Ladies and gentlemen, thank you for standing by and welcome to the U.S. Physical Therapy Q1 2018 Earnings Conference Call. At this time all lines have been placed on listen-only mode. [Operator Instructions]. It is now my pleasure to turn the floor over to Mr. Chris Reading, Chief Executive Officer. Please go ahead sir.

Thank you. Good morning and welcome to U.S. Physical Therapy's First Quarter 2018 Earnings Call. With me today on our call include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, Chief Operating Officer-West; Graham Reeve, Chief Operating Officer-East; Rick Binstein, our Vice President and General Counsel and Jon Bates, our Vice President and Controller. Before we begin our review and a discussion of our results thus far in 2018, we need to cover 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.

Okay, thanks Jon. I'll start this morning by proving a little color on the quarter and then discuss as well the acquisitions we announced earlier this week. First the quarter; for starters I think we built a pretty solid foundation upon which we can use to leverage our goals and objectives for the remainder of the year. To begin, if you recall we added to our regional operations group earlier in the year, creating a new region, rebalancing the workload for a very important VP of Operations. Similarly starting in March this year Graham joined us as we split the company into relative halves; Graham as COO East, Glenn McDowell as COO West. So for at least a portion of the first quarter we were able to reset and rebalance the team and the workload to begin where there was change to establish new relationships at the partnership level. All that has gone very well to-date. Our partners have been receptive to the changes and our officers have been traveling and working to establish their priorities for the coming year, as well as to work on continued service to those new to them partnerships. I am pleased with how well everyone has worked together to make this happen as smoothly as it has been done and again, I think this bodes well as we work through what is traditionally a very busy spring quarter. To move to the quarter itself, we saw visits build nicely in spite of the periods of extreme weather and I’ll confess to not have the term – not have had the term bottom cycle in my vocabulary previous to this winter, and as it played out we had a few of them in the east as well as some prolonged crazy weather and what normally…

Thanks Chris. Chris hit on a number of the financial items, so I’ll make this brief. Specifically as it relates to the PT operations, revenue increased 7.4% to just over $100 million. Patient visits increased 7.2% and as Chris mentioned we actually saw a slightly increase in the average net rate, despite the Medicare rate reduction. Revenue from management contracts was $2.2 million and from our industrial injury prevention business it was $4.9 million. Total operating costs were 78.6% of revenue versus 78.7% a year earlier. In terms of the dollar increase, $5.5 million was attributable to operating costs of New Clinics. There was an increase of $2.8 million related to the industrial injury prevention business due to a full quarter of operations and an increase of $0.3 million related to management contracts while we were able to reduce costs at our Mature Clinics by $300,000. The company’s gross profit for the first quarter grew by $2.5 million or 11.9%. Chris mentioned the improvement in the market percentages as it relates to the VP operations. As to the industrial injury prevention business those margins improved from 14.3% to 15.8%. Corporate costs were 9.4% of revenue in the first quarter versus 8.8% a year earlier. Part of that is a result of the changes in the management structure, where there was a significantly more incentive comp accrued in the first quarter this year than a year ago. Operating income for the recent quarter increased 7% to $13.1 million. Our income tax rates were 25.8% in the first quarter this year versus 27.3% a year ago. Earnings from operating results increased 10.6% to $7.1 million. Same store revenues for de novo and acquired clinics opened for a year or more increased 1.9% as visits increased 1.4% and the net rate increased by 0.5%. In the first quarter this year our adjusted EBITDA was $14 million. We have cleared our second dividend of the year, the second quarterly dividend for 2018 to $0.23 per share, which will be paid on June 8 to shareholders of record as of May 11.

Thanks Larry. With that operator, let’s 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. Just quickly just touching back on the cost alignment initiatives, I know we’ve been talking about that for the last couple of quarters. Just, it sounds like you are certainly starting to make some headway. I guess 300,000, 400,000 cost reductions and your margins improved. I know that in prior history you had put some numbers on them. I’m not looking for that necessarily, but this is sort of the early stages and do stills see a lot of you know – a lot more or some materially more actions that you have to take over in the next and few quarters I suppose or before you sort of wind that down.

Yeah we still have some opportunity for sure, and we have portfolio as you would expect, but with a decent chunk of our team, portions of each of the regional support group, with Graham the division that we made, it’s going to take a little bit longer, but we are making some progress. We saw some of that in the quarter and we expect particularly as volumes build that that will you know kind of make its way through as the year progresses. I don’t have a number yet and we have to see how the second quarter begins to play out, but the guys are focused on it, and I expect we’ll make continued progress.

Okay, and obviously the volumes, you know it seems it’s starting to recover after a sort of slow start. You got a great year last year, 4% same store for the full year. Without giving us an exact number, do you think you can you know get close to that again? Any reason to believe you know unemployment still remains low, the economy still remain pretty good. Any reason you know macro level to think things should really change.

