Good morning, ladies and gentlemen, and welcome to the U.S. Physical Therapy Second Quarter 2019 Earnings Conference Call. At this time, I would like to inform all participants that your lines will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to introduce our host for today's call, Mr. Chris Reading, Chief Executive Officer. Please go ahead sir.

Thank you. Good morning and welcome everyone to U.S. Physical Therapy's Second Quarter and Year-to-date 2019 Earnings Call. With me on the call, Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, our Chief Operating Officers; Jon Bates, our Vice President and Controller; and Rick Binstein, our Vice President and General Counsel Before we begin our comments on the quarter and the year, we need to cover 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'll go ahead and start with some color on the quarter and year-to-date period. Second quarter was another strong quarter for us and a very good start overall to the year. Net revenue grew 9.8% for the quarter on strong same-store revenue in the PT space, 5.4% along with healthy growth overall across the platform and visits per clinic per day. Revenue from our industrial injury prevention business increased by 64%. You can apply your own adjective to that, but I think that's pretty darn good and that's compared to where we were a year ago period. Just a quick recap of when that business started and what we have done thus far. The Briotix deal was finalized in late February of 2017. Since that time, we have bolted on two terrific deals, one in the spring of 2018 and another just a few months ago. Our most recent injury prevention acquisition has helped to broaden our service offerings to include post-offer employment testing, which we refer to as POET, which is a core and very refined part of BTE's business as well as on-site medical clinics. Both of these programs we ultimately expect will benefit our continued growth, service and organic expansion within our injury prevention business. On the physical therapy side, we have continued to make progress in key focus areas. Notably visits per clinic per day growth was a healthy plus one from prior year and also from the first quarter of this year. Our partners and their staff, our sales group and our ops team have worked in concert with respect to new patient and overall relationship development, which is underpinned by great care and communication and that has been the driver around our very strong same-store growth numbers for the year as well…

Okay. I'll start with the quarter and then talk about the first half. In the recent quarter revenue increased $11.3 million to $126.4 million due to an increase in revenue from both physical therapy operations and the industrial injury prevention business. Revenues from physical therapy increased 7% to $113.4 million as patient visits increased 6% to over one million, 1.058 million and our net rate per visit increased by $1 to $107.16. I've noticed that most of that revenue increase came from older mature clinics. Our revenue from management contracts was flat for both periods. Chris mentioned the industrial injury prevention business revenue increased 64% to $10.3 million due to significant internal growth plus the April acquisition. We did a much better job in terms of controlling costs with margin increases during the period. Total operating costs were 75.1% versus 76.4% a year ago. Salaries and related costs were reduced to 55.9% from 56.1%. And our rent supplies, contract labor and other costs were down 18.2% as compared to 19.3% a year ago. The gross profit for the second quarter grew by 15.7% to $31.4 million. The gross profit percentage increased by 130 basis points to 24.9%. The PT gross margin increased 100 basis points to 24.7%. And as Chris mentioned, gross margin for the industrial injury prevention business grew by 480 basis points to 29.2%. As I noted in the press release, I think the outcome the most impressive is when you look at both the industrial injury prevention business and treatment of injured workers that revenue -- combined revenue increased by 28% year-over-year. Corporate office costs were 9.1% of revenue in the second quarter, compared to 8.8% last year. Our operating income for the quarter increased 16.9% to $19.9 million and operating income as a percentage of revenue…

Thanks, Larry. With that let's go ahead operator and open it up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brian Tanquilut of Jefferies.

Hey, good morning, guys and congratulations. Good quarter.

Thank you, Brian.

Hey, Chris. All right. So I guess my first question with the strength in volumes this quarter same-store came in at 4.6%. Is there anything you would call out or any views on the -- on your ability to sustain that what's driving that kind of like market share gains? Or is there any initiative that's helping push that because it's obviously above your historical average?

Everybody is working together well. Partners are doing a great job obviously the sales team as well. Our folks are doing well on the support side. So there's not what I would call any new initiatives that are driving that. We're just focused and it's working.

