Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy’s Second Quarter 2012 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 Instruction] Thank you. Chris Reading, you may begin your conference.

Thank you. Good morning, everyone. Welcome to U.S. Physical Therapy’s Second Quarter Year-to-Date 2012 Earnings Conference Call. I’m on the road today, but with me on the call are a number of important people, including Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Jon Bates, our Vice President and Controller. Before we begin today’s quarter and year-to-date results review, I would like to ask Jon to please cover our brief disclosure. Jon?

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, this morning I’m going to start out and go through a number of things, to help you better understand our performance, and then I’ll ask Larry to review the financials in a little greater detail. In our core PT business, we should discuss a number of positives, including this quarter our visits per clinic per day increased from our first quarter, which was already very strong, and with nearly a full visit per clinic per day better than our quarter 2 performance in the prior year period. This helped to improve our productivity, which increased approximately 0.7 of a visit from this prior year period and came in at the highest level that we have seen so far for our company, moving us closer to our previously-stated goal of 12 visits per clinician per day. Additionally, we were able to improve our net rate per visit to $105.65 for the second quarter, which was a solid year-over-year improvement, as well as a sequential improvement from the first quarter this year. Salary and related costs at the clinic level was well controlled and actually decreased slightly from quarter 1, 2012 to quarter 2, 2012 despite growing our facility base, which included an acquisition we completed earlier in the quarter, which added 7 locations, and a couple of very capable and highly motivated partners. In Larry’s portion of the call, he will discuss the financial performance particularly related to the salary and other related costs in a little bit greater detail. Our corporate costs were also well controlled coming in at 10% of revenue for both quarters. Our work comp initiative Fit2WRK, let me just say that Ray and his team are doing an amazing job securing contracts and relationships for our partnerships across the country. Our partners have…

Thanks, Chris. First I’ll talk about the results year-to-date, and then I’ll go through the more recent quarter. Net revenue has increased 8.5% from $116.7 million to $126.5 million due to a 10.4% increase in patient visits and an increase in their average net rate to $105.10 from $104.67. The increase in physical therapy revenue was partially offset by a decrease in other revenue of $2.1 million due to a reduction of revenue from physician services. Our total clinic operating costs for the 6 months was 73.8% of revenue. Clinic salaries and related costs were 51.7% versus 52.1%. Rent, clinic supplies, contract labor and other costs were 20.1%. I want to note that the entire increase in operating costs, both for the year-to-date and the quarter, are attributable to new clinics and acquired clinics, so it was not -- it affected the margins accordingly, so, it was not that we have seen an increase in cost in our mature clinics. The provision for doubtful accounts was 1.9% versus 1%. In the first 6 months of 2012, as Chris mentioned, we put a schedule in there so people can see how the PT and physician service businesses did respectively. The gross margin from the company’s core physical therapy business increased 12.5% or $3.7 million. This was partially offset by a $2.6 million reduction from physician services. Our corporate office costs as a percentage of net revenue were 10% year-to-date as compared to 10.7% a year ago, so we've seen continued improvement with regards to that. Our operating income for the first 6 months of 2012 rose to $20.5 million, our net income was $9.2 million as compared at $8.6 million, and our earnings per share year-to-date has grown to $0.79 versus $0.72. Same store revenue for de novo and acquired clinics…

Thanks, Larry. Operator, I think with that we’ll ask you to open it up for questions.

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

Chris, just wanted to get a quick follow-up on your acquisition environment or even just organic environment -- openings. It sounds like, maybe, there are a more rising amount of quality physical therapists out there looking to partner up, or did I read that correctly?

No, I think what we’re seeing, in fact our phone is ringing pretty hard, what I referenced in my earlier statement was just smaller practices looking to partner and particularly small and under-resourced practices. And one of the things that we did earlier this year, and it’s bearing fruit, is we took our top partner groups through a multi-day training program on how to prospect for and begin to think about integrating and acquiring small, little, tuck-in deals. So these are different than our traditional larger, true acquisitions. But we’ve begun to do a number of these little smaller deals and tuck them into our existing practices. I think that will only continue to grow. The broader environment is that, as it has been, I think there are plenty of people looking to -- for what the future holds. In terms of purely organic, new individual people, maybe working at the hospital or working at a local private practice, that continues to be about like it has been. I think this year will be about like we did last year. Again, that’s a little lumpy, too. Sometimes it moves around quarter-to-quarter, but the environment hasn’t changed a great deal for organic openings, not that we’ve seen at least thus far.

