Good morning. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy 2019 First Quarter Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Chris Reading, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to U.S. Physical Therapy's First Quarter 2019 Earnings Call. With me today, Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, our Chief Operating Officers, West and East; Rick Binstein, our Vice President and General Counsel; and Jon Bates, our Vice President and Controller. Before we begin to discuss our results for this quarter, we will have Jon read a brief disclosure statement. 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. I want to make some brief color-based statements on the business and then have Larry review the financials in more detail. Our core Physical Therapy business as well as our industrial injury prevention services partnership performed very well for the quarter despite some persistently crazy weather and record cold across much of the country this quarter. Our same-store revenue and volumes were both very good. Volumes at 3.6% against a tough comp a year ago with a net rate increase that combined to produce a 4.7% increase in same-store revenue for Physical Therapy. Also notable and positive for the quarter, gross profit percentage for PT improved 120 basis points compared to last year, PT management contracts improved 470 basis points and our industrial injury prevention business increased 650 basis points compared to our 2018 Q1. This large margin increase in our industrial injury prevention business was driven in combination by the growth in the business and also by greater percentage of our prevention services being delivered now by athletic trainers who, along with our physical therapists, are doing a terrific job for our client-based companies. As we've discussed earlier, margin expansion and cost control's been a big focus and I just want to give a shout-out to our partners and our team. They are doing a really good job right now. As you know, we also added to that segment – to the industrial injury prevention segment, again most recently with a great acquisition just a couple of weeks ago, a terrific team who shares our vision for prevention, while adding to our Briotix partnership complement of services, we believe in time will be a significant cross-sales opportunity within our portfolio of client-companies. So before Larry covers the financials in greater detail, I would like to say that we feel very good coming out of what is typically our seasonally-weakest quarter with as good a footing as we have right now in a long time. The investments we have made in people, resources and in our acquired and legacy partnerships with so many exceptional people is paying off. Our partners and their staff, along with their sales teams, have definitely continued to deliver great care and service, and results, which ultimately drive referral volume and visits. Additionally, we feel better about the margin expansion, cost control efforts, which are bearing fruit. So that concludes my brief overview. Larry, if you would, go ahead and review the financials for the quarter.

Okay. Thanks. Revenue increased 7.3% in the first quarter to $116.2 million. Revenues from PT operations increased 6.1% to $106.7 million, due to an increase of patient visits of 4.7% to over 1 million for the quarter and an average – and an increase in our average net rate per visit to $106.49 from $105.15. The majority of the increase came from Mature Clinics, so that's noteworthy. Average visits per day in clinic increased by 4.7% from 25.7% in the first quarter last year to 26.9% in the most recent period. Revenue from the industrial injury prevention business increased 42% to $6.9 million. Though we did an acquisition last year, most of that was from internal growth. Total operating costs were 77% of revenue, a reduction from 78.6% a year ago. Chris went through the gross profit percentages, so I won't do that, but the gross profit overall grew by 15.1% in the quarter. Corporate office costs were 9.7% of revenue for the first quarter of this year as compared to 9.4% last year. Operating income increased 18.2% to $15.4 million. Operating income as a percentage of revenue increased by 130 basis points from 12% in the 2018 period to 13.3% in the recent quarter. The provision for income taxes was 24.3% in the first quarter of this year versus 25.8% last year. Our operating results increased 18.6% to $8.4 million or $0.66 per diluted share as compared to $0.56 this time last year. Same-store revenue for de novo and acquired clinics, Chris hit on, but again they were – in total they increased 4.7%. In terms of other financial measures for the first quarter of 2019, the company's adjusted EBITDA grew by 11.7% to $15.6 million from $14 million. Also noteworthy is that adjusted EBITDA as a percentage of net revenue increased by 50 basis points from 12.9% to 13.4%. As I noted in the press release, we had exceptional net cash flow during the quarter, which enabled us to pay down the credit line to the lowest level in 6 years. Our second quarter dividend of $0.27 will be paid on June 14.

Thanks, Larry. That concludes our prepared comments. Operator, if you would go ahead and open it up and you'll have some questions.

[Operator Instructions] The first question will come from Larry Solow with CJS Securities.

Congratulations, good start to the year. The same-store sales growth actually was a pretty solid number and it's been running a little bit above historical averages for the last couple years. And I think this quarter was – I think weather was sort of not great, right? So it seems like it's never great, but it wasn't like it was better than last year, right, and we're on easier comp. So pretty good number and that's somewhat above your, I guess, full year outlook, right? Any thoughts on that?

