Ladies and gentlemen, thank you for standing by. And welcome to the U.S. Physical Therapy Second Quarter 2016 Results Conference Call. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the prepared remarks. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Chris Reading, President and CEO of U.S. Physical Therapy.

Thanks, Kristal. Good morning and welcome everyone to U.S. Physical Therapy’s second quarter 2016 earnings call. I’m currently calling in from one of our more recently acquired partnerships in Virginia. And I am happy to say that it’s busy and bustling. They were open at 6:00 AM this morning and had a lot of patients waiting to be treated in Houston. With me on the call include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Jon Bates, our Vice President and Controller; Rick Binstein, our Vice President and General Counsel. Before we begin to discuss this quarter’s results we need to cover a brief disclosure. Jon, if you would, please?

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. And these forward-looking statements are based on the company’s current views and assumptions and the company’s actual results can vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Thanks, Jon. Well, for starters it’s a good feeling to be able to report a record quarter for our company and in conjunction with a very good overall start this year in general. I want to start by thanking our partners, directors and clinicians for the fine clinical work, care and compassion with respect to our patients. And we all work to serve, because without that there is no good quarter or a year without great patient care as a foundation of it all. I also want to thank our sales group, as well as our regional operations team for their persistent focus on the push to drive referrals, which have been strong for these first two quarters so far this year. I also want to thank our corporate support team for the service and support, which in turn allows our partners to remain focused on what is truly important, locally, to move our many partnerships forward. Finally, a big thanks to our recently acquired partners, who are delivering great results. That will no doubt contribute to our long-term growth and success. Now I’d like to touch briefly on some highlights for the quarter as well as the year. Let’s start with volume. Visits in Q2 and really all-year have been very strong. In fact, in Q2, we had a couple of months with either record visits per clinic per day or tied prior record. That happens as a result of the focus on driving referrals into our door, which then allows the clinicians to do great job in helping our patients to get their lives back and return to all of the activities at work and in life that they enjoy. Net rate for the quarter was up slightly from a year-ago quarter, and it’s been generally steady overall.…

Yes. Thanks, Chris. I’ll start with the quarterly review. Net revenue increased 8.6% to $90.4 million due to an increase in total patient visits of 8.1%, and an increase in the average net revenue per visit to $105.27 from $104.85 a year earlier. Gross margin increased 9.1% to $23 million or 25.5% of revenue versus 25.4% of revenue a year earlier. Corporate office costs were 8.9% of revenue for the 2016 quarter as compared to 9.1% from the 2015 period. As Chris mentioned, the operating income for the second quarter of 2016 increased to 11% to $15 million. Interest expense was $300,000 as compared to $200,000 a year earlier. The provision for income taxes was 39.8% in the 2016 second quarter versus 40% in the 2015 quarter. Operating results increased 12.2% to $7.1 million. Earnings per share were $0.57, that’s $0.02 better than the analyst consensus estimate and $0.06 better than 51% in the year earlier period. Same store visits increased 2.1%; our same store revenue increased 1.5% as the average net rate per visit decreased by 0.7% I’ll now cover the first-half results. Net revenue increased 10.5% to $177.3 million, due to an increase in patient visits of 10.6%, offset by a decrease in the average net rate per visit to $105.25 from $105.56. The gross margin for the first-half of the year increased 14.7% to $43.5 million or 24.6% of revenue as compared to $38 million or 23.7% of revenue in the first-half of 2015. Corporate office costs were 9.6% of revenue for the first-half of 2016 compared to 9.5% a year earlier. Operating income for the first six months of 2016 rose 16.7% to $26.5 million. The provision for taxes in the first-half of the year was 39.8% as compared to 40% a year earlier. Operating results for the six months rose 18.4%, $12.4 million and earnings per share were $0.99 versus $0.85 a year earlier. Same store visits increased 4.9%, while same store revenue increased 3.7% as the average net rate per visit decreased by 1.1%. Turning to other financial measures in the second quarter, this year the company’s adjusted EBITDA grew by 11.2% to $15.4 million and for the first-half of the year adjusted EBITDA grew by 16.8% to $27.8 million. The second quarter of 2016 operating results prior to equity-based compensation increased by 11.3% to $7.8 million or on a per share basis to $0.63 from $0.57. In the first six months of this year, operating results prior to equity-based comp increased by 17.8% to $13.9 million and on a per share basis to $1.11 from $0.95. We announced in the release that the company’s third quarter dividend of $0.17 will be paid on September 2 to shareholders of record as of August 19. And we also raised our earnings guidance for the year. We currently expect operating results for the year to be in the range of $23.7 million to $24.5 million or on a per share basis $1.90 to $1.96.

