Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy Q1 2016 Earnings Conference 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] Thank you. I will now turn the call over to Chris Reading, President and CEO of U.S. Physical Therapy. Please go ahead, sir..

Thanks you. Good morning, everyone, and welcome to U.S. Physical Therapy’s first quarter 2016 earnings call.

With me on the call this morning 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; and Jon Bates, our Vice President and Controller. Before we begin our prepared comments this morning, we’ll review a brief disclosure.

Jon, if you would?.

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.

I have to start off by saying that, it definitely feels good to have gotten off to a great start this year, especially after being a little choppy at the same point in 2015, our entire team, partners, clinicians, support staff, and corporate support all work very hard to move us in a great direction, where starters [ph] volume was strong and built throughout the quarter.

Now I understand that last year’s comps made things a little bit easier, but I want to point out something. Visits per clinic per day in 2015 didn’t hit the 25 or greater mark until November last year. And in this first quarter, which most of you know, is a seasonally lighter quarter for us.

In two of the three months this quarter, both February and March, we were above the 25 visits per clinic mark for both of those months. In total, patient visits increased 13.4%, which produced the net revenue increase of just under $10 million for the quarter.

That combined with costs per visit control helps to drive our net income to common shareholders, otherwise refer to in our release as operating results, up 28% and resulted in our diluted EPS improving from $0.34 to $0.43 per share.

As I started out saying our visits were strong, our same-store volume was particularly strong this quarter at 6.7%, which I believe is the highest same-store volume increase per quarter, as this management team has seen since our arrival in late, excuse me, 2003.

Our sales team is doing a great job and our partners and directors are doing a phenomenal job of providing great care. We’re still finding time to get out and work to grow the business by driving new referrals. On top of that, our newly completed acquisitions are delivering record volumes as well.

Relating to costs this quarter, we did a better job of controlling costs, particularly as it related to our strong volumes. However, we’re still working to keep it dialed in, moving unnecessary access when it isn’t producing volume levels that we expect to see.

The end result this quarter were better margins, up approximately 180 basis points on the gross margin basis and driving our operating margin up an over 25% compared to the 2015 quarter.

In the macro operating environment, we expect to continue to get good deals done and to move market share, helping our partners to take advantage of growth and expansion opportunities.

Currently, we expect referrals and volumes development efforts to produce good results and we’re very pleased with the efforts of our newly acquired partners with our early contributions and focus. In fact, I just recently get back from a trip out to see one of our newest acquired partnerships.

I was able to spend time in their facilities, meet with their clinicians and key staff,and I will tell you that I was very impressed and very pleased, not surprisingly our partners have done a great job with their communication to their staff, as we got our deal done with them.

And as you know, our team here has been together for a very long time, they know how to work effectively through these early transition times, making sure that we keep parts and lines intact, while providing excellent support to further our low commission [ph] and and vision.

There’s no surprise to me than to find happy bride highly capable and energetic clinical teams delivering what I observe to be excellent, enthusiastic, and compassionate of care. There’s further no surprise that our nation’s leading winter sports teams have chosen our partners many years over to be their official care provider.

This is just one highlighted example that, talent, passion and capabilities of many partners around the nation who are all working hard with us to further grow and scale their partnerships and extend and expand the reach across the states and communities that they serve.

On a regulatory and payment front, we’re seeing evidence of early-stage movement away from lower priced or comp networks into a more provider friendly networks, because let’s say, the providers are the ones investing and delivering great care.

And if we can do that and communicate well, getting workers back to the jobs quickly, and in many cases avoiding unnecessary and costly interventions, including surgery and we should command a higher premium that we get today. For the year for us, our net reimbursement is right about where we expect them to be so far in 2016.

We will remain focused on delivering great value with high service to our payors and customers and we will continue to pursue fair reimbursement for the great work that our people deliver everyday.

Shifting gears for a moment, I’ve briefly spoken in my shareholder letter about an alliance that we have helped to create in which are proud to be an active member. We refer to this group as APTQI, otherwise known as The Alliance for Physical Therapy Quality and Innovation.

