Good morning. My name is Latricia, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy Q1 2014 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Reading, you may begin the conference.

Thank you. Good morning, everyone. Welcome to U.S. Physical Therapy's First Quarter 2014 Earnings Call. With me here this morning is our team, including Larry McAfee, our Executive Vice President and Chief Financial Officer; Jon Bates, our Vice President and Controller; Rick Binstein, Vice President and General Counsel; Glenn McDowell, who's usually here with us, he's traveling on business. He won't be joining us today. Before we begin our discussion surrounding our Q1 results, Jon will cover a brief disclosure. If you would, 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.

Thank you, Jon. I want to start out by extending a sincere thank you to our partners and staff, our sales team and our operations group for coming together and staying focused to what has to be the -- what had to be the worst winter weather of longstanding memory. In spite of the crazy weather, which included an ice storm in Houston in March, and in spite of the MPPR and sequester effect on this quarter compared to Q1 2013 before it was in effect, in spite of all of that, we were able to get some really good things done this quarter. Our revenues grew by more than 11%, our visits by 11.5%, and that was after losing approximately 10,000 visits in January and February alone. As you will note in our release, EPS grew again in spite of the $0.07 to $0.08 impact from MPPR and sequester. Our gross margin improved 12.1%, and operating income grew by almost 13% as a result of the focused efforts of a great many dedicated team members, partners and clinicians. At the beginning of this year, we said we were going to do a much better job of expense control. And I confess that the weather made that all the much more -- all that much more difficult. And yet the team did a great job under the circumstances with respect to expense management and part-time staffing control. And with all of the craziness, we were able to eke out a little bit of same-store growth in the midst of all that we had going on. Again, this is a real testament to our partners, our sales team and the clinicians working to get patients in the door so they could receive the care they need. And Glenn, along with our…

Okay. Thanks, Chris. As Chris spoke to, the weather severely impacted us. But when we announced in early March the 10,000 patient visits at approximately $0.04 earnings hit as a result. We also noted that our referrals year-to-date were ahead of budget. Finally, in March, as combination of the improving weather and the strong backlog resulted in a significant increase in patient visits. Our net revenue, as Chris mentioned, increased 11.2% to $69.8 million in the first quarter of 2014 due to an increase in patient visits of 11.5% to 643,900, offset by a very slight reduction in our average net rate per visits. Our total clinic operating costs were 76.1% of revenue in the first quarter, as compared to 76.3% in the year-earlier period. Our operating costs of mature clinics were actually reduced by $1.2 million. Our provision for doubtful accounts for the quarter was 1.4% as compared to 1.7% a year ago. Our gross margin for the first quarter increased by 12.1% to $16.6 million, and the gross margin percentage was 23.9% as compared to 23.7% a year ago. Our corporate office costs were 10.2% of revenue in both quarters. Our operating income for the recent quarter increased by 12.8% to $9.5 million. Net income for the 3 months was $4.2 million, and our diluted earnings per share were $0.35. The analyst consensus estimate was $0.30. In Q1, same-store visits increased slightly, while revenue decreased by 1.7% as the average net rate was reduced by $1.91. This was attributable -- largely attributable to the MPPR and sequestration reductions, which went into effect in the second quarter of last year. Our adjusted EBITDA for the first quarter of 2014 increased by 12.7% to $9.5 million. As of the end of the most recent quarter, the average age of accounts receivable was 42 days. As of March 31, our credit line borrowings totaled $45.5 million. Despite last week's $10-plus million acquisition, our current credit line borrowings are only $50.5 million. So only up $5 million during the period, so obviously we had some significant pay downs since the end of the quarter. Our cash flow remains solid.

Thanks, Larry. With that, operator, we'd like to ask you to open up the line, and we'll take questions. Hopefully, we'll take questions.

[Operator Instructions] Your first question comes from the line of Brooks O'Neil with Dougherty & Company.

Congratulations on a terrific quarter, especially in light of the unusual factors. I was actually in Houston for that ice storm and it was kind of wild. I was in San Antonio for a an ice storm in March as well.

Yes. Hopefully, it's a one and done, we don't get it again. Last winter wasn't a lot of fun.

Well, I live in Minnesota, so I'm something of an expert on winter. And I can tell you that it ends almost every year.

Good to know.

There you go. All right. So can you just give us any insight into how the trends have continued into April and May? I know you don't want to talk a lot about it, but did it continue to be pretty good as we headed into the springtime?

Yes. We don't want to talk a lot about it. But things are steady. So we're...

Okay. Can you just talk a little bit about what you're seeing out there? Obviously, now we're part of the year into the implementation with the ACA. You're talking to a lot of employers, large, medium and small. What are you seeing out there in terms of response, behavior, et cetera, as it relates to your business, obviously?

Yes. I'm not sure any of us really do the ACA. We see certain employers certainly having to manage their -- because of the hourly and benefit-related thresholds, having to manage their workforce. And so, in some cases, hiring more people but offering less worked hours per week. Our activity with the Fit2WRK group, which we've grown and support, and in sales and marketing around the country, they continue to do a phenomenal job. And so, the demand continues to be very, very high. I'm very pleased with that group's efforts. The results are producing, and our partners' efforts, in conjunction and coordination with that. So I don't know whether that has anything to do with ACA. But right now, it seems to be a good climate for us.