Okay. Thanks Larry. That concludes our prepared comments. Operator, if you would let us, go ahead and open it up for questions.

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

Good morning, Larry.

Good morning, guys. Congratulations on another great quarter. Just on the visits, obviously, it continues to grow very strong on another 8% growth. Any thoughts on the same store sales growth declining a little bit? Is that just off of difficult comp? Was there a slow month in there that maybe hurt that a little bit or…?

Yes. We had great April, a great May, in fact, really record April and May. May I think was all-time high. It dropped off a little bit in June, but it wasn’t bad. I think we had a pretty good comp last year. We had pretty solid visits last year at this time. And so right now, we’re seeing July just a little bit slower than we were in the June, about 2%, not a lot, but little, which kind of follows our vacation seasonal pattern. And we correct it, once school gets back in, things will pick back up, and largely speaking business had been pretty solid this year.

Absolutely, absolutely.

Same-store growth is normally in the 2% to 3% range. And that’s not bad, but they may look bad by comparison in the first quarter, which was a record. That’s pretty much norm.

Absolutely, and I know first quarter also last year we had some bad weather, so you got an overall easier comp this year, and…

Easier and better comp, right.

Right and I think we’ve gotten 4 - you’ve got some 4s and 5s a little fewer the last quarter. So I think - but obviously historically this is still a very solid number. In terms of - and you mentioned it a little bit, you touched on, on the prepared remarks - salaries or just overall cost a little bit as a percentage of revenue a little higher. And it sounds like it’s mostly driven by the acquired clinic, so perhaps an opportunity for you on the next few quarters to trim some of that.

Yes, I don’t know it’s much as trim as just keep get dialed in. And one of the things we’re seeing with some of these acquired facilities, these acquired partnerships I should say, is we’re seeing strong visit growth. The deal that we did out in a Pacific Northwest with our friends out there, they had a series of record-months one after the other, and actually today or yesterday maybe just opened their 11th clinic with some more on the docket. So we’re seeing those facilities grow. Typically, that’s what happens. It takes us a little time to help kick-in the sales program and some of the other things, but there is opportunity there, which comes over a period of time.

Okay. And just lastly, it sounds like your de novo organic pipeline is very strong in the first half of the year. I know you gave a net number of clinics. Can you just tell us how many you opened and closed?

Yes, hang on, just closed it. We believe we opened 11 clinics through the end - I think with through the end of June. I think we have another 14 or so that are on the docket between now and year-end. No guarantee that they’ll all happen. But I think they’re pretty far along in terms of the leases on those. So I think those are pretty solid. We acquired I believe 9, when we did the deal in the Pacific Northwest. I don’t have closures in front…

Look, I can net that out from those two other figures. Okay, so sounds like opened 25 and 14 in the back-half. It’s a pretty nice number. So as you said it is grateful.

You probably want to hit - I mean, normally we have two or three that fall off and roll into January.

Right, right.

Okay. We normally open about 20 a year. We should at least hit that, if not, better.

Sounds good. Okay, great guys. Thanks a lot.

Thanks, Larry.

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

Hey, Brian.

Hey, good morning, guys. Larry, corporate overhead was down quite a bit during the quarter perhaps for you guys. But how should we think about that for the back-half of the year given incentive accrual?

Well, that first quarter, since we blew the numbers out, incentive comp was significantly higher than in the second quarter. Also you have your product costs and whatnot that were typically in the first quarter. So we haven’t really given you guidance as to how much it will be. It depends on how much we earn.

Yes. And, I guess, the other way to think about that is, I know in the past you’ve talked about that 10% sort of long-term target or slightly below that. I mean is that still the way you’re thinking about corporate overhead?

Yes, I mean, it’s typically lower - the second quarter is typically seasonally your best quarter, so corporate overhead would normally be a lower percentage. But for the year, yes, it will probably average out around 10, I would think.

Okay. And then, as I think about your same-store, you were up against the 2.9% comp in Q2 and you put up a 2.1% number in volume. It looks like we’re going to be up against some tougher comps in the back-half of the year. So should I think back-half as probably just a little more challenge in terms of the same-store? Does that matter in your numbers where you are up against a tougher number for the year before?