This alliance is made up of all of the nation’s largest outpatient providers of physical therapy as founding board members, along with hundreds of locations, including small, medium, and large local and region private practices.

We’ve been together now to better part of three years and our collective facilities represent approximately 5,000 locations delivering outpatient physical and occupational therapy and employing approximately 10,000 clinicians.

Our focus over this period has been to be a reasonable and thoughtful voice for our profession and as others around us have worked to craft long-term payment reform solutions that we believe are necessary or one necessary should compensate physical therapy services in a way that recognizes the efficiency and value that we collectively provide to our injured patients, restoring function and preventing more invasive and expensive procedures.

Our participation in APTQI has been both rewarding and important as we now have a strong organized and cohesive voice in matters that can shape our profession for years to come.

In closing, let me say that we’re enthusiastic about our company and the opportunities at hand, and we will continue to pursue those opportunities with great vigor as we work to meaningfully grow and scale our company. That concludes my prepared comments at this time. And I’ll ask Larry to review our financials in more detail. Thank you.

Larry?.

Yes. Thanks, Chris. I’ll now go over our company’s first quarter performance. Net revenue increased by 12.5% to $86.9 million, due to an increase of patient visits of 13.4% to 808,000, and a decrease in average net revenue per visit to $105.22 from $106.34. Q1 2016 revenue of $86.9 million was $3.5 million higher than the analyst consensus estimates.

Average visits per day clinic for the first quarter of 2016 were 24.7, a 7.9% improvement as compared to 22.9 in the first quarter last year. Our clinic operating costs were reduced across the board. Total costs were 76.4% in the recent quarter versus 78.2% a year ago. Clinic salaries and related costs came down 70 basis points to 55% from 55.7%.

Rent, clinic supplies, contract labor and other costs were 20.1%, 100 basis lower than – basis points lower than 21.1% a year ago. The provision for doubtful accounts is 1.3% in both periods. Our gross margin in the first quarter of 2016 grew by 22% to $16.8 million. In total, there was about 180 basis points improvement in the margin percentage.

Corporate costs were 10.4% of revenue in the recent quarter versus 9.9% a year ago. Our operating income in Q1 2016 increased by 25.1% to $11.5 million. Our income tax rate was $39.8 million in the recent quarter versus $40.0 million, a year ago. Net income for the first quarter 2016 was $5.3 million, as Chris mentioned, a 28% increase from a year ago.

Earnings per share of $0.43, or $0.04 better or 10% better than the analyst consensus estimate of $0.39 and $0.09 improvement from $0.34 in Q1 2015. We included in today’s release some non-GAAP measures.

In the first quarter of 2016, the company’s adjusted EBITDA grew by 24.6% to $12.5 million, and our income prior to equity-based compensation increased by 27.4%..

Thank you, Larry. That concludes our prepared comments. Operator, if you would, let’s go ahead and open it up for questions..

Sure. [Operator Instructions] And your first question comes from Brian Tanquilut of Jefferies..

Hey, good morning, guys. Congratulations on a strong quarter..

Good morning..

So, Larry, just a question on the revenue per visit, same-store was still down a little bit.

Is there anything that you’d like to point out? Is that just a year-over-year comparison and continuation of things that we saw in the Q3?.

There’s nothing unusual in there. We were a little higher, first quarter in 2015, and this has been more of a normalized rate as 2015 progressed until 2016. It’s about where we expect it to be this year..

Got it. And then, Chris, to your comments on the 25 visits per day, per unit, we’re starting to see – we’re obviously seeing good performance there.

Do you think that we’re getting close to that point where you’re going to have to build de novos or spin-offs from these – from – for your top performing facilities because of capacity constrains?.

Yes. So 25 visits, the footprint of our facilities with 25 hasn’t stretch us from a capacity perspective and of course, that’s an average number we have. We are still less than that some that are greater or more.