That's good. Can you talk just a little bit about anything you're seeing from a reimbursement perspective? Do you expect the trend to continue to be pressured? Or do you think it's [indiscernible] out now?

Well, last year's MPPR and sequester kind of came out of left field. We expect, we budgeted for this year is to be kind of a relatively flat year overall in aggregate. I mean, we'll see -- I don't expect anything in the near term to be different than it has been. And I don't know that I would characterize the entire environment as having -- as being pressured. I think, certainly, from a federal perspective, things happen from time to time, sometimes predictably, sometimes not. But I think it's a steady environment right now.

Good. That's very helpful. Just 1 or 2 more quickies. Obviously, we noticed no update to the guidance for the year. I mean, clearly, sounded like March probably turned out at least as well as you thought maybe a little bit better. Can you talk about your sort of thinking about the guidance at this moment?

Yes. We talked about it internally. I mean, it's only the first quarter of the year. As you know, sometimes we do significant acquisitions, or normally when we do a significant acquisition -- or after the second quarter, we often update guidance. So if necessary, I think, we'll do it then, but we're not doing it right now.

You wanted to see a little more, I guess?

Yes. I mean, March doesn't make a trend. It was above our expectations, actually, and things are going fine now. So we'll see. And then, probably, I would guess after the second quarter if we need to, we'll revise guidance.

Sure. Okay, that's good. And then, lastly, obviously, you've been very active from an acquisition standpoint, including the deal last week. You have some debt on the balance sheet now. Can you just talk about what you're seeing in the pipeline, what your appetite is for continuing to be as active as you have been over the last year?

Well the appetite is no different. We continue to have good discussions with people. As I said before, we're going to be active, and we're going to be probably lumpy from time to time. So again, you're going to see our activity continue to be -- our appetite and our activity continues to be relatively steady as we have been. We're not going to be month-to-month or even quarter-to-quarter, but we'll get things done.

The next question comes from Larry Solow with CJS Securities.

Could you maybe just give us a little more color on your acquisition you made last week? I actually joined the call late. I'm not sure if you discussed it at all. But it seems like a pretty decent size acquisition, 13 clinics. And it looks like they're larger than your average size clinic, so it actually looks like even a bigger deal than what's on the surface.

Yes, a great deal. I get most excited about the people, super good people. But that's been the theme. We've been really blessed with being able to bring in really, really high caliber, quality, very capable people, and so this one's no different. This is in an area where it's a dense, heavily populated area where there's room to grow. Just since the deal has been announced, I guess word gets around in certain areas, and so the owner or partner in this deal has gotten some calls and some additional interest, physicians and other things locally. So definitely, together, we have a plan to expand. And that's been the case with all the deals we've done of late. It's been -- they've been great. We're very pleased.

Okay. And then -- and your outlook for pricing on the commercial side and how you made this acquisition -- what was the pricing of the acquisition you just did? And what's your sort of overall outlook as you look out into '14?

Yes. I think -- I don't remember exactly what our net rate was on this deal, but it's regionally appropriate, and I think price was priced appropriately. I think they've done...

Yes. Their net rate was a little lower than our average, but not a lot. And then, it was in our normal 5 to 7 multiple range.

Okay. Then, in terms of cost cuts. It sounds like you've certainly done some, and it's obviously helped the bottom line. It sounds like, from your prepared remarks, or in the press release, that you still think you have more to do?

Yes. It's mostly keeping our part-time staff dialed in very close with volume. Obviously, in the first quarter, we had a little bit of a challenge in that the majority of our people are full time. And when we close for snow, there isn't much you can do with that other than just put your head down and get through it. So absent now the weather impact, I expect with the continued efforts, we'll continue to get this dialed in. And it's an ongoing work in progress, but I think there's still more room.

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

Chris, you talked about referrals being ahead of plan. Could you just remind me kind of the evolution of how a referral turns into a visit?

Sure. You know what? My partners and our directors and our staff, in many cases, have relationships. And those come from being involved in the community, being embedded in the community, being on the sidelines nights and weekends, and at church and other things. And because these people have longstanding tenure, they're owners in the partnership, they have stability to create relationships based on good care and trust. And they go out and they call on these doctors. And so, we have sales staff that are, in most of our markets, the vast majority of our markets, we have salespeople that go out and call on these doctors and are a regular face in those offices. We have staff that do a variety of different things, give lectures to case managers in the industry, call on physicians and communicate well. And obviously, are focused on doing a great job for their patients. And so, those things result in relationships that drive business. You just have to be out there and be present, and physically present, as well as clinically present to keep those things going.

Okay. And so -- just exactly how are you measuring a referral? Is that once you get the first visit or...

Yes. It's not just the prescription that comes over a fax. It's when that patient is seen in a clinic that it becomes for us a referral. In truth, there are certain referrals that come in that come by phone or by fax. And a percentage of those, you don't get in. That happens in any facility, ours and others. We only count it when it becomes a patient.

