Chris Reading - President & CEO John Bates - VP, Controller Larry McAfee - EVP & CFO Glenn McDowell - COO.

Larry Solow - CJS Securities Mitra Ramgopal - Sidoti Tyler Pearson - Stephens Brooks O'Neill - Dougherty & Company Jason Plagman - Jefferies Good morning. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy Third Quarter 2014 Earnings Conference Call.

(Operator Instructions) Thank you. Mr. Chris Reading, President and Chief Executive Officer, you may begin your conference..

Thanks, Hope. Good morning, everyone and welcome to U.S. Physical Therapy's third quarter earnings call. This morning Glenn McDowell and I are making this call from Colorado Springs, where about 1000 private practice owners are currently gathered for the annual Private Practice Physical Therapy Conference.

Unlike other conferences in our space, this particular conference is attended by large regional and smaller private physical therapy business owners and leaders. It is by far the most productive conference of the year for us reconnecting and networking for future acquisition-related partnerships.

Holding down the fort in Houston, the rest of our executive team including Larry McAfee, our Executive Vice President and Chief Financial Officer; Rick Binstein, our Vice President and General Counsel; and John Bates, our Vice President and Controller. Before we cover our financial results, I believe John has a brief statement to review.

John?.

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, John. So I'll begin by providing a little color on the quarter and then turn it over to Larry to cover the financials in more detail. First and foremost, volume was really strong for us this quarter which is a result of a lot of hard work, good execution on the part of our partners and directors, as well as our sales team.

In fact, I don't think I can remember a summer where visits per clinic were as strong as we saw this past summer. Obviously, we're pleased with the same-store growth which came in at 4.9%, improving over Q2 numbers which were also fairly robust.

We continue to emphasize our five-point sales plan and we continue to add sales reps to our newly acquired partnership facilities to further assist in expanding their market share.

As the summer progressed, we saw volume improve with September finishing out just three visits below our best average daily visit month of the year and the entire third quarter ahead on visits compared to prior quarters this year. Overall for the quarter, net revenue grew 18.1% compared with Q3 of 2013.

Salary cost as a percent of revenue improved over the same quarter prior year. With summer vacation coverage over, we have refocused on making sure, as we finish this year that our part-time staffing costs are in line and carefully matched to volume.

On the margin side of the business, we continue to see strong performance with this quarter coming in at 24.1% on a gross margin basis. For the nine months this year, our gross margin is up about 60 basis points over the same period in 2013.

For our newly acquired facilities, when we purchase into these, they're generally at a lower aggregate margin than what we're running as a whole. This creates further forward improvement opportunities over time.

Shifting a bit, on the deal front we were expecting that there would be a lot of deal-related activity toward this year's end and we're seeing exactly that very thing playing out right now with sellers coming to market. In general this has been a very good year, producing a lot of fruit.

We remain busy and focused on executing our strategy on all of our primary points as we work to further grow our company organically, as well as with acquired partnerships with excellent local leadership.

Larry, why don't you go ahead and review the financials in more detail before we open it up for questions?.

Okay, will do. First I'll talk about the third quarter. Chris mentioned that revenue increased 18.1% to $77.7 million due to an increase in patient visits of 17.6% and an increase in the average net rate per visit to $105.92 from $105.27. Total clinic operating costs were 75.9% of revenue compared to 75.5% in the 2013 period.

Clinic salaries and related costs were reduced to 53.8%, as compared to 54.3% a year earlier. The provision for doubtful accounts continued to remain relatively low at 1.4%, versus 1.7% in the 2013 quarter. The gross margins of third quarter increased by 16.2% to $18.7 million.

Corporate office costs as a percentage of revenue were 9.6% in the most recent period, as compared to 9.5% a year earlier. Our operating income increased by 13.9% to $11.3 million. Earnings per share increased from $0.38 to $0.43; the analyst consensus estimate was $0.42. As Chris mentioned, same-store visits grew strong, 4.9%.

Our same-store revenue increased 4.5%, as the average net rate per visit declined by about $0.42. I'll talk about the nine months ended September. Net revenue increased 15.5% to $225.7 million due to an increase in patient visits of 15.5% and a slight increase in the average net rate per visit to $106.18.

Total clinic operating costs were 74.6% of revenue in the first nine months of this year, as compared to 75.2% a year earlier. Clinic salaries and related costs were reduced to 53.1% of revenue, as compared to 53.9%.