Okay. And then just touching briefly on the physician services, which I know is, obviously, still a small part of your business. I can fully appreciate the lumpiness. It looks like basically a breakeven, plus or minus, in the first and second quarter. Is that something you -- are you building in, in the back half of the year as well?

We modeled what we think we’ll do for this year. It isn’t a big year for us. You remember, one of the additional points of lumpiness had to do with the fact that we -- the way this revenue model is structured, there’s a big initial payment, and then there’s a gap period until the facilities open, if they’re not already open, which is, kind of, the shift in our model to an already-open medical practice, and a focus on that. But back to the comment. There’s a big initial revenue slug and then there’s a gap. We had, at the beginning of last year, a few big groups take a number of territories, and so the revenue slug was big, and now we’re in the process of getting those facilities open. One of the biggest had some internal trouble, really unrelated to the fact that the business model works. It’s somebody that didn’t do what they needed to do and there was a default. And that happened with revenue flowing in at the front half of 2011, and then we ended up having to back that out in Q3, and so particularly for Q2, in a comparative sense, there’s a lot of built-in lumpiness just with that. But we think it can continue to grow, but it will be a modest contributor for this year.

Got you. And then just last question, Larry. I know you mentioned on the higher expenses were -- really attributable to the acquisition, but just as a percentage of revenue, were they skewed because of that? In other words, did you add more costs because of that? Basically I’m looking at the rent and...

Yes. Let me give you a couple of figures and these will be in the 10-Q that will be filed later today. But if you look at our overall increase in clinic operating costs, that’s the line before rent and other, the first half of this year increased $1.6 million, but $3.3 million was the increase attributable to new clinics and acquisitions. So mature clinics actually were reduced by $1.7 million, so when Chris alluded to we’ve done a good job of cost control on the existing clinics, we have, and so that brought your margin down a little bit. And then for rent and others, all that increase was attributable to new clinics. The mature clinics were actually flat for rent, supplies, and other clinic costs. So -- to me, it’s a good news/bad news situation because, you’ll remember, we’ve done large acquisitions in the past and their margins might be a little lower than ours, [indiscernible] as an example. For [ph] years the margins have increased significantly.

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

Quick question. First question for you. So you did a 2.8% comp in the quarter. Wondering with employment levels appearing to be flattening out, are you seeing any change in the volume trend, whether it’s quarter-to-date or it’s just towards the tail end of the second quarter?

Let me, rather than comment on the quarter-to-date, because we tend to seasonally move around a little bit with volume anyway. Toward the end of the second quarter, particularly the last 2 weeks in June, we saw a little bit of a dampening in terms of our overall volume. Prior to that it’s been very strong and very steady. It wasn’t bad at the end of June, but it dropped a little bit. I don’t know whether that was employment related or just a lot of pent up demand from the prior period in the beginning of summer and a lot of people on vacation. But, we’ll have to see. I expect that we’ll still have a positive same-store visits in revenue year. At what level it can continue, we’re in the middle of summer, it’s hard to say right now.

I’ll remind people that aren’t as familiar with the company, we have definite, well-defined seasonal pattern, so typically you’re going to see a slowdown in summer as both patients and doctors go on vacation.

We would typically see the beginning of a slowdown at the end of June anyway. We hadn’t -- we had a much better Q1 than normal this year, and a really strong Q2, very, very strong. So the fact that it slowed down a little bit doesn’t give me great concern, but we’re working on it hard just to make sure that we can continue to keep good volume growth in our facilities, and as we’ve talked about, we’ve worked on our costs and our efficiencies, so we expect all that work to continue.

Okay. And then, Larry, just very quickly on same-store, what’s the breakdown between price and volume for the quarter?

I don’t have it in front of me. I think it’s in the release. It was a combination of both. If you call me later, I can give you the actual data, but I just don’t have it in front of me. I apologize.

Not a problem. Chris, the CMS issue, their physician fee proposal for 2013, last month, just wanted to hear what you guys think of that? I mean what's the -- if it goes through as proposed, what would that look like for USPH?

Larry, you and Glenn want to handle that? Brian, I apologize, I’m on the road, and I don’t have the number crunch in front of me. But I think, from everything that we’ve seen so far, it’s certainly good news.

Well CMS -- this is Glenn. Right now when you look at the physician fee schedule reduction, as of January 1, it’s supposedly a 31% reduction from Medicare on physician fee services. Now that Congress sort of kicked that can down the road, again, we don’t know what’s going to happen, but we assume that Congress will do something again this year. When you look at general geographic payments from Medicare, payments will be flat or slightly up depending upon the geographic index that we’re in. So depending upon what happens with the physician fee schedule, we expect Medicare to look quite good unless the physician fee schedule reductions go into effect in some shape or form.

