Ladies and gentlemen, thank you for standing by and welcome to the U.S. Physical Therapy Fourth Quarter 2017 Year End Earnings Call. [Operator Instructions] Thank you. And it is now my pleasure to turn the call over to Chris Reading to begin, Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy's Fourth Quarter and Year End 2017 Earnings Call. With me on the call today are Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, Chief Operating Officer-West; Graham Reeve, Chief Operating Officer-East; and newest member of our family, Rick Binstein, Vice President and General Counsel; Jon Bates, Vice President and Controller. Before we begin to discuss our results as well as our plan for 2018, we need to read 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. Okay, I'll start this morning by covering some highlights for the quarter and the year and then moving into a discussion about some of the changes and the progress we made and are making, which we expect to have a beneficial impact on the year as well as our future. First, a few highlights. For the fourth quarter, our operating results increased 16.9% compared to Q4 2016. We've produced strong net revenue growth this past quarter with a 20% increase when compared to the fourth quarter of 2016. Total operating cost for the quarter were 78% of net revenues which represented a 130 basis point improvement from the 2016 quarter. These operating costs included a one-time $400,000 goodwill write-off related to the loss of row [ph] facility, large component of it's business tied to a management contract with a local hospital which had fallen on difficult financial circumstances. Inspite of the non-cash charge, we were able to make a good damp in our operating cost while at the same time adding some key operational support. We continued our fourth quarter progress by adding some additional operations capabilities in the form of key people in this first quarter of 2018 as well. Notably among these are Graham Reeve, our Chief Operating Officer-East, who comes to us with a deep healthcare background, including as a licensed physical therapist. His career eventually progressed to include leading a large 6 hospital group with 1,800 licensed beds as their CEO. Graham will be sharing operational responsibilities with Glenn McDowell who capably served our Company for more than 14 years and who will handle as Chief Operating Officer, the Western half of our Company -- who handle the Western half of our Company as COO along with our Industrial Injury Prevention business. Graham will…

I'll start with a review of the fourth quarter. As Chris mentioned, revenue increased 20.2% to $109.2 million. Patient revenues from physical therapy operations increased 14.3% due to an increase in patient business at 15.3% partially offset by a small decrease in the average net rate per visit. Revenue from management contracts was $2.2 million as compared to $1.3 million a year earlier. Revenue from the workforce performance solutions business was $4.7 million for the fourth quarter. Other revenue was $700,000 in both, the 2017 and 2016 periods. Total operating costs were 77.9% of revenue in the fourth quarter as compared to 79.3% a year earlier. As Chris mentioned, we've made solid progress at reducing our operating costs, salaries and related costs including those from new clinics were 56.9% of revenue as compared to 57.2% a year earlier. Rent, supplies, contract labor and other costs as a percent of revenue were 19.6% million as compared to 20.8% million a year earlier. The provision for doubtful accounts in the recent period was 0.9% as compared to 1.2%. The gross profit in the fourth quarter was 22.1% of revenue, an improvement of almost 150 basis points from 20.7% in 2016. The gross profit from the Company's physical therapy clinics was 22.6% versus 20.8%. The gross profit on management contracts was 18.9% as compared to a loss a year earlier, and the gross profit on previously acquired workforce performance solutions business was 10.6%. Corporate costs ran at 9.3% of revenue, up from 8.6% a year earlier while that was attributable to the staffing changes we made, for the year they were actually down. Operating income increased 27.5% to $14 million from $11.0 million a year earlier. Interest expense on debt was $500,000 versus $300,000 as we've carried a higher average borrowing amount during…

Thank you, Larry. That concludes our prepared comments. So operator, if you would please open up the lines for questions.

[Operator Instructions] Our first question comes from the line of Larry Solow of CJS Securities.

Chris, just a question for you maybe which is on -- starting to a higher level, just on your sort of the fine tuning of the organization and on the last call you talked about adding new territory, obviously, it looks like you've split up the COO position sort of regionally into two. Do you think you're sort of completed with what you've done and just how about a little more color on that?