And the provision for doubtful accounts for the nine months was the same as the most recent quarter at 1.4%, as compared to 1.7% last year. Our gross margin for the first nine months increased by 17.8% to $57.2 million. The gross margin percentage has been 25.4% versus 24.8%. Corporate office costs were 9.8% of revenue in both periods.

Our operating income for the first nine months increased by 19.1% to $35 million. Net income increased 16.8% to $15.9 million. Diluted earnings per share jumped from $1.12 to $1.30. Same-store visits increased by 3.9% for the nine-month period, below what the most recent quarter produced.

And our same-store revenue increased 3.3% because we, again, had a slight rate reduction as compared to a year ago..

Thanks, Larry. With that, Operator, let's go ahead and open it up for questions..

(Operator Instructions). Your first question comes from the line of Larry Solow with CJS Sec..

Really very impressive same-store volume growth again for the second quarter in a row.

I realize industry data is very fragmented and I'm assuming you guys are certainly outperforming, but any inkling on how the industry's doing? Just general trends are they getting, at least, better? Or is it sort of they're waffling back and forth and you guys are improving?.

As you know, there's only one other public company in our sector and looking at their data, they don't describe it the same way we do nor do they provide as much information. But I'm looking at -- they reported the other day and from looking at their data, it didn't look to me like they had the kind of same-store volume growth we've seen..

Just for a feel for private guys, just I imagine you guys come across a lot of other nonpublic entities that--.

Sure. I mean anecdotally like I said, I'm out here in Colorado Springs with a ton of private practice folks. The year has progressed I think for a lot of them, the really capable ones, somewhat similar in trajectory.

Now I don't have any ability to gauge same-store growth because honestly most private practice owners -- I'm not sure -- it's not something that gets talked about but generally, first quarter was bad, second quarter was excellent and this year's been kind of a solid year for most capable providers. I'm really proud of our folks.

I think this is the best summer we've ever delivered. Summer is often a challenge for us and it really -- everybody pulled hard and came through, so..

Okay. You mentioned there's some opportunities for some additional cost cutting, I guess some of these acquired companies because if look at operating expenses as a whole, actually the pace of growth outpaced your very strong revenue growth.

Is that primarily a function of some of the acquisitions you made? Because I know you've cut a lot of cost at your legacy clinics..

Larry, tomorrow when we file the Q, take a look at that because we differentiate between mature clinics, older clinics that were already here and the acquisitions and you can see that the cost in the acquisition and the margins, as Chris alluded to earlier, the margins are lower, the costs are typically higher than what we run with our mature facilities or facilities that even if they were acquired that we've owned for several years and been able to get some enhancement..

Larry, it isn't so much a big cost cutting opportunity necessarily. I mean with all of our clinics, we try to keep things dialed in. It's an opportunity to dialogue and sometimes look at things a little bit differently. But we're seeing good volume growth with our acquired facilities, so that'll improve margins.

In a few of these opportunities, we've seen contracting improvements -- in a couple of cases, pretty significant contracting improvements. And so we expect rate to go up and that should enhance margin.

So these are small incremental things that happen over a period of time and we expect over some period of time, that those margins will continue to improve. It won't be an overnight thing; it won't be a this quarter thing, but we're moving in that direction..

The productivity at the acquired clinics is normally less than ours. It's common to see the per day/per therapist at 10 or less versus our company average of 11. So, as Chris mentioned, you don't necessarily have to cut costs if you can grow the patient volume..

Your next question comes from the line of Mitra Ramgopal with Sidoti..

Chris, first on the same-store revenue, how much would you say is really due to initiatives on your end versus just overall strength in the industry?.

Mitra, I wish I could give you a really pointed answer that I felt confident was completely accurate. I don't know. I mean, we don't have good data on the whole industry and to be honest, the whole industry is not homogenous.

You’ve big companies, you've got equity-backed companies, you've got regional providers and you've got a lot of very small players. There is not a lot of good data. I think in the markets where we're operating, we're moving market share and so that means we're taking it from somebody.

But I can't honestly tell you that our 4.9% compares to the industry's 2%. I just don't know..

I know you mentioned the summer was very strong. I don't know if you could comment in terms of -- we're one month into 4Q with October, if you saw those trends continuing..

I think I want to be careful what I say about the current quarter, but things are steady..

Okay. And I know you mentioned you added some sales reps.

I don't know if you could give us an update in terms of how many sales reps you have and what percentage of the clinic base is being covered?.

Yes, I don't know. Glen's here with me. I don't know if he has that available.

Glen, do you have that?.

Yes, currently we’ve 87 total sales reps covering about 337 locations and we continue to look for sales reps. We've got about 14, 15 other sales rep opening that we're looking to fill that would provide some additional coverage..