Well, total volume growth has been up significantly, same-store is only part of the picture. It’s a subset. But normally - I mean in a normal environment our same store volume growth is typically in the 2% to 3% range. We did throughout 4% quarters here and there.

But I think, Larry, wouldn’t you say that the second quarter last year it took us a little while. We got some traction in the second quarter. So probably it’s a little tougher comp than it has been thus far.

Well, if you think about the second quarter last year the [weather finally got you so] [ph] and, again, once that happened, volume spurred quite a bit.

Hey, Chris, I know you’re very active in the industry. As you think about the volume strength that you’re seeing, would you say that’s more secular or is that more company-specific in terms of kind of same-store performance?

Yes. I have a lot of friends that are running a lot of these company’s and good people. But when we get together, we don’t necessarily get down to nitty-gritty and swap and same-store volume stories, as much as other things. I really honestly don’t know. That’s my honest answer. I think we’re working hard to drive and do the best that we can. We’re not satisfied even when we put up good numbers. We’re always pushing, but in terms of how that exactly relates to everybody else, I really don’t know.

No, it is fair, sounds fair.

Honestly, a more important measure in terms of increasing earnings as visits per day per clinic. And we’ve done a - the operating team has done an excellent job increasing that. That’s been going on for a couple of years now.

Got it, and then, Chris, we’re hearing more and more about outpatient knee replacements going to ASCs. Is that an opportunity for you guys as that shifts out of the hospital and patients going straight to home after a knee replacement surgery.

Yes. I think it is. I mean, obviously, when the patient goes - has the surgery in the hospital, has maybe a two-day stay in the hospital. And then, often times, gets transferred into, directly into the hospital’s affiliated rehab facility, in-patient rehab facility for care. And then, often times, then into home-health from there. So we’re seeing in some markets like Nashville, where we have very strong presence and very good relationships with Vanderbilt and with the doctor groups there. We’re getting those patients directly out of the ASC and getting them into a much more aggressive treatment. So I think, over the long run absolutely. I think it’s an opportunity. I think it will take some time to play out. And I don’t think it’s - you don’t move around immediately, but over a period of time, sure.

Last question for me, just a follow-up on Larry’s question on wages and clinicians, is there any difficulty in hiring clinicians at this point that you see in the market or is it still stable, same as before?

Glenn, why don’t you speak to that? I think you’re probably closest to it compared with Larry and I on the ops front.

Sure. I mean, basically what we’ve seen is over the last few months we’re starting to see the market tightening up a little bit, especially in small or more rural markets. So it’s been a little more difficult resource [for sourcing and land] [ph] candidates. In the bigger urban markets, it’s not as that. We have seen a little bit of tightening compared to where we were say, six months ago.

Got it. Thanks, guys.

Thanks, Brian.

Hey, related to the operating expenses, if you look at the release 81% of the increase was attributable to new clinics. And, frankly, most of those were acquisitions. The norm is, when we do an acquisition that their margins, gross margins are typically lower than ours and their cost per visit are higher. And as Chris alluded to, that’s something that we work on over a period of time. It’s not normally something we can change immediately, but we do normally make some progress there.

The next question comes from the line of Dana Hambly with Stephens.

Hey, good morning and thanks. Larry, just following up on that, not a huge deal, but just how long does it typically take to integrate a decent size acquisition?

Yes, I’ll ask then Glenn.

It depends, right. Normally, it’s going to take about a year, year-and-a-half for us to get it throughout the way. We do transitions to minimize impact. Make sure we have hearts and minds in place. It takes us a little bit longer than, say, a traditional company does. But we think by doing it that way we get things go along better with what we do, so…

Okay, excellent. And on the pricing, anything to call out other than it was actually positive this quarter, any changes in payor mix any particular, changes in any particular payor-mix bucket?

Well, payor-mix is around - each pie-slice is around 1% or 2% quarter to quarter. The rate has been very consistent with what we budgeted. That’s pretty much what we expected.

Okay. And then, to follow Brian’s question on the joint replacement pilot and some participation there is a new one that’s just been announced for cardiac demonstration and I’m talking about cardiac rehab? I don’t know, if that’s something that your clinics would participate in, any comments there?

Traditionally, no, we’re not involved with cardiac rehab, just because of the complexities and monitoring that involve.

Right, and, Larry, did you give visits per clinic per day?

It was 25.6%

25.6%. Thanks very much.

Thanks, Dan.

Our next question comes from the line of Mike Petusky with Barrington Research.