So we obviously started working on this last year. Glenn and I worked on it together, came to a conclusion that we were all spread a little thin, so we rebalanced the regions, we've promoted somebody internally of very strong long-term performer for us, created a new region, rebounced those regions. And then within the regions, one of the other things that we've done, that we think will be important to us going forward is we've added another Director of Operations who will be focused, especially focused on our sales and marketing team and on driving referral and growth opportunities. And so some of that began in 2017 final quarter, some of that hiring has extended into this first quarter but is -- I think we're approaching, relatively speaking some completion. Some of the other changes and additions we made last year include -- we added a cost accountant, somebody who has helped us to come up with some really nice reporting for the Ops team to be able to better stay on top of and see subtle adjustments and changes in efficiency and cost structure. And so we're still in process and getting those new people assimilated, getting everybody to the point where we're conversant with all of the new tools. Obviously Graham is celebrating his 7-day anniversary with us today; so he's been with us all of the week. We started the week with busy good 2-day board meeting and so he's been drinking from a fire hose but very capable guy. And as noted, Glenn and Graham will split the country; we've done a lot of deals, we've had a lot of growth, when we all got here, we had about 200 facilities and work around 600 now and the market is more complex from a regulatory environment than ever. And this gives us the resources that we need that will carry us into the future and so I'm very excited about the people, we have some outstanding people, very excited about the changes, we made some adjustments here in some other areas and trimmed a little bit in some areas that weren't producing so much fruit as we needed, added some other key elements which undoubtedly I believe will produce good fruit. And so a lot of that's done Larry, but some of these folks are new and we got to help them get upto speed; it's going to take us a little time as you would expect but you know, it will happen as we move through the year.

As you mentioned, very good team store growth, especially on the volume side in the quarter and then frankly, the year. I assume -- and I know there is no industry data but I suppose you guys are likely outperforming and taking some share of competitors; where do you see this '18 and beyond? And are you building into similar type of an outlook into your guidance?

We never really project -- we don't talk about what we've done from a same-store perspective but we think if you look at what the economists are saying, the first half of '18 is supposed to be relatively the same as '17, potentially a little slowing in the economy in the latter half of '18. We've got our budget built into the guidance numbers that we've provided, so we expect same-store growth. I don't remember to be honest at what percentages.

It's at a more modest rate, it's at historical which is closer to like 2% but that's the same figure we used last year and we did better than that. So I don't think we are being conservative, we just went with historical averages.

And just on the guidance outlook, if I -- so if we take away the lower tax rate, the benefit from the tax -- it's only a little, pretty modest growth in the bottom line?

Well, the reason is, with the Medicare rate cut which we announced when it came out, that affects not only Medicare but some of our commercial payers. That rate reduction which is about $2 a visit works across our Company to be $0.65 per visit and if you take that times the number of visits we expect, that's actually a $0.15 swing. So I know -- well, most of the analysts now include acquisitions in their estimates which we don't, so that's part of the difference. But there is a major swing with that Medicare rate reduction, that doesn't mean we won't move to mitigate that but we budgeted to have a $0.15 effect.

Our next question comes from the line of Lalishwar Ramgopal of Sidoti.

First, I just wanted to follow-up a little on the last question Larry regarding the reimbursement cut; if you can give us a sense what the pair of mix was at the end of '17?

For the fourth quarter, private and managed care really or commercial insurance companies was 52.5%. Workers comp was 13.3%, keep in mind that excludes the workforce performance solutions business which we reported as other revenue. Medicare and Medicaid combined were 26.5% and then other was 7.7%.

And again, I guess the slight dip in terms of average net revenue for the business in the quarter was really due to mix?

Yes.

Chris, I just want you to share a little in terms of your expectations for the workforce performance solutions business going forward?

We like that business a lot, it's new for us but the guys are doing very well. We have move activity planned in that space, we have more growth planned. One of the reasons we like it because it enables us to go directly to these large self-insured companies and focus on things that we know and can do well. So we focus on prevention, we're embedded in these businesses, we have people that become known and to develop deep relationships within these businesses and industries, they help keep the workforce safe, they do advance ergonomic work, we have ergonomist [ph] that do ergonomic projects. So a lot of it's really based upon prevention and CEOs and CFOs understand that that's an important element for their continued growth keeping a healthy engaged workforce and their profitability. On the other side of the equation, the employee of a huge number of people who have commercial insurance plans and they have the ability to influence who the providers are in that side. So we think and we're just scratching the surface and we're just getting started but we think there is opportunity certainly in this space. Many of these -- there are many, many companies; many more companies that don't have these kind of services within their facilities as compared to the ones who do. We think there are some good companies out there that we can acquire and partner with as we've done in the PT space, we understand the business model, we understand the cash delivery and we think it's going to be a growing small now but we think overtime it will grow steadily, modestly, potentially but steadily to be a decent part of our Company and our offering.