Yes. I think that's right on all counts. So between snow and the crazy cold, particularly in parts of the Midwest and in the East Coast, weather wasn't great and in spite of that our partners did a really good job. So as I said, we are encouraged with the start. We are out of the weather period now thankfully, and we look forward to hopefully being able to continue to perform this way.

And pricing was, again, not a huge move, but maybe slightly more than I had thought. I don’t know if that's just a rounding error, sort of some pluses and minuses there?

No, the net rate was higher than we budgeted.

Okay. So anything in particular that you think that trend can hold or hard to really say?

Well, it moves around a little bit from quarter-to-quarter. I think it's at a – probably a reasonable level in terms of future periods.

And you've done a nice job obviously improving the margins of the acquired industrial businesses. Over the long run, would you expect these margins be a little bit better than what we see in PT?

Yes. I think so. I mean, we've not had a real static period since we started this a little over 2 years ago and so that's influenced it a little bit as well. But yes, I expect it will settle maybe a little bit higher than PT.

And then just lastly. Corporate office, a little higher than I thought as a percentage of revenue and on absolute basis. Will you try and maybe get out a little bit ahead of last – sort of the [crew] performance or anything that's driving the number a little higher?

Yes, incentive comp was higher than the first quarter last year.

That's pretty much it. I mean, everybody – Graham started 1st of March last year and so he was out in the first couple of months on a comparable basis. But relatively speaking, the team additions we made last year are all here now, and so we are pretty settled.

The next question will come from Matt Larew with William Blair.

Wanted to ask about clinic count here, which was down 1 from the fourth quarter and clinic growth over the last 4 quarters has slowed a little bit. You referenced in press release obviously cash flow strength and resulting reduction in borrowing. So just maybe give us a sense. Obviously, you have plenty of capacity for what your pipeline looks like and how you expect maybe clinic growth to trend maybe, just been a timing issue in terms of some of the partnerships recently, but if you could give us a sense for why clinic growth was slow here in the last few quarters and how you expect it to maybe change in the next several quarters?

Yes. I think when you look overall our new clinic openings for the year, combined with some little tuck-ins that you guys don’t hear about because we don't announce them, that's been in 20s – low-to-mid 20s in combination. So that's been pretty steady. We have some timing elements throughout the year in terms of when we do the openings. And then we've continued to pare clinics. On the acquired clinic side, we continue to be active in the market, we expect to get things done. We're not chasing per se an openings number, which quite honestly before we got here, the company used to do. So we're trying to do meaningful things that are going to be a long-term benefit and we will continue to do that. But to your point, we have plenty of capacity and we'll continue to do things that we think are going to be a benefit over the long run.

In the first quarter, we opened 3 clinics, but we closed 4. We closed more clinics last year than we ever have. And most of the time when we close clinics, they're single locations and they're legacy clinics from years ago and they just don't – there's not the upside with them that you have with groups that have a little more density.

That's helpful. And then I wanted to maybe touch again on industrial injury prevention business and just maybe ask, you referenced potential cross-sell opportunities. So can you just give us a sense for how that might unfold over time and what that process would look like relative to maybe what the businesses are doing independently today?

Yes. So – it's a good question. So for the first year after we acquired the first partnership, which is a Briotix partnership, didn't – effectively we didn't introduce both sides of the company and there was a reason behind that. There was some general concern that we were buying the first injury prevention company, maybe just to scoop people into our physical therapy operation. And those folks do a great job on prevention. They actually prevent a lot of injuries. So those curtains – those artificial curtains have been removed. We are beginning to get leads now from our partners in the field and interaction between both sides of the company. Now the company we just acquired, because they offer some different products and services, actually the majority of those products and services are delivered by a network of physical therapy providers around the country. So we expect over time that our clinics will have an absolute net benefit from that program. Now I just want to say, we've had a lot of great other companies who performed those services before and they'll continue to get business just as they have, they've been very reliable network for us. And so – but we expect to grow that business and we expect that our clinics will benefit over a period of time. We're just getting started with that integration obviously that we disclosed a couple of weeks ago. So we're very early, but we are very excited about it.

And then the final one would be, just in terms of cost per visit flattish and you had mentioned at the end of '18 that you've loosened up some costs in response to figures of legacy partnerships, obviously saw a bunch of openings in Q4 and maybe that was obscuring some of your underlying cost reduction work. So just maybe give us a sense for what are some of the key areas you're focused on here on the efficiency side and how should we expect cost per visit to trend throughout the year?

