Right. Okay. I am just looking at this, I know salaries and whatnot are – obviously have been a little inflated the last few quarters, it looks like you started making some progress this quarter, but just as a percentage of sales, still pretty high number there, 55.5% or so. And you mentioned a lot of the increases at the newer clinic. So is there – but it sounds like work to be done across your full panel of all your clinics, so is there more work to be done in the newer ones, across the board or is it a mix?

It’s a mix. It’s definitely a mix. I mean the newer facilities or organic facilities are cost – very cost efficient. There is not a lot of staffing, things that you can do there. The acquired facilities, we have got them priced in the way that we operate. But in our existing facilities, the ones that have been around for a while, I am not really particularly happy right now with where we are or with our timeliness in our response. Listen, one of our challenges and it’s an opportunity and we are going to get it figured out, therapists, by and large are people that look at things in a very positive way. So they look at a patient and they expect them to get better, expect to be able to influence that patient’s outcome, and they do. They look at their business and expect it to get better. And quite honestly, sometimes the actions don’t meet the expectations, and we’ve got to get that aligned. We can’t have facilities that are backing up and not making staffing changes. And that’s not a company thing, that’s not a corporate thing. That’s a local market thing that we have to get dialed in, and we will. I’m not happy with where we are right now. Everybody is very focused on it and there’s – but there’s more work to do.

And along those lines, do you happen to have the visits per clinic per day, which I imagine continues to rise pretty well? And then, I guess, the more – the statistic, which, I guess, probably can use some improvement as the average visits per day per therapists. Do you happen to have those handy or...

Yes. So visits per clinic per day for the quarter were 24.3. Just for perspective, there were 22.9 in Q1, 24.4 in Q2, which is typically our busiest quarter. We really stayed quite steady through the quarter. We finished the quarter. September was 24.6, and so we continue to clip along in that 24 range, which is again, it’s an improvement over where we were a year ago, but we can do better. And we’re continuing to focus on that and again, get our staffing – it’s not big dollars on a per clinic basis, but we’ve got to get it – it aggregates to big dollars, and we’ve got to get it dialed in a little better.

Congrats. And then the visits per day per therapist, you have those stats?

Visits per licensed therapists per day were 10.8 in Q3, and it was 10.8 in Q3 of – for ‘14.

Yes. We haven’t made enough – we haven’t made progress.

Got it. It’s still pretty flat there. Okay, got you. Okay. Yes.

Yes, it’s flat. And this is no reason for it to continue to be flat. We’ve got to make, and we can, some adaptations there, and we will.

Right. Got it. I guess, you see rising patients per clinic. So I guess, you want to leverage that and not have to increase staff per increase.

Right.

Okay, great. Excellent. I appreciate that. Thanks guys.

Thanks, Larry.

[Operator Instructions] Your next question comes from Brian Tanquilut of Jefferies.

Hey, good morning guys. Chris, just a question on one of your comments today, you said that at intra quarter, you were able to address the commercial rate issue that – or get some rate adjustments in place. Do you mind just giving us some color on that and how we should expect the strategies on rate growth on the commercial side going forward?

Yes, I wasn’t specifically speaking to commercial just in aggregate, things we needed to do. So right now, I think our rate opportunity continues to be mix-related, primarily. Certainly, we had a little bit of fine-tuning to do and occasionally, here and there, we always do with our mix of 500 facilities from an operations perspective. So we’ll continue to do that. I think that’s always going to be there. And in general, I think rates are going to remain relatively flat unless we can get a meaningful mix shift. We expected them to be flat this year to down a little bit, and we’ve begun to address that. We’ll continue to work on it.

We also had a slight increase in units per visit in Q3 over Q2, so we were up about half a unit, which will have an impact on rate too.

Got it. And then, Chris, you talked about your scheduling efficiencies, and that’s something that you guys have worked on over the last few years, especially after the Medicare cuts happened. So how much is there left to improve, scheduling efficiencies for – taking into account the different payer classes and payer – and the revenue rate that each payer reimburses you for?

Yes. So there’s still some room. I mean, we – honestly, Brian, I think we’ve seen, in general – our partners, in general, have done a good job with a lot of things. We haven’t done a great job with that, and we’re not happy where we are and there’s still an opportunity. It’s not massive, it’s not a 50% opportunity for sure, but there’s definitely opportunities across many of our facilities to get some weekly improvements in efficiency, making some schedule adaptations, where we’re not at or above 11 visits per clinic per day. And that’s begun to roll out, and I think that’ll have a positive effect. But we’re focused on it, and we’re a little frustrated that we haven’t moved it. And it’s an area that we are very attuned to right now.

Chris, related to that, we – across the health care environment or health care sector, we’ve heard other companies talk about labor inflation or just wage inflation. And looking at your salaries expense being up 11% year-over-year versus visits of 8.7, I mean, are you seeing any pressure in wages yet or increasing difficulty in hiring clinicians?