I don’t think there is any reason on the macro side that it’s going to affect same store. Last year was a great year. We had a good March with weather and April has continued to improve. So we’ll have to see whether we get back to the 4% or we end up in kind of the more normal range, but there isn’t anything on the macro side that should influence it.

Okay, and just lastly I realize pricing sort of moves around on a quarterly basis, sometimes it’s skewed by acquisitions. But anything unusual that would sort of – and again it wasn’t. I think I assumed you’d go down 0.5% or 2%; you actually went up a 0.5%. But anything in the quarter that sort of offset the Medicare cut and actually gave you a lift?

Nothing unusual. I think the portfolio, the deals that we’ve done and the fact that we are you know – we are making sure from a clinical services perspective that everybody understands precisely what to do. We are company that hires a lot of new grads and these new grads come out and they don’t know how to code. In fact they are kind of thought less is more and coding less and doing it incorrectly is just as bad as coding high and doing it incorrectly and so we’ve been very focused on that, particularly with the Medicare cut, to be precise. I think that’s had some effect, but as you mentioned, it’s not a big change.

Got you. Great, thanks Chris. I appreciate it.

Thanks Larry.

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

Hey Brian.

Hey, good morning. Chris just wanted to talk about the industrial injury business. Obviously you did an acquisition earlier this week or this month. So how should we be thinking about the opportunity sizing there? And if you don’t mind or may be Larry just walk us through kind of like the economics that we should be thinking about in that kind of business?

So the opportunity, we are just kind of the front end of this. We did the deal back in or I guess we closed at the end of February, our first partnership ’17 – end of February in ’17 we did this deal, effectively beginning May. Those two partnerships now become one and so we are in the process of moving that all together. We’ve been working on that actually for a couple of months and that’s going well. We think there is a bigger opportunity to deploy some additional sales and its going to take us a little while to digest this, just as it did, you know the deal we did last year. But we are scratching the surface, we’ll continue to look for other opportunities in addition to the organic opportunities I think that exist. And one of the things about this deal that we just did is they have, we are in the same business, they are largely – their business is largely core prevention, whereas in our earlier acquisition we\d do some other things as well that are a little bit more peripheral, but still add to the company. In our new acquisition they do it all with athletic trainers and there is a price point differential. As you would expect, there would be between athletic trainers and licensed physical therapists. Trainers actually are very, very capable, very confident because it’s really what they do on the field, which is work on injury prevention and quick assessment and response. And so we think there is a little bit more margin opportunity over a period of time, not immediately, but over some time to move our existing partnership gradually in the direction of being more ATC centric where it’s appropriate to do that. So I don’t know if Larry you want to add anything to that.

In terms of size, I mean our run rate now in the PT business is over $100 million in the quarter. The industrial injury prevention you are talking about is a combined operations closer to like $8 million $9 million a quarter, so obviously it’s much smaller. I do think there is, whereas the margins in PT business run 21% to 25%, that business we just bought at better margins in the business we acquired a year ago, partially because of use of ATCs versus PTs. So what has been a 15% margin business can be better, but I’m not sure it will be as high as the physical therapy business.

Hey Larry, is this a PMPM model or is it per visit model, or is this – what’s the reimbursement model for this kind of business?

Yeah, it’s not PMPM. I guess it could be but it’s not. It’s based on a contracted number of hours for a given service. Typically over a calendar year period, so these are – while we have some one-off contracts that are shorter term, most of these contracts are for a calendar year to begin with service like prevention, which can involve a number of different things, and then gradually you know our goal is to demonstrate the effectiveness of that and to grow in terms of the number of contracted hours, but its all, mostly all on an hourly basis Brian.

Got you, and then my last question Chris, as I think about the M&A environment, not to ask you about pipeline or any of that, but what are you seeing in terms of chaining interest or increasing interest from sellers at this point in the non-platform space?

I think it’s similar to what it’s been for the last couple of year, and as I’ve mentioned before, as I go the private practice meeting every year which is end of October beginning of November that group just like, just like when I look in the mirror, I’m seeing more gray hair on my own head. That group’s becoming a little grayer and a little thinner on top and so those people have to figure out what’s next for them in terms of how to monetize their largest assets. And many of the folks, particularly the folks we are interested in, they built a business that’s too big for their employees to buy and so I think the interest is going to continue to be high. Not everybody is ready at the same time for the same reason, but I think there certainly isn’t any change in the environment from an interest perspective that I can tell.

Alright, awesome! Thank you guys.

Thank you.

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

Yes hi, good morning. Just wanted to follow-up a little on the industrial injury business and Chris, I was wondering as you expand further in this filed, are there any opportunities or investments you have to make regarding the sales force, is it different calling points?