Okay, that's helpful. And on the -- yes, it sounds like March was pretty strong. Is that -- can you help me out? Is that just the pent-up demand from the 10,000 visits you lost in the first 2 months or are those 10,000 visits gone and you can never recapture those?

Yes, it's a little bit of both. When we get a prescription from a physician, usually it comes with a patient already having a follow up with that doctor and back in a few weeks or months. And so, if they lose a week or a few days, depending upon when that occurs, sometimes you can make it up, sometimes you can't. It depends where they are in the cycle to see their physician, whether they're just getting started or whether they're on the tail end of their care. So sometimes you don't make it up, sometimes you can. I don't really think that it's necessarily significant pent-up demand although you would have some from the end of February and maybe rolling into March. You have people outside getting more active and doing yard work and other things. And so, that creates, after a long winter, some strains and aches and pains. It sometimes make their way into the facility. March is typically a better month for us, though.

Well -- and normally, when you have this kind of weather factors, especially if they last for several days or week or longer, what you see is the durations go down. Meaning, the average number of visits per referral. So whereas we might normally average 10 or 11 visits per referral, you'd see them drop to 8 or 9. So you can definitely see where they've come in less than they would have if the weather had been better.

Okay, helpful. That all makes sense. And then, just lastly for me. Larry, do you have the payer mix for the quarter?

Yes. Our private and managed care was 51% of revenue, workers' comp was 20%, Medicare and Medicaid was 23%, and other was 6%. I'd like to give you some more details on workers' comp. This -- first quarter last year, workers' comp was 17.7% of revenue. And that is now increased to 20.4% because of Fit2WRK and the acquisition we did in December. So on a relative basis, that's a 15% increase in the amount of workers' comp revenue year-over-year.

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

This is Jason, [indiscernible] on for Brian. Just had a question on if you're seeing any benefits from the ACA and improving employment outlook. Should we expect that -- how should we expect that to impact same-store going forward for the duration of the year?

Larry may have a different answer. I would tell you not try to model in an ACA number into a same-store number. I don't know what the impact is. We haven't, I don't think, seen really transparent numbers in terms of how many truly new people that didn't have insurance before, now have insurance, rather than having lost their insurance because it no longer qualified and having to switch to a new insurance. So I think that, that's -- I don't think we're seeing an impact from ACA yet. And if we are, I don't know how we measure it.

Yes. Again, our focus is typically in suburban markets where we have a more affluent patient base. And so, we don't see indigent patients as a rule, though we see some. And we don't typically see Medicaid, though we do in certain states where it pays okay. So I don't know that the...

And young people aren't high users in their early 20s of physical therapy. So relatively speaking, we discount the effect of ACA right now on any trends in our business. Whether that changes over time or not, remains to be seen. But right now, I'd say don't try to predict what it's going to do. I don't think it's having an effect.

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

Just a quick question. I was wondering if you could just give us a sense in terms of the competitive environment in light of the reimbursement pressures out there. And if you're -- some of the patient referrals you're seeing, if any of that is coming from business that was going to competitors before?

Yes. Again, that's a good question. It's one I don't necessarily know how to quantify. I mean, we have the ability to track what comes into our door. We don't have the ability to track necessarily what might have historically gone into somebody else's door. It's a competitive environment. We're in a very fragmented environment where hospitals are in this business, and small and large private practices. We're well-resourced and our partners have a lot of resources from Fit2WRK, to marketing support, to draw on, to try to be more competitive and can gather a greater share. But again, I don't know specifically how we measure that point-to-point.

We do know from firsthand experience. Chris and I have talked to a couple of the other large PT companies out there. And at least in the 2 cases I'm aware of, their same-store sales did go down in the first quarter compared to last year. That -- now that doesn't mean we necessarily took any market share from them. I think they were firstly impacted by the weather. But I think it was, frankly, it's almost amazing that we were able to produce same-store volume growth considering how bad it was.

Great. And, Larry, as it relates to that same issue, I know the acquisition pipeline has always been pretty robust. But are you seeing additional opportunities as a result of the environment out there, or again, it's a nonissue right now?

I would say it's steady as she goes nonissue. Last year, we had MPPR and G-codes and a lot of changes, and that kind of shook everybody up. This year's a little less change, I think a little steadier. But we think that there'll continue to be a lot of consolidations and we'll continue to be selective about who we bring into the family.

Yes. We say this every call, but it's not a pipeline. It really isn't. It's not like we've got 10 deals lined up and scheduled to close. It doesn't work that way. So as Chris said, it's pretty lumpy. And we did 5 deals last year, that was unusually high number of deals. So I don't know that we'll do as many deals this year. We just did one. We might not do another one for a couple of quarters. I don't want people to read into it, something, if we don't do a deal every quarter.

There are no further questions at this time.

Okay, listen. Thank you, everybody. Larry and I are available if you have any additional questions. We appreciate your time this morning, and we thank you for your interest. Have a great day.

Thanks for participating in today's conference call. You may now disconnect.