It’s not difficulty in hiring. We felt a little pressure really at the end of last year to, again, with select people and select markets and across more of our facilities to do a wage-related adjustment, and I think that’s affected us a little bit this year. I don’t know that we’d see a progression within the year. To be honest, I would have to defer maybe to Glenn on the op side. But from my perspective, I don’t think we’re seeing intra-year pressure. We did make some adjustments at the end of ‘14.

I agree with Chris. We hadn’t seen much of an increase this year. There hasn’t been any shortage of therapists, so finding and hiring therapists has not really been a major issue. So salary pressure has not a big part of it.

If you look, Brian, the rate is down slightly, and our productivity hasn’t increased. And honestly, to a large degree, that’s the whole reason the cost look out of whack.

Got it. Larry, last question from me for you. Rent expense looks like it ticked up quite a bit as well. So how should we think about that? Is there anything other than just unit growth?

No, that’s the mix with the acquisitions in newer clinics, which typically had higher rentals expenses than the older clinics. So we’re not seeing a lot of pressure in terms of rental rates.

Alright, got it. Alright, thanks guys.

Thanks, Brian.

Your next question comes from Mike Petusky of Barrington Research.

Hey, Mike.

Hi, good morning. I guess, just one more pass on the salaries and related. So Chris, you said earlier, that you have right-sized some of the partnership expenses, but you have also said, hey, I am not really happy where we are in terms of this issue, if I am understanding it correctly. And I guess, I am wondering how much of what you see as kind of the labor issue? Do you feel like you have addressed at this point and how much is left to go?

Yes, I think we have addressed a pretty good chunk of it, probably the bulk of it, but we are still through the budget process. We have identified still some opportunities to either make some adjustments or make some quick changes with respect to the volume that we are able to handle within those facilities. And so we have very distinct and clear plan across each of our regions down at a partnership level. And when we make those adjustments, we’ll have to make some changes. And again, these aren’t big on an individual facility or partnership basis, but they’re necessary. We’ve had plans in place, in some cases, in the local market. Maybe we’ve gotten part of the way there, maybe we haven’t. But we’re carrying staff that was planned toward a particular volume. And if we’re not going to get there, we have to – I don’t like to do it. I mean, we’re affecting people’s lives. It actually is probably the single thing that irritates me more than anything else within this business, is when we don’t adequately protect these folks that we bring in on a local basis. But we’ve got to do the right thing, and the first right thing is to make sure we have enough of volume. And if we’re not going to do that, then we have to be right-sized.

One of the things in the budgeting process, the last few weeks, we’ve talked about over and over again, and Glenn has done a ton of work on it, is we have to staff at where we’re running now, not where we think we’ll be September next year. We can’t wait on volume to justify cost.

And I would say that it’s really not a matter of reducing staff anymore. It’s really a matter of capacity at this point and increasing our productivity. If we do that, it’ll take care of the salary issues that we have now.

Got it. Just a quick one, I guess, for Larry. Is – Larry, I know that normally this in terms of dollars sequentially, it is just up because you guys add facilities, but based on the changes you made in Q3, is there any chance of that number – in terms of dollars, not as a percentage of revenue, but in terms of dollars base relatively flat or should it kind of...

Are you talking to the stuff about operating costs or what – I am not sure what you are talking about?

I am still fixated on the salaries and related?

So you don’t have clinic costs?

Yes.

We are adding facilities though.

Yes. We are adding facilities. Now you have $230,000 that related to employees that were terminated, but it’s going to go up as we add more locations.

Just trying to get some margin expansion back to where we have been running. So I mean that’s the opportunity, the gross dollars are going to continue to rise over time.

Yes. Corporate costs are lower because our incentive comp is going to probably be less than half of what it was a year ago.

Okay. So could the corporate cost stay relatively flat sequentially?

I hope not.

The goal is to get this thing chugging along again and to see that. It’s not a people’s thing, it’s really incentive comp. So long-term, the goal is to get back in a healthy shape on both sides.

I don’t expect us to run at less than 9%, let me put it that way, like we did this before, it’s less than 9%.

Yes. And just – thank you. Just a couple of I guess the housekeeping, can you guys give kind of the payer mix across the different items you normally, how you break it out and then also the fails [ph] and sales in facilities covered, please?

Okay. In terms of the payer mix, commercial insurance, which includes both private and managed care was 51%, workers’ comp was 18%; Medicare and Medicaid combined were 24.6% and other was 6.4%.

And on the sales side, we currently have 92 sales reps covering 398 locations.

Okay, alright guys. Thank you so much.

[Operator Instructions] Your next question comes from Mitra Ramgopal of Sidoti.

Yes. Hi, good morning. Most of my questions have been answered, but just a couple of quick ones. Chris, I know you indicated the bulk of trying to get costs under control is sort of behind you. So wondering if that you feel the target is by year end, it should be back to where you feel more comfortable or is it sort of more like mid-2016, any sense on the timeframe?