Okay. I think we have 2 competing – we have a push, pull. On one side, we have a little inflation on the labor market and on the other side, we have our continued opportunity/challenge, which is to manage our part-time staff really down to the hour across a broad network of facilities. So as I mentioned, we've got the right people on board. I think we have more effective and realtime transparency input. But we still have our challenges. Our acquired partners tend to run a little bit higher and that tends to change over time and that has changed and it's improved. And we've gotten some margin expansion. So I'm encouraged right now. I don't expect that we're going to see any massive dramatic moment with respect to our cost. We have some regulatory kind of boundaries that keep us in a pretty narrow range and then we have to manage as effectively as we can within those. And I think we're doing that right now and if that can continue, I'll be happy.

I mean, really the way we typically see costs go down is by increasing your visits per day per therapist, which – Glenn, do you have what the quarter-over-quarter was?

Yes. In Q4 of '18, we ran at 10.61 on a visit per therapist basis. In Q1 '19, we ran at 10.51, and that number was impacted slightly by the weather and loss of business that we had.

But in the first quarter last year, we ran at 10.41. So there was a 1/10 of a visit improvement, if you're looking at apples-to-apples. So – and like Glenn said, if the weather had been better, frankly our margins would have been – well, first, our margins were very good. We haven't ever seen that kind of improvement really, not 130 basis points; that's a big swing. And then – but then it would have been even better if we hadn't had the severe weather.

[Operator Instructions] The next question will come from Mike Petusky with Barrington Research.

So Larry, I want to drill down on the release from a few weeks ago where you guys announced the acquisition in conjunction with that increased EPS guidance for the year. What was essentially because it's not – to me it's not clear in the language. Was that essentially – the increase in EPS guidance – was that just a reflection of the accretion that you guys assume with the acquisition? Or did you already have a good sense of the quarter at that point? What actually went into that guidance?

That increase in guidance was solely based on the accretion in this year, which is obviously not a full year results from that acquisition. And we look at guidance regularly. Next time we do a deal or maybe after the end of the second quarter, we could possibly revise guidance again.

Well, Larry, we had – at that point in time, we had January and February –

We didn't have March results and March was a super month. So we could have probably – I don't want to have to revise guidance every quarter. It's not unusual for us to do it couple times a year.

Right. Well, that essentially is what I was getting at it. It feels like the current guidance range, particularly at the low end, it feels conservative. It feels like you guys could have been really tempted to have revised.

Mike, it doesn't matter. Your number is always higher than the range anyway.

Fair enough. Okay. So moving on, Larry, what's the assumed tax rate in your guidance for the year? Obviously, effective tax rate was a little lower than...

Okay. We used – Jon just said we used – I think it was 26 – it was 26.5%. Now in the first quarter, it's lower because you have a lot of restricted shares [passed] and if the price at the time is higher than it was at the grant date, you get a bigger tax benefit. Does that make sense?

Yes, yes, yes, no, absolutely, absolutely. And then just a quick question. CapEx was a little higher than normal, anything to call out there or any sense for what the year might come out at?

Honestly, I didn't notice it.

Okay. And just last question. Payer mix for the quarter, anything about that?

Yes, I got payer mix here. Let's see. Prior to managed care, basically the insurance companies was 46.4%, Worker's Comp was 15.5%, Medicare and Medicaid combined was 29.4% and then other was 8.6%.

The next question is from Mitra Ramgopal with Sidoti.

Just couple questions. First again, same-store numbers in the quarter really solid and I was just wondering if there was anything in particular that might have been driving visits in terms of all the initiatives you might be implementing?

Good partners doing good work, and management team and the sales and marketing support and our sales teams just doing a really good job. So I think it starts with good care at the facilities and relationships that get created and people are focused. And I give credit to our partners on that. I think they're doing a terrific job.

Okay. No, that's great. And Chris, as you look over the remainder of the year and next as you continue to build out the IPP business, is there any significant investments you need to make on that front, whether it's on sales force or technology, anything along those lines?

Yes. So we continue and it won't be just one big lockstep. So we continue to invest in that business. We talked a little bit about it last year that we got to a point where we needed to make some investments. So for instance, we're bringing on some more folks in the accounting area. We're probably going to bring some additional resources on – not probably, we are – in the technology area as well. And at the same time, we're seeing a lot of opportunity. Our pipeline looks really good there in terms of potential clients and people that we're in discussion with. We started the year out, I think, on a really good footing. So yes, we'll need to continue to add to that team. But all the major building blocks are in place and now we need to scale. I don't see any massive technology switches or changes that are going to be monumental. It's just bringing in the right folks to help us continue to grow in scale.