But we do continue to build de novos from our highest performing partnerships and in some cases and communities, where we have our highest performing facilities. But this 25 isn’t a capacity number by any means..

Okay. And then it’s kind of related to that on the same-store side. In the past you’ve mentioned that there is a certain point of same-store – or strong same-store performance we are – you almost cannibalized yourselves because of the de novos strategy to build more capacity and also take advantage of the opportunities in the market.

So how should I think about that same-store performance? I mean, do you think that we can sustain this sort of mid single-digit range, or are they plans to rollout or ramp up de novos in order to take advantage of the opportunity and bring down same-store a little bit that way?.

Yes. Well, we haven’t changed our plans on de novos. We have a strong volume. We continue to build de novos under our strong partnerships. We had – honestly, we had a wider Q1 last year, partly – primarily due to weather. So I think our comps this year were pretty good. And having said that we – I think, we did really a pretty good job on same-store.

I expect that as the quarters unfold, our comps are getting a little tougher. And I don’t know if we’ll continue to see the mid to upper single-digits, but I think it will be strong and – but I don’t think it can change our de novo focus..

Brian, we – Brian we’ve opened 20 satellites from last year, we haven’t slowed down..

Yes..

Satellite meeting has an additional de novos kinetic of an existing partner and those are ones obviously that might cannibalize some visits. But we’re not – we don’t slowdown our clinic growth to try to drive a metric by same-store..

Yes, that’s not even in the equation..

Gotcha.

And then last one question for me, Larry, corporate office costs of 10.4%, I’m guessing, this is the incentive comp accrual because of the strong quarter, is that a good way to think about that?.

Yes..

All right. So trying to bring that back to roughly 10% going forward is probably a good idea.

Is that a good way to think about that?.

Well, yes. Last, I’ll be honest, a year ago – because it was a fourth quarter, we have virtually no incentive comp. This year, it was such a good quarter with the incentive comp. The way – our incentive comp is largely tied to our earnings per share. We’re ahead of – well ahead of the incentive plan at this point, so the accruals are..

And at some point, it’s, I would say….

[It would come back along] [ph].

Yes, it is going to like, assuming we continue to deliver good performance, there will be a point at which that comp like..

Yes..

That’s about – it’s only about a couple of negative measures in this whole report, that’s one of….

Okay, gotcha. All right. Well, thank you so much. Congrats again..

Thanks, Brian..

Thank you. Your next question comes from Larry Solow with CJS Securities..

Good morning, guys. Wondering if you could just maybe help to put these fabulous numbers, could you talk a little bit of benefit from pretty mild winter compared to last year, but obviously the visits per unit were record.

How does the industry is there? Can you add any color on what competitors are doing, or are they seeing some improvement in traffic as well, or do you have any better look at that?.

Yes, I don’t have a statistical word that it’s going to be meaningful to anybody. I think select releases to-night after the market close, I think, they will release to-night, they’ll call us tomorrow. So you can look at there, and I don’t – I don’t have any prerelease now….

Right..

Of course, but I think everybody has the same winter, if they had geographically dispersed. So this wasn’t easy, but it was certainly better than last one, so..

Yeas. I mean, it depends on a lot of the competitors, as you know were regional. So if you’re in the Northeast or Midwest, yes, you probably have a lot better statistics, and we’re a national provider. We’re in 42 States….

Right..

In addition to the Northeast and the Midwest, we had markets like Tennessee and Georgia that were affected by winter weather..

Right..

In fact, like Texas and Oklahoma in March, a year ago, so it has to do with where you’re located..

Right. And on salary-related costs, you brought that down.

Just curious so, I talk maybe you may even get better leverage with the significant sales growth you had, but salaries and cost still actually grew on an absolute basis, not too far from what the growth was in revenue, any thoughts on that?.

Well, most of the – a very, very high percentage of the growth in the clinic are….

Right..

Salary costs..

Right..

Gain from acquisition..

Okay..