Yes. So it’s a great question. I think it has more, Mitra to do with staying dialed in at the appropriate level. I mean we are not talking about, for the most part bodies going away. We are talking about part-time people, staff at the right level. We are going to continue to be around and so that’s an ongoing focus area. Again, $32 a day for us, which is it depends on the market, but give or take it’s roughly an hour worth of somebody’s clinical time in a given day. That aggregates pretty quickly across 500 facilities. And so the real opportunity is to keep this dialed in and we intend to do that now. We are going to have to make occasional period-to-period adjustments. But I think the bulk of the big change is which again, were small changes aggregated across a lot of facilities, not big massive shifts of process or people, but those will continue to be ongoing. We will have a little bit in a quarter and we may have a little bit in the first quarter as we see where our volume comes out.

Yes. I mean we – as we have gone through the budgeting process, we made cuts in the third quarter. It became clear with certain partnerships and clinics that there was still some, again mostly part-time or PRN or whatever excess capacity or people there longer than they needed to be. So there are some more cuts being made right now.

Okay, thanks. And Larry, given the increased focus in terms of, as you mentioned, bringing cost on a control, improving productivity, etcetera, does that sort of hold – make you hold off a little in terms of potential acquisitions?

No.

No, not a bit. Yes. No, that’s absolutely not. I mean, it doesn’t – we have a great cash position. We are in great balance sheet position. We are talking to great people. We are really excited about the people that we expect to bring into the family and there is a lot more to do. So no is the right answer. No, we are going full steam ahead.

Thanks. And then finally I know when we talked about reimbursement being a little tighter last year, there is a sense of maybe some of the smaller players might be weeded out, etcetera. Are you seeing any benefit from that at all?

So when you say smaller players...

He is talking about private practices, single clinic.

The more mom-and-pop, yes.

So I’m sorry, Mitra, because I thought you were talking about something else. Could you just walk me through it again?

Yes. I was just wondering if sort of tougher reimbursement environment might provide an opportunity for you, as some of the...

Yes, yes, yes. Okay. I follow. I follow. So absolutely, I mean, beginning October 1, everybody in health care dealt with ICD-10 and there continues to be – the government continues to do what the government does from time to time. And between HIPAA and ICD-10 and G-codes and all of the other overlay, the competitive environment, the aggregation of hospitals, systems and even business in our physical therapy space. It continues to be to disadvantage the smallest of players. So yes, I think that’s just wonderful opportunity, which just underpins our answer for why our continued appetite to do deals is strong and is not impeded by anything going on in the company. We have a strong company. We have a strong team. We’ve got great partnerships, and we expect to add to those, fueled, in part, by the complexity of the world and the market right now.

Yes. I mean, I don’t want to – it came up across in this call that the glass is half-empty. It’s more than half full. We – our guidance is such that we expect to have a record earnings year. The growth rate is slower than we like. Our margins are off a couple of percent. A couple of percent is a lot of dollars though. We need to make sure we wring out the cost to realize that.

Okay, thanks again for taking the questions.

Thanks, Mitra.

[Operator Instructions] Your next question comes from Dana Hambly of Stephens.

Hey, good morning. I apologize if you covered this and if you did just let me know. I can go back and read it. But on the new clinics opened or acquired in the past 12 months, obviously, some margin drag there. Can you just remind us typically how long that would take to get to more corporate-level margins?

Well, again, when we do an acquisition, we do a multiple of EBITDA. So I mean, the largest and best acquisition we ever made had lower margins than us. But I mean – so that’s part of it. And part of it, honestly, is we’ve let our cost of our existing clinics grow faster than revenue in some markets. That’s really been the biggest drag on margins.

Okay, alright. And as it – Chris, as you get bigger, does it become harder to find the types of practices that you’re looking for? Obviously, it sounds like some growing pain, but maybe you addressed this, is it becoming a lot more difficult to manage this many practices?

No, I don’t think so. I don’t think so at all. We have the people, we have the systems, we have good partners. We just need to make some subtle adjustments, which we’ve spoken to, which we will do. And we’re bringing in great partners and – who are continuing to expand their base and then adding de novo facilities and tuck-in practices in. So we just need to execute. It’s just that simple, and we will.

Alright, great. And just last one. Larry, did you give the dollar amount of the accrued comp that was down year-over-year?

No, but it will be – for the year it will be over $1 million less than a year ago.

Okay, great. Thanks very much.

Thanks, Dana.

At this time, there are no further questions. I will now turn the floor back over to management for any additional or closing remarks.

Alright, thank you. Thanks everybody. We appreciate your time and attention this morning. Larry and I are here if you have any questions either later today or through the remainder of the week and have a great week. Thanks again.

Thank you. This concludes your conference. You may now disconnect.