Glenn, what was the proposed rate increase or decrease for 2013 in the physician fee schedule?

Well if you’re looking at the physician fee schedule reduction as of January 1 for 2013, it’s a 31% reduction. If you look at the geographic index piece, it’s anywhere, depending upon the geographic index, it’s about a 3% increase from a rehab standpoint across the board on average.

Got it, okay. And then, Chris, you talked about Fit2WRK. Just wondering, are you guys able to track how that accrues directly to your same store? Because it seems like you’re getting a lot of good traction there. Just wondering if you can associate the volumes directly, and how you’re gauging the success of that initiative?

It’s difficult to track for a couple of reasons. One, because this last year we’ve seen a huge migration across -- to a different billing system, and so we don’t have an absolute homogenous environment from one year to the next. But we are seeing some very good volumes come from these contracts. Some are in the visit line and some are just in the revenue line for the consulting and related services that we’re performing. Glenn, you want to talk a little bit about how we look at that and, ultimately, it flows into, primarily, into our comp revenue, although there’s certainly some in other income. And in these markets, just anecdotally, where we have these larger contracts, we’re able to see a pretty significant change and track that based upon a payer, whether it’s at Chrysler or TPA, or Sedgwick, and so -- but it’s a lot of cut and paste right now.

Yes, this is Glenn. When you look at the Fit2WRK and the work comp piece, typically what we’ve seen, and I don’t have the numbers in front of me, is we have seen an increase of our work comp revenue as a percentage of -- from a net revenue standpoint, quarter-over-quarter, many of these contracts are on a local or regional basis with the opportunity to grow larger as we go along. So we’re tracking visits, we’re tracking revenue. I don’t have the numbers in front of me right at this point in time to be able to do that, but it does give us the opportunity to potentially grow these to a greater market as we continue to manage these services across the board.

Got it. Larry, last question for you. Free cash flow was really good this quarter. I know that you’ve got seasonality over the course of the year. Outside of seasonality, is this sort of -- is this cash flow momentum something we should be considering for the back half and going into next year?

I don’t know how far you can project it out. I mentioned on the audit committee call we had the other day, this is the best cash flow I’ve seen, since I’ve been with the company. Consider that we have increased our dividend, did an acquisition, and have actually paid down debt year-to-date, and now we’re in -- really with a slower summer period, it’s been a really strong cash flow.

But from -- like from a DSO prospective...?

I mean we're at 45 days. When I joined the company, we were at 70 days, so to put it in perspective so. I don’t think we’re going to go to 40. It may go down a couple of days. As more and more billing migrates on line, and we have less paper processing, typically the timing gets better, plus we’ve been very aggressive, stepped up our collections effort which was, frankly, already better than most of our peers.

Your next question comes from the line of Brooks O’Neil with Dougherty & Company.

I think there’s probably a lot of new people thinking about your company. So I was hoping you could describe in a little bit more detail what exactly the Fit2WRK program is, and then maybe take a minute or 2 to describe what exactly the physician services or osteoarthritis program is?

Yes. Just real briefly, I think most people are pretty familiar, but Fit2WRK is a branded program that we have across the country. We’ve done -- the first year we rolled it out, which was about 2 years ago, we did across-the-board partner training for a standard FCE product. We have people that do very specialized consulting at an industrial level, so with some of the companies that I mentioned earlier, they go in, and they write legal job descriptions, they do ergonomic analysis, we bill for all that. We help them analyze their claims history and implement programs, services, and changes within their business, some of which ends up resulting in visits to our facility, and some of which stays as services that we provide within those local industries. As Glenn mentioned, those can be local relationships that spin into regional relationships with large companies, all of whom you guys would recognize as brand names. We’ve begun to expand those into some more national-looking contracts -- 8, 10 states, multiple states, discussions about the country, and so that’s been a branded effort for us from the physicians services' side. It’s a series of programs in and around musculoskeletal medicine, a core of which are focused on osteoarthritis, particularly osteoarthritis of the knee. Created a brand there, a franchise model, which created for -- which established a territory that somebody would purchase and enable them to deliver these services within an existing or a new facility than a particular territory for a fee. That fee is actually going to change, probably here in the near future and will likely go up. We haven’t finalized that yet, but we’ve been talking to some franchise consultants, probably one of whom we will enlist to help us push this forward. And we’ve done some other sales-related efforts in that regard. So these are programs that are offered, not in our own facilities, but in facilities that are now becoming franchisees of these programs, of this product or series of products. And so we’re also in the process of looking at some other service offerings within that brand. It’s young. It’s new. We’re just getting our legs under us, so to speak, and if anybody has any additional questions, although I’m traveling today, Glenn is in the office, and he could be able to take those if you have some more specific clinical-related questions.