So our existing clinics were up a tiny there. But honestly, they are doing so much better that our profit sharing and incentive comp to them was up..

Right..

That kind of a high-quality problem..

Absolutely..

Yes, and I would say, we’re still – it’s going to continue to be a focus, and we’re going to continue to work to keep with us dial the inventory can. Again, numbers – really small numbers over a large base make a big difference. These aren’t dramatic shifts, but little big that up for the good as well as the other direction.

So we’re going to continue to have to work it out and I think would be okay..

Got it. Just lastly, just take it back on Brian’s question on the corporate office costs. Generally they sort of trend up during the year as you accrue more, if you think you’re going to get close to your guidance.

With such a strong quarter, is it – did you potentially accrue a little more this quarter than you might normally early in the year, so we might not see that usual uptick sequentially and maybe it sort of comes down a little bit on a quarterly basis?.

No. Typically, and our volume is typically stronger in the second and third quarter than the first..

Right..

So the percentage of revenue, it would normally go down anyway, even if we accrued the same amount of incentive comp every period..

Right..

Our incentive comp is tied to a formula, it’s published in S1, and everybody an figure it out. So – we’re ahead of plan at this point..

Right..

And I don’t know it will come down in dollars, but it should come down as a percentage of revenue..

Okay. So actually – I’m sorry..

I would just tell you that in a given year maybe even years past, where we’ve accrued a little bit more later in the year is, because when we haven’t started out as strong and….

Yes..

We picked it up as the year goes on, s ….

Right..

So our reality is pretty closely tied to when the results are deliver. And I expect if we can continue to perform well, which is certainly the plan that it will likely as a percentage of the year goes on. We’ll get more fully incurred..

Got it. Okay, great. Thanks, again..

Thank you. Your next question comes from Mitra Ramgopal with Sidoti..

Yes. Hi, good morning.

First is, coming back on the same-store the strength you saw there and the increase in the average business et cetera, aside from the favorable weather, I mean anything you’re doing internally from the sales standpoint et cetera that’s also helping you to drive those numbers?.

We’re constantly – we just had an annual sales meeting that I think it was an outstanding meeting. We’ve got some really, really good people that are in these markets. Our partnerships have embraced sales, in most cases that’s been in addition to what they’ve done before, and that’s been a big difference maker.

And we’ve got Partners and our Directors really believing that it’s making a difference in our partnerships when they get out on a regular basis. And again it’s like any of this thing – any of these things that we talk about that are important. We continue to tweak it along way.

It’s not a new initiative, but it’s a continued persistent focus on doing the basic things really well and I think people have done a great job right now..

And just follow-up a little on that, as you look at tweaking things around, as you look at the sales force and the size of it right now, handy covers across your network, do you need to for example make any more additions there or are you in pretty good shape in terms of where you stand?.

No, we’re growing and we’re adding facilities organically and we’re acquiring partnerships and so we’ll continue to add over time.

But it’s not like we have any big layering gaps other than as we grow into these newly acquired partnerships and they get comfortable and confident that sales is in fact making a difference and we’re seeing that in a pretty uniformly. So we’ll grow as a result of that and as a result of our organic growth.

And we’ll continue to evaluate the effectiveness and make certain changes where we need to. But it will grow with our company. We’re pretty fully covered I think, but we’re not done growing, so it will grow with us..

It was perfect, sure, thanks. And then on the staffing side, one thing we’re hearing in some areas of healthcare, it is a lot of shortages depending on the profession specialty.

I was wondering what you’re seeing on the therapy side and your ability to recruit and not potentially able to pay off?.

Yes, I think it’s a pretty good environment. I would say it’s a relatively benign environment meaning that it’s not tilted dramatically in one direction or another. Our recruiters are doing great job, filling openings, partners are doing a good job, networking and so we’re definitely not struggling right now to fill positions..

The average number of days takes us to fill positions, but still near the lowest it’s ever been and 13 years we’ve been in the company, so..