It’s a different type of sale and so there will be some investment and the sales cycle is a little bit longer you know than it is, much longer in fact than it is for a sales person that goes out can have an impact on our PT business month one. It’s unlikely that a sales person is going to have a month one impact on the industrial business, but the quantity and the volume and the pricing in that business is generally significant enough that we think with the progressive add over time, not a huge investment out of the gate, but just you know, just thoughtful adding to the sales side will help us grow this business and what we think will be a material meaningful way as we look forward.

Okay. No, that’s great and again are there any other adjacent areas you are considering?

Right now we are looking to grow the business that have and knit it together well and to continue to expand. Because this new acquisition offers you know primarily just the one service, I think there is an opportunity to cross sell some of the things that we do in the original business. But there isn’t anything that we are chasing right now that is you know what I would consider to be a separate; you know unintended market right now in adjacency.

Right. Okay no, that’s great. And Larry, just two questions, first is how we should think about the tax rate going forward and also if you have the payer mix handy?

In terms of the tax rate I think in our guidance we spoke to like 28%. So around 28% is what we estimate it will be. With regards to the payer mix, insurance related managed care type payer was 49.2%, workers comp was 14.6%; now that excludes the industrial injury prevention business. That’s just a fee for service. Medicare and Medicaid combined was 27.7% and the other was 8.5%.

Okay, thanks again for taking the questions.

Thanks Mitra.

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

Hey, thanks and good morning. Just about on the injury prevention business, is this similar to the PT business where its – you know there’s hundreds of small independent companies out there, and is the growth opportunity more organic or acquisition driven. I’m just trying to – are you biggest now with these acquisitions.

You know I can’t say for sure whether we the – Dana whether we are the biggest or not. We are certainly I think one of the – with this acquisition, one of the biggest. I can’t off the top of my head name somebody that’s bigger, but honestly I don’t know, I get to see the financials on some of these companies, so I’d be guessing. There aren’t hundreds and hundreds. We’ve identified what we think are the biggest players. There is a smaller number as you would expect in this business than we see in the PT side of things where they are literally thousands and thousands. There aren’t that many on the prevention side, and a lot of its mom-and-pop which doesn’t even make our radar screen. But we think we can grow organically in a very significant way and then we think over time there maybe some attachments that we can make with people that you know do great jobs, that have established either vertical niches in certain industries that are a little different than ours potentially or key areas which are strengths that maybe a more peripheral area for us. So we’ll see.

Okay. And would it be fair to think that the multiples you would be paying would be comparable to the PT multiples, and it sounds like you are going to structure these much like PT where you do these partnership deals?

We are continuing to do the partnership deals. We’ve done two deals and so I don’t know that I have enough of a pattern yet and to tell you what the multiples are going to look like or how that’s going to compare. But I’m not going to lead you to believe that it’s going to be materially different either. It’s just a little early to tell.

Okay and does this fit in well with your fit-to-work business.

It does, it fits in real well. So there were aspects of fit-to-work which are really better delivered at a clinical level, and by that I mean in our facilities there are certain aspects with fit-to-work that we were able to do out of our facilities that were outside the clinical. But frankly those were stretched for us and so this kind of meshes the two together, so we continue to do both and I think it’s a good puzzle piece type fit between all the products and services.

Okay, thanks very much.

Thank you.

[Operator Instructions]. You do have a follow-up question from Brian Tanquilut with Jefferies.

Hey Larry, just wanted to ask on same store visits, is there any call out in terms of what you estimated. Say the flu impact was on the downside or the weather?

Well, we don’t – Glenn would tell you it's a huge number. But no, I mean it certainly impacted us, so…

The flu is bad this year and then the weather was...

The weather was a mess. But I mean, actually honestly I didn’t expect to have 2% same store growth. If you had asked me that in February, I would have told you that it was like – it was bad, but it certainly has an impact. I can’t tell you what the percentage was.

Okay, because I guess my question really is based on the 1.4% same store performance and visits against some easy comp from last year, how does that translate into your view and guidance or with the assumptions you guys baked in for same store in your guidance range.

Well, I don’t know [inaudible].

I don’t remember, I don’t that it was.

It was last year, that’s the comment you guys made.

Anyway, I don’t know.

We are ahead of budget for the quarter in terms and that budget is baked into the guidance that we gave you. So I think you know full steam ahead without any changes right now.

As you know, and it’s common, either when we do material acquisitions or after we get a quarter or two in year, we frequently revise guidance. So it’s something we’ll look at the end of the second quarter.

Cool, alright. Thank you.

Thank you.

At this time we do not have any future questions. I would like to turn the floor back over to presenters.

Okay, well listen, thank you everybody. We appreciate the questions; we appreciate the time this morning. If you have any follow-up, we are here in the office. Have a great day! Thank you. Bye now.

This concludes today's call. You may now disconnect.