That’s great, Chris, I appreciate it. I’m just curious, I mean, it doesn’t sound like there’s anything that's changed in terms of your overall optimism about your opportunity in that physician services area, it’s just a matter of, sort of, continuing to work the bugs out of the model?

Yes, well we do have some bugs, and we do have to make some changes, and I think one of those changes is really to focus on existing practices rather than where there’s been established patient flow and medical success, rather than trying to do as many ground-up facilities where there isn’t a complete team in place, the resources it requires of us is pretty significant. And so, while I think we’ll do some of those with well-resourced groups, our focus will be more on the practices that already have established medical facilities, large and small, in place. That may cause us not to have as many 10, 12, 15 market sales that are in big chunks, and therefore, somewhat lumpy. I think it will be a little bit more linear and, maybe a little bit more plodding, but I think with the additional sales efforts I think we’ll get there. It’s just going to take us some time.

Okay. And then just lastly, I’m curious if you’ve seen any change in the competitive environment in any general or specific sense?

Well, there’s been consolidation in the industry, and so you have some more bigger players in the environment right now. You have more private equity. There had been a couple of deals transact here this last quarter, both physiotherapy and dreyer [ph]. And I think in general, the environment, the care environment, is the same as it has been. The access to therapists is about the same as it has been recently, which is pretty good, not easy, but it’s not like it was a few years ago, which was particularly difficult. And so I think for us, as a couple of the guys have earlier mentioned, our cash flow is good, our debt is very modest, and we have the ability to deploy that in a thoughtful way to continue to grow the company in -- both organically and in chunks as we come across these acquisitions that we like. So we’ll continue to do that.

I just wanted to note for financial reporting purposes, Fit2WRK or worker’s comp revenue goes through the PT portion of the income statement, patient net revenue, for the most part, whereas the physician services is in other revenue. So when somebody is trying to find this, that’s why we put the gross margin analysis in there this period.

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

First I’m just wondering if you can get an update in terms of the sales force and percentage of clinics currently receiving sales force coverage?

Glenn?

Basically at the end of the second quarter, we had 67 total sales reps covering 289 locations. From a key indicator standpoint, or metric standpoint, the second quarter was probably our best quarter we’ve had across the board. Our visit per FTE was at 11.4 versus 10.7 in the second quarter of 2011. Our units were at 4.23, and our durations were 11.4 versus 10.7 in the second quarter of 2011. So we had a very good metric second quarter.

And does that make you more inclined to add to the sales force because you’re generating, sort of, greater productivity?

We are always looking to add to the sales force. We have about 17 open positions right now. We continue to look, but we churn our sales force so that those underperforming reps we’re replacing over a period of time. But, yes, we’re looking to add more sales reps across the board.

Okay, thanks. And Larry, is it fair to assume, absent any new acquisitions, you’ll probably look to use the strong cash flow you’re generating, and pay additional debt?

Well, yes. Normally we get any cash, once or more a week we pay down the debt. I mean, obviously, the best use of capital is do a start-up, second best use is acquisition, and you can debate whether paying dividends or buying back your shares is your third best use.

Okay. Do you have the payer mix handy?

Yes, I got it right here. The private and managed care -- I’ve rounded these numbers to whole percents -- the private and managed care is 53%, worker’s comp is 17%, Medicare and Medicaid is 25%. By the way, Medicare is most of that, Medicaid is only 1.4%, and then others is 5%.

Okay. And again, based on the business you’re doing, you really don’t see that changing significantly over the next year?

If you go back 5, 10 years, the mix of these 5 pieces doesn’t move much, other than worker’s comp that has increased, maybe, a percent or two compared to a few years ago as a result of the Fit2WRK.

Thanks. And just finally on the guidance. Again it, looks like you’re pretty confident despite some of the softness around certainty we are seeing in the general economy, that the business is continuing to be strong for you?

Yes. I mean, if you look at the guidance figure, we expect the second half to be a little slower than first half, but most of that relates to seasonal factors, including you’ve got summer, you’ve got more holidays, including the Christmas and Thanksgiving breaks in the fall.

[Operator Instructions] At this time, there are no further questions.

Okay, well, listen, thank you everybody for your time this morning. We appreciate your questions, your interest in the company, and we’re happy to answer any further questions as the day or the week progresses, so please let us know. Have a great day.

Thank you, everyone, for joining today’s conference call. You may disconnect your lines at this time.