Okay. No, that's great. And again, as it relates to the revenue per visit, that's up nicely probably. I guess, how do you see that over – going forward? I know reimbursement can always be a wildcard there, but it seems like it's just been really steady for you guys over the last – for a number of years now?

So I'll tell you what I told everybody when I spoke at your conference, so just a little bit ago and I have been telling people for the last couple of years. We're in a relatively flat environment right now. We're making some progress and we're getting some themes and net-net, that's been my general expectation, it's been truthful. We've done a little better than that. And we continue to do better than that. We've got some really good people and the deals that we've done, we've gotten some pretty nice increases in, helping our acquired partners move that number a little bit. But I think it's about where it's going to be for a while and that's what I've been saying. If we can do a little better than that, I'll be really happy.

The next question is from Dana Hambly with Stephens.

Chris, you mentioned in your prepared comments about the jump in the gross profit margin in the industrial injury prevention. You talked about prevention services being performed more by athletic trainers. I just wonder if you could flush that out and help me understand the nuance of why that would drive such a big jump in the gross margin?

Yes, yes, yes. It's a good question. I'm pleased that you're asking it. So about a year ago, we did our second industrial injury prevention acquisition, rolled that into a Briotix partnership and that's been a great addition. Briotix, when we first started, the vast majority of our prevention-based services were done by physical therapists. And it just so happens that based on demand and educational background and other things, that physical therapists are a bit more expensive than athletic trainers. In that business, virtually our sole expense is people expense. We don't have, for the most part, clinics. We don't have a lot of equipment, but we do have people. When we acquired company number two, they almost exclusively used an athletic trainer model in their prevention business. It works very well. It's not dissimilar to what athletic trainers do, taking care of a team, whether it be college or pro. We're taking care of a team, it just happens to be in a business. And so where clients want, where we need for particular reasons to deliver it with physical therapy, they do a great job and we'll continue to do that. But a greater percentage, I think, of our portfolio and will be, I think, a growing percentage, will be delivered on the prevention side by athletic trainers. And it's just a little bit of a cost differential there.

Another thing is, as you grow the business, Briotix has a separate corporate and administrative staff. And to the extent you grow revenue, you're going to grow margins because you're going to spread that. You're not going to grow your corporate costs for that business as rapidly as you're growing the top line. So it's just like U.S. Physical Therapy.

Sure. All right. That makes sense. And can you compare and contrast the BTE acquisition with the Briotix business?

So when you compare – in what ways?

I mean, is it a different – a very similar product offering or you bringing in some new capabilities with the BTE?

It’s mostly new capabilities. In fact, the overlap was pretty minimal, really very little overlap. So this is what made it such an addition having just a great team with the BTE guys. Really, really strong team, which we're really excited about. Just almost a totally different product offering. So deep in post-offer testing and screening. They have on-site medical clinic capabilities, which they rolled out for some of their client-companies, which is impressive, which is new for us. We didn't have a post-offer testing product to speak of. And they have a very robust one, has done a great job for their client companies. So those 2 elements are really new puzzle pieces for us that we're really excited about.

Okay. And then Chris, you mentioned last quarter about your therapists could be a lot more efficient if not for all the regulatory burdens. Versus what you talked about last quarter, any reason for optimism or pessimism this year on the regulatory burden front?

Yes. I might turn it back and say I have about as much optimism as I do on the political front, that the sun's going to shine every day. No, it's kind of gridlocked for a reason. We do meet with CMS on Monday. I fly to Baltimore on Monday to meet with CMS. We are going to talk to them, have a serious discussion with them about eliminating the necessity of an additional signed plan of care, which the doctor has to do and then which we have to get back. And that's after the patient has been referred and diagnosed and sent to physical therapy. This is, of course, for Medicare patients. But in terms of what period of time that happens over, it's not going to affect our therapists as much as it affects our administrative staff and others who have to chase those things down. But we're going to try to peel the onion over time, but no, it's not going to be quick.

Okay. And then last one from me, Larry. With the BTE acquisition, were there any transaction costs that were significant enough to call out?

Yes. There was actually about $0.02 worth. We didn't make a big deal of it because it was such a good quarter, just like we didn't – we probably lost a $0.01 or $0.02 to the weather as well.

We had more cost in this field just because of the complexity of the structure than normal.

Okay. You're saying about $0.02 drag?

That was $0.02 in transaction cost and $0.01 to $0.02 for weather.

Thanks very much.

Thanks.

And at this time, there are no further questions.

All right, guys. Thank you for all the good questions, and have an awesome day.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.