And again, as you look at acquisitions, obviously I know the focus will still be on core clinic -- expanding the clinic network but you mentioned some potential opportunities on the workflow side too. I'm just wondering if you could comment a little on the overall environment for acquisitions in terms of any change in more competitors coming in or pricing?

We're not seeing any change on pricing. I'm hopeful that some of these tax changes ultimately help to put a lid on some of the pricing changes that have occurred, it's still very competitive environment, yes, there are plenty of competitors out there, a lot of people are active, we try to continue to differentiate ourselves because of how we handle life faster with brand continuation, with continued equity -- significant ownership by the founders and partners and without major disruption in the culture of the business. So we're little lumpy and bumpy, we had a great year last year, we expect to continue to be active this year and I don't want to say a whole lot more than that but we're continuing to have good discussions and we'll see what kind of fruit that produces for the year.

And to elaborate on Chris's tax changes comment, obviously with the lower tax rate we'll produce more cash flow. It's a swing, we said our tax rate would go down -- we estimated down to 28%, it would have been 38%, so that's more free cash flow. But on the flipside, as most ambassadors knows, out of the 10 largest companies now in the sector owned by private equity groups who obviously, normally leverage these deals up. So to the extent that interest rates rise and/or that the deductibility of interest is limited by the Tax Act, those things are probably favorable to us from a competitive standpoint with regards to acquisitions.

Now I would tell you don't expect to see any major changes in the near-term interest rate, it's still pretty benign but they are going to go up and so we'll see what happens overtime.

Our next question comes from the line of Rachel [ph] of Legacy Capital.

Actually I just need some clarifications and some help on the math, given your new put cost [ph] relationship; does that mean in 2018 there is no mandatory redeemable changes on the interest expense, does that all go away and become zeros?

Yes, we're having now the revaluation, but yes, it does. And so it goes back to actually how we used to account for stuff to put it in simple terms.

So none of this funky interest expense with both the -- non-earnings is applicable to non-controlling interest and the redemption value for both these zeros going forward?

Yes, maybe so over the equity line from the liability line, so there is not anymore interest expense.

On the P&L?

Yes, the revaluation when we buy them out or a change in value and then you have obviously their earnings, their minority interest earnings that are attributable to them but no more the interest.

So maybe if you could just help me with the math because I'm trying to backout into an operating number in comparing 2018 based on your guidance versus 2017. I know one of the previous callers asked about this but if we're looking around $30 million of net income to get to your $2.33, $2.40 number of the year; there is about $5 million of net income to others, so that's $35 million that are -- from the entity…

You're getting into too much detail. Our guidance is to operating results which takes those figures out of there, the redeemable non-controlling interest. So that's apples-to-apples with what all the analysts use. So I would suggest you work from those figures.

Okay. So maybe -- let me just simplify that; I'm trying to just get to a pre-interest operating income number for the Company, 2018 versus 2017 because when I'm doing it I'm actually seeing a down number for 2018 versus 2017, is that correct?

No, it is not. I'll be happy to talk to you about that offline but again, we only give guidance to the operating results figure. We don't go into revenues or any of the other line items.

And just last question; just same-store sales, maybe I have something wrong but I think you reported patient visit is up 4% for the year and just looking at my notes, it doesn't appear that we had a 4% increase in patient visits, same-store sales for any quarter of the year. Am I missing something?

I'd have to go back and check but we'll complete double and triple checks, these numbers, they are correct. Go ahead, Jon.

No, it's just -- and the calculation in same-store when you do it, you have to pull out the components of it that you'll see numbers within your revenues, certainly in the financials as they are reported but if you're looking at it over comparative time period, you're pulling some of that current period out because it's not in the -- not comparative as a same-store. So in the definition of same-store; that's why when you reported and some cases might be higher, some cases might be lower because you try and look at a comparable period whether it's a quarter or a year. So that's the long answer to your question.

So quarterly, once you're comparing quarter-over-quarter -- and then, you'll get a different answer when you do year-over-year.

We can walk in through offline if you would like to.

[Operator Instructions] Our next question comes from the line of Brian Tanquilut of Jefferies.