Okay, thanks.

And then Larry, just finally I was wondering if you had maybe the payer mix handy?.

Yes, so part of that managed care really commercial insurance was 51.1%, workers comp was 17.2%, and Medicare and Medicaid combined were 25% and then other were 6.5%..

Okay, thanks again..

Thank you..

Thank you. Next question comes from Dana Hambly with Stephens..

Hey, Dan..

Clearing number for organic growth, where you see a lot of incremental EBITDA and so is it above 3% organic growth we should anticipate more than expansion or is there a number out there you can point to?.

Well, organic growth doesn’t necessarily drive margin, because if you had – if you grew 5%, if you let your cost grow by 7%, obviously your margin will go down. I mean we report total increase in sales of visits and revenue we did the same thing with same-store. I mean our productivity went up..

Right..

That’s our average business per day. We’re 24.7 this quarter per clinic versus 22.9 a year ago. It’s more things like that as long as you keep an eye on staffing to drug..

Yes.

And so maybe ask in different way, and so above a 25 patients per day, I mean kind of the incremental cost per patient is pretty de minimis?.

Well, again if you’re in the margin where you have to add another full or part time person, no; but on average, yes. So we said our target is set for – there we see 12 or more patients per day.

So as they new to that number, because we average lesser than as a company, we should not to add staff and so yes, that incremental visit 23 to 24, to say it should be – have a high margin contribution. Look at it..

And our 25 is definitely an average..

Yes..

And so the typical facility is not a run in 25, they’re running below or….

Right..

Of that number and what Larry said is exactly right. It depends on where your steps are and whether it’s an incremental benefit, whether you have to add a little bit more cost in order to see those, not typically one extra visit….

Yes..

That maybe four or five extra visits so..

Gotcha, right, now that’s helpful.

And then on – I assume there will no mention of guidance, or no change to guidance at this point despite the earlier quarter?.

Yes, what we’re going to do and we talked about an extensively both management dealing with the Board, what we’re going to do is wait and get some data from April and May and then we’ll review guidance and we need to change if we will. I will say this is based on the first quarter results.

We’re obviously in the upper end that the range we initially gave for guidance that’s been lower..

Yes, now that makes sense for that.

And then Larry, on the adjusted EPS you’re including now that’s just – you’re just adding that stock comp that the only change?.

We in conjunction and do at our 10-K. We look – we always look at other company’s reports and then also their press releases. And we saw actually more in healthcare then I expected, but certainly you take another business just now you see a bigger adjusted for equity comp.

Also people are always asks for EBITDA, I think we only have to follow that’s once that, so we said while we just include those measures in the press release with a schedule, which shows how they’re calculated to make it easier for me..

Yes, I now hear you pretty much the last one to do that, but I said the adjusted EBITDA that haven’t changed from the way you calculated before, right?.

This is our – this is income for the equity comp. It’s just the measure we saw on a bunch other reports. So we included it as well..

Sure..

[Multiple Speakers] We didn’t want to be the first one and so we….

You, cash enough..

So we’re even using the email and mobile phones..

Welcome. And then the last one, Chris you talked about the alliance and payment reform.

Is there anything specific the alliance is advocating for at this point or it is still a work in progress?.

Well, our – it’s our trade group, APTA has been working with the AMA on kind of their own alcoholic coding reform maybe less payment reform and more coding reform. We’ve been very engaged with them over these last three years. I think we had some things that we’ve agreed on and we had some things that we disagreed on.

But I think our involvement over that period has made a big difference. I think we – we’re working together in the part and some cases to both dialog with CMS, work with the payer community, and work across the profession to do something that’s sensible and meaningful that that points us in the right direction.

And investors quite frankly, some of the concerns about healthcare cost and efficiency, effectiveness in general, I think we can go that. We have a very cohesive group, very, very cohesive.

We’re well together and without getting too deep in the lead I think it’s been a very good process and we definitely made a difference and I think we’ll continue to make a difference for the profession, not just for a member companies. I think this affects the whole profession and something that we feel is an important time, we’ve invested in it.