Got it. And then Chris, there are upcoming changes in home nursing rules and I think the home nursing guys are looking to use more physical therapy assistants and reduce their reliance on PTs. Are you seeing any of that kind of playing out already where the market's getting better for you from an employment perspective for PTs? And then -- or does that squeeze you on the PTA side?

Can you repeat the last part? Does that what on the PTA side?

On the PTAs, I mean because I think the assumption is that the home nursing companies are going to try to shift their staffing models to be heavier on the PTAs and lighten up on PTs. So how does that dynamic help or hurt your staffing, your ability to staff and your costs going forward?

Yes. I think there have been times in the past where when there have been big swings in home health and in other areas related to employment that it's helped or hurt us taking the market or open the market up. So I can't tell you that we've recognized any of that yet. I am pleased and I mentioned this to the Board when we had the Audit Committee call the other day. But given the fact that the labor market's pretty good right now and PTs are coming out with a fair amount of debt, I think the group's done a really good job in terms of cost management so far this year. So I want to give everybody a shout-out on that side. But I think long-term, what you'll see with us particularly a few years out as we expect CMS to pay us differentially for PTAs versus PTs, less for PTAs we'll do the opposite. We'll probably offload some PTAs not completely, but where we need to and we'll probably go with more -- and we have that right now more of a PT-centric employment structure. So I think that goes well for us, if what you say plays out in home health.

Got it. That's awesome. And I guess my last question, during the quarter you divested one practice or one-to-one partnership. If you don't mind just walking us through a little bit of background there and how -- it looks like some of the metrics kind of like revenue per unit and business per unit are up. Was that a factor in driving those? And what was also the driver the decision to sell to the partners in that specific instance?

Yes. First of all, the deal didn't finalize until the last day of the quarter and so there's no effect on any of the metrics in the quarter. I need to limit a little bit, what I can say about it. What I will say is, we kept several key parts of that market in that original deal. We had three minority partners come with us. They're doing well. In fact they're in Houston this week and that's going very well and that has gone well. And it was an opportunity on both sides to focus where we can -- where we believe we could make progress and sell some assets that were desired to be acquired on the other side that were doing a tremendous amount for us. So I can't say a whole lot more than that.

Okay. No worries. I guess my last question for Larry, just really quickly. Any reason for the increase in minority interest as a percentage this quarter and also the rent expense coming down quite significantly? Thank you.

Minority interest moves around quarter-to-quarter. It just means some of our larger partnerships were doing better which is not unusual. The rent utilities -- some of that is a reduction in payroll costs too for contract employees as we've done a better job of limiting PRNs and whatnot.

All right, got it. Thank you guys. Congrats again.

Thanks Brian.

Our next question comes from the line of Larry Solow of CJS Securities.

Good morning. Thanks guys. I echo those thoughts and a really strong quarter on basically all your metrics. So congrats on that. Chris any feel on how the industry is doing? Clearly you guys are outperforming a lot of company's significant issues. But with record low unemployment I would imagine that got to be helping everybody, so how do you feel how the industry has been maybe just not this year but over the last few years trending-wise?

The only company that we get really an opportunity to look at other than just having to talk over beer with some of the other CEOs and people aren’t sharing in a deep way their statistics. The only company we used to look at is, Select and they've done well. They've done fine. So I would just point you to them as maybe a broad comparable. I really don't have a sense for how everybody else is doing. I think we're kind of focused on what we need to do and how we can control what we can control and not to worry about everybody else.

Yeah. Understood. How about pricing both on a same-store basis and overall? I think when we started the year we thought it would be sort of flat. You had a little uptick in Q1 and a bigger uptick this quarter. Is that more units being built more efficiencies or better mix? Or what's sort of driving that better pricing?

Units are flat. I wouldn't focus as much on the second quarter pricing, maybe on the year-to-date pricing on a blend basis is kind of where we think we are. We move around a little bit quarter-to-quarter, but the group's worked hard to squeeze out some gains but I don't think it's coming from an uptick in utilization.