Chris, just a first question for you. As I think about the cost structure and margins, and I know we've been talking about this for the last couple of quarters but are there other levers left to pull to drive the margin higher because given that the corporate expense line is optimized at this point or is it just a matter of waiting for all the initiatives and the efforts that you've put in to work through the P&L over the next two quarters?

Yes, I think it's to work through the next few quarters with the team and the resources that we have. We talk about levers to pull, you know, it really comes down to do we have on a fairly precise basis the right number of people handling the patient volume that we have on any given day or week or month, and standing on top of that. And we now have some fairly -- involve sophisticated reporting that people are -- again, we have some new people still getting their arms around but that's where it comes down to. And then overtime, can we get some incremental of small productivity increases; it maybe – we've been working on that for a while, I think that's partly offset by the continued burden and complexity of documentation and some of the regulatory framework that just unfortunately slows everybody down in healthcare. And then on the corporate side, we have trimmed some cost in some areas, we've added some cost in some other areas, that's reflective of our guidance but we'll get our corporate overhead as a percent of revenue; it will drop overtime and so there is still some room there because we're going to continue to grow and add deals and other things. And so -- but those are the key areas. Larry, go ahead.

And Brain, again, we've talked a lot about margin percentage which has accelerated [ph] over the last year and a half -- the margin percentage has to climb some on an annual basis when it was actually up in the fourth quarter. That said, at the end of the day you spend dollars not percentages, and our gross profit increased to 10.5% for the year. Now the margin rate was slightly lower but again in the fourth quarter that was starting to turnaround but at the end of the day you really got to look at how many dollars you're getting to the bottom-line.

But to follow-up to your point, I mean as I think about wage inflation in PT and your ability to flex, you talked about scheduling and having the systems in place for that; I mean how do we put all that together? Like, what is the wage inflation picture right now and what is your ability to flex; is it -- are you able to reduce man-hours or does it have to be headcount?

So let me explain, because if I say headcount people get maybe the wrong idea. A lot of this is done with part-time folks whose hours flex up and down according to volume and so it's not that somebody is going away, it's that we might literally be trimming an hour here or there across what has grown to be a pretty large portfolio of facilities. And so it's not dramatic -- occasionally, not often but occasionally we'll have somebody that we brought on with the expectation that they would fill up the schedule and for the reason it doesn't happen and overtime if it's through detrition [ph] or to action, we part with that person. I think the key is we now have more folks to stay doubt in on that and I'm not going to tell you it's going to be always perfect but we've been working on it, we're focused, we're going to continue to work on it and we'll see what happens.

Last question for me -- sorry, the inflation, Chris, what are your thoughts on wage inflation for PT?

I mean, we'll see. Obviously, it's a good employment market, we look at unemployment numbers, there is low, they have been in a really, really long time. PT has always been a good employment market but we're an attractive segment in that market, we're an attractive within this physical therapy part, orthopedic outpatient. I mean, we have great facilities and good reputation; so there is undoubtedly some wage inflation, I think it's probably a couple of percent and we'll see how that plays out overtime. Other areas within the healthcare sector which are influenced or where PT is involved, we've gotten a hit over the years, home out and skilled nursing facilities and other areas, LTax [ph], and so that's created a little bit of a buffer for us potentially but yes, there is a little pressure for sure.

Last question for me. As I think about the flu, is that a factor that could provide a short-term headwind in Q1, just given how prevalent the flu is this quarter?

The flu in January and for good part of February, in addition to the weather was hard, people -- some people go out when the weather is bad, but nobody goes out when they have the flu, and so this was a pretty tough flu season. That said, at least for the start of the year, we ended up, the volume was a little bit lighter but I think we ended up about where we expected to be and so we'll see how the rest of the quarter plays out. I think the flu is starting to ramp down, although the guys on the northeast are getting the hit the last couple of weeks pretty hard with weather, so hopefully that will pass soon. But you know, first quarter is a challenge, always between weather and flu and other things. And so March is always a big month for us, an important month and you know, that's not baked yet. So we'll just have to wait and see.

[Operator Instructions] At this time I'm showing no further questions. I'd like to turn the floor back over to management for any additional or closing remarks.

Okay, everybody, thank you for your time and attention today, we really appreciate it. We're available if you have any offline questions and we hope you have a wonderful day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.