Member companies have invested heavily in this. We have a little bit of a award just now. We’re going to create, probably, I mean, not to distant future, super pack. So that we can continue to be involved and what’s important to be involved in and then do that’s the right way, and so it’s a commitment that I expect to continue for very long time..

Okay, thanks so much..

Thank you..

[Operator Instructions] Your next question comes from Trent Ketterer of Spitfire Capital..

Hey, good morning, guys.

Just quickly to clarify in guidance, you guys are going to wait presumably, hence we have a bit more data and presumably update on the Q2 call?.

No we probably hear it before Dana. Again as we always stay, and if we think there’s going to be a significant change from what we have out there, we updated at that point of the task we’re doing in conjunction with an acquisition. But I don’t – we don’t report second quarter numbers to August.

So I would suspect to be looking April and May and then if you – if we’re going to raise guidance then we’ll do it down..

Got it, okay.

And then just quickly sorry if I missed this, but can you just talk a little bit about the acquisition pipelines for what you’re seeing out there in terms of deal flow?.

Yes, so I want to you to pipeline words, but we’re in discussion with some really good people, just like always and just as we have been comparing different environment for sure. And we’re going to continue to be both selective and disciplined and what we do.

But I think that people like in our profession are realizing that there is consolidation that’s occurring and if there are differences somehow the various consolidators and depending upon what their view of the future and focus is. And their opportunities kind of choose up and to be continued opportunities for us.

So we’re going to continue to be active, but we’ll continue also to be disciplined as we have and think that’s worked well for us in the past and expect to continue to work well for us..

Great, thanks guys..

Your next question comes from Michael Petusky of Barrington Research..

Good morning, guys..

Good morning..

You guys just have handy money chance that old metric you used to sometimes give on us every semi-regular basis that visit per therapist or visit per FTE, do you have that and then the comp versus last year?.

Yes, for the first quarter of this year, our visit per FTE was 10.68 and for the first quarter of 2015, and it was 10.54..

Mike, one of the things that moves that number out a little bit, it is – of the acquisitions move it really around a lot. And so it’s definitely depending upon when they happen and how honestly, how rich the net rate is in some of these deals. And where the margins are that can move that number around a little bit.

And since we’re not static, it’s little bit more to compare period to period. We have more transparency in that internally to know that we just brought a deal on either has a little better productivity or a little worse productivity than our average, but that definitely moves the number..

We, internally and I don’t want to get into reporting this number every quarter too as we get a lot of that.

But we measure internally, original USPH de novo clinics and across the number of different metrics and then we do the same for acquisitions and that that we have some acquisitions or productivity is higher normally it’s lower at least initially so….

Okay, so is there a way obviously the visit number, the kind of visit per clinic number went up really nicely I mean is there another metric and visit per therapist for kind of a clinics that have been open more than one year with you guys.

I mean is there a metric to that would kind of capture the therapist productivity increased better than that visit per FTE?.

Well, yes internally we look at it Horner per clinic basis we can even drilldown per clinician. So from a management standpoint, we’re reviewing operating results, we look at it by region by partnership, by clinic, by individual. I’m not sure it really be very helpful to street, you just get that done..

Okay, but it sounds like you’re going – you’re really genuinely moving the needle on products therapist productivity is that fair to say?.

Yes..

Okay, all right, great.

And then I didn’t catch that if you gave it, do you have a current salesperson number and how many clinics they’re covering?.

Yes, right now we have in Q1 we had 93 sets sales reps covering 427 locations..

Okay. All right, great. That’s all I’ve got. Thank you..

Thanks Mike..

[Operator Instructions] And we have no further questions..

Okay, thank you, operator. Listen, everyone thank you for the time this morning. We appreciate the questions and the input. We hope you have a great day. Thank you..

Thank you. That does conclude today’s conference call. You may disconnect your lines at this time, and have a wonderful day..