And Larry, if you could remind us what the guidance was? I believe it still remains unchanged..

$1.64 to $1.70, John?.

Yes..

$1.64 to $1.70. We haven't revised guidance. I would say it's probable that we're going to finish in the upper half to high end of that based on where we're right now..

And I know the Q is being filed tomorrow, but I don't know if you had the payer mix handy?.

Yes, I got it here. The commercial which is the insurance backed is 52%, workers' comp was 19%, Medicare and Medicaid were 23% and other was 6%. .

(Operator Instructions). Your next question comes from the line of Tyler Pearson with Stephens..

Just one quick one, are you guys seeing any pressure from any states around workers' comp reimbursement?.

Yes, no state-related things that I know of. Actually we've seen most recently over the summer, California reversed course going from a horrible reimbursement environment for work comp to significantly improved opportunity in California. Other states, we haven't seen any state mandated changes that I'm aware of.

Glenn, do you know of anything?.

Yes, the only state that we're aware that may be doing something is Alaska which is at least having discussions about lowering their work comp rates, but nothing definitive has been posted yet..

And then also just an update on Fit2WRK, maybe the contracts or anything you're seeing there would be helpful. Thanks..

Glenn, you want to go ahead and take that? Fit2WRK continues to be very busy, very strong. I don't know -- I have to be careful what contracts we disclose. Sometimes we have got confidentiality agreements in place.

But, Glenn, anything you want to mention there?.

Nothing that I can mention specifically. I know that we continue to look at regional and national opportunities where we can either go direct with employers or get right of first refusal from a work comp standpoint. We continue to see, I think, good growth in that area and continue to look for additional opportunities there..

(Operator Instructions). Your next question comes from the line of Brooks O'Neill with Dougherty & Company..

I saw in your comments that the acquisition pipeline remains full and that you intend to continue to be active.

Can you elaborate on that at all?.

I didn't specifically mention a pipeline and I try to avoid the pipeline comment..

Come on..

No, I'm a broken record in that area. But there's definitely a lot of companies that are coming to market right now or thinking about it. So I expect that we'll continue to be active in that. When I say I expect, we're active in that. So let me be really clear, we're going to get some good deals done..

I think that's going to, along with your strong operational performance that's been a key driver of your growth and I expect that to continue.

Don't you?.

I do, and we've been really blessed to bring on some great people. The companies that we acquired in 2013 are doing an excellent job. The people are outstanding -- really, really pleased. The people that we're talking to right now, while we may not get all those deals, they're outstanding folks.

We think we'll get some and yes, we're going to continue to be active..

Your next question comes from the line of Brian Tanquilut with Jefferies..

This is Jason Plagman on for Brian.

Just a quick question, do you see any change or acceleration in the pace of your de novos over the next year or two or should we expect kind of steady-state?.

I would expect steady-state. Now we're a little back-end loaded on de novos this year. But yes, we're seeing good, steady expansion in our top partnerships organically, programatically. But I don't see any big wholesale shift. We're not going to just throw facilities out there to hit some kind of an arbitrary facility growth number.

We are doing these thoughtfully and selectively where we think there's a good long term opportunity. They continue to bear good fruit when we do it that way and so that's the continuing plan forward..

And just to follow up on that, what's the limiting factor on how quick you can go there? Is it finding attractive markets? Is it partners' capacity? Just some insight there would be helpful..

Yes, so it varies. I mean you have to do this with people. And so our partners are clinicians and so for the most part most of them are in the clinic and some of these partnerships have 5 to 50 facilities. And so they're busy running what they have. They continue to look for opportunities.

We have to have the right person to move into that, often it's somebody we already have in the partnership and they jump forward and become a director. Sometimes, depending upon the geography, we have to find somebody. Partner has to be engaged to do it, we have to feel like there's an opportunity there.

We're not twisting people's arms to do these but we're actively engaged in looking and so it's multifaceted. But again, as we grow and as we add acquired partnerships, we're going to naturally -- I think our organic pace will pick up a little bit just because we'll have more partnerships with which to work. But I don't expect the shift to be dramatic.

.

And there are no further questions at this time. I would now like to turn the floor back over to management..

Okay, everybody. Well, listen, we thank you as always for dialing in and for asking great questions. I am going to be kind of tied up this afternoon in meetings at this private practice convention. I know Larry's going to be available to take additional questions after the call. So we hope you have a wonderful day. Thanks again. .

Thank you. This does conclude today's conference call. You may now disconnect..