Hi, good morning.

Hey, Mike.

Hey, did you guys actually have the kind of the Medicare, Medicaid and workers’ comp mix for the quarter?

Yes. So the insurance business was 50.9%, workers’ comp was 16.2%, Medicare and Medicaid were 26.2% and other was 6.7%.

Okay. So I guess I want to follow that up with - as you guys look at acquisitions or just think about your business in general, I mean, is there a way for you guys to effectively move the needle? Medicare, Medicaid, it feels like it’s been creeping up a little bit, workers’ comp really hasn’t. I mean, when I think about net rate and how do you move the needle on net rate, obviously, I think about mix and - I guess, I’m just wondering as you look at acquisitions or you just think about your business in general, is there a way to really move the needle there or is that just tough?

Well, let me say this, Mike. I mean, so I’ll give you a couple different examples. We did an acquisition, now it’s almost I guess coming up on the third year in Kansas City that was 90% work comp. So initially, that’s a needle mover, right? That was an acquisition that really didn’t see commercial business since it’s onto Medicare. And so, we were able to add that business and that’s pure growth. So that actually took that particular business’ subset of workers’ comp business backwards, even though they didn’t lose any work comp business, but took our total business forward. Conversely, we might do a deal, like one of the deals we’ve done recently. And they have a low comp percentage, which is an opportunity to grow comp. But it may in appearance drop our aggregate comp mix down. And so, I think, when you look at the total, you look at the net rate and you look at what the net rate has done overtime, and it’s - as Larry said, our payor-mixes moves around a little bit, but the rates held pretty steady, in fact, it’s up a little bit this year. And if we were static it would be a little bit easier to trend and track. The fact that we’re bringing on new partnerships and they have pretty widely different mixes that it tends to influence the result a little bit and make it a little muddy in terms of just quick and dirty analysis.

When we look at an acquisition, we’re looking at what its earnings contribution is going to be and what are our opportunities over time. The fact that they have a low workers’ comp percentage wouldn’t cause us not to do a deal.

Right, and maybe I’m on the wrong track here, but let me just, I guess, follow-up on the subject. So, Chris, I guess, when you think about, if you were kind of thinking about the business as you would hope it would be three years from now or five years from now. I mean, would you hope that that workers’ comp number would be outside of the kind of the 16% to 17% sort of have been or like move it more towards 18% to20% or does it not really matter as you know there is just a lot of moving parts here?

Well, two comments. One, the comp is our best payor and so we’d like to get that up as much as we can. So part of that comment is, yes, but Larry’s comment is really the overriding one. We want to grow earnings and sometimes based upon the deals that we’re doing, if they have, again, a low comp percentage, but we have an opportunity to grow earnings there, it doesn’t really matter as much as long as we keep the forward growth. So it just depends on the deals that we do and how things suddenly shift over time. And I think, when you look at our net rate, it’s been pretty steady, even though our mix has moved around a little bit.

Okay. Let me just ask one around M&A. Obviously, a few years ago or maybe it’s actually at this point several years ago, you kind of did that STAR-deal which was obviously a big deal. I mean are there deals out there like that where you guys are actually in even initial discussions that can, to use that phrase, move the needle? Are there deals out there like that that you guys are exploring or are you going to kind of just stick here knitting and do what you do really, really well?

No, the STAR deal was I think a $4.9 million EBITDA deal when we did. It’s substantially more than that now. Absolutely, there are deals out there. We’ve been in discussions, absolutely. We’re not - if there is an impression that we are only doing very small deals. That’s a misimpression. But the pricings got to be right. The people have to be right. And we’re not going to do something just to make everybody happy that we’ve got activity in a quarter, if we don’t think it’s a good long-term fit. In some, we want to do and the pricing may not be in the mix for us. So it’s a combination of things, but we continue to be very active when we expect to get things done.

We look at the larger deals. Most of the time, we bid on the larger deals, but we’re normally not the winning bidder.

Got you, got you. Okay, great. And just a last one I guess is sales reps and facilities covered for the - at the end of the quarter?

Yes. We had - end of Q2, we had 97 sales reps covering 425 locations.

Very good, thanks, guys.

Thanks, Mike.

[Operator Instructions] And at this time, there are no questions.

Okay, Kristal. Thank you, everyone, we appreciate your interest in participation in the call this morning. Larry and I are available if you have follow-up calls. And we’ll talk to you soon. Thanks again.

This concludes today’s conference call. You may now disconnect.