Okay. How about the strength in the industrial unit? Your prevention business is really, really impressive. And I realize it's sort of separate from your core PT business. But does that lead in? Does that -- which was impressive growth. Is there any sort of cross up-selling or other opportunities that sort of helped the core business?

Yeah. Not yet. There can be. The BTE deal particularly with the post-offer testing, we pledged our current network when we did that deal that we keep that intact and we wouldn't change that. We haven't and we don't expect to. We do expect that our facilities our USPH facilities as we grow that business forward will be large benefactor where we haven't in the past in a contracted party with BTE prior to the deal. So I think there's opportunities there. We're beginning in some markets to see treatment related opportunity. We initially claimed that very slow and we kept those companies kind of firewalled from each other, because we didn't want anybody to think that's why we had bought it just to suck over the injury business. I think that's a really good job on the prevention side, and therefore there should be less injuries. But over time, we're seeing more synergy more opportunities that are being bubbled up from our partners in the local markets with the relationships that they have, which then benefit the Briotix group. So I just think it works well and it's complementary. I don't think it's been a big impact or driver on any of our numbers on the PT side to date.

Just to explain the post-offer evaluation tests are actually performed in physical therapy clinics. And that was the majority of BTE's business. So they actually sell contract a couple of hundred, 300.

Yeah. It's a bunch.

It's 300 clinics. And as Chris said, we said we keep that network in place, but as we get new contracts in other markets, we will be able to direct some of that business to the USPH clinics.

Got you. Fair enough. And then just last question in terms of the -- you mentioned Chris lots of opportunities for acquisitions. Can we assume on both sides of the business? Or I know you've done a couple on that size good tuck-ins on industrial piece. Is that pretty much -- obviously opportunities will come, but are you more focused on the PT side or both?

A lot of activity on the PT side right now. We've got to digest what we've just done, and I think that's first order of business. And we did it last year when we did a deal in the spring. And so our sales team within that whole group has just done, including the newly acquired company has just done a phenomenal job creating organic opportunities. So we'll grow as we integrate that most recent acquisition. And once we get that digested, we'll get our head up, and we'll continue to look for opportunities there, but right now, it's more PT focused.

Great. Thanks. I appreciate it, guys.

Thank you.

Our next question comes from the line of Matt Larew from William Blair.

Good morning. Larry, first I wanted to ask a question on the cost side. A number of service providers had a little lighter cost in terms of health benefits and internal employees costs in the first half of the year. Was there anything timing related that drove some of the cost containment that you think might pick up or change in the back half of the year?

No. We didn't get any benefit from health care cost for our employees. In fact, our claims were higher than we expected. So I think that was really controlling contract labor, it's probably the biggest swing factor that has been around much.

Yeah. Okay. And then Chris, you alluded to most of the focus for the near-term being on the PT side for development. But just as you think about over the next year or two et cetera, broadening the industrial injury prevention platform is it more service line extension? Is it geographic expansion? At what point do you think you have the scale to more aggressively acquire larger national contracts or opportunities? Just I guess think – help us think beyond this year in terms of how you're looking at building that business.

Yeah. Well, just to give some perspective, and I don't have the exact number, but we have done some pretty good sized acquisitions that haven't had a national presence. We're now in all 50 states in this business, and onsite in over 1,000 locations within companies of all sizes Fortune 100 down to regional companies. And so there's a massive organic opportunity, there as we've added particularly this most recent acquisition to cross-sell some of those new products and services both directions between our regional Briotix company and most recently the BTE company. And that really hasn't started yet, and so we're still in the digestion process and continued growth within all of those product lines. There's going to be continued opportunity to bolt on other companies, whether they're – and I don't have any right now. And we're – like I said, we're focused on what we're doing and we're making good progress with that. But as we grow we may develop broader service lines. We'll certainly cross-sell the lines that we have, and that will give us a good organic opportunity. But we're early. I don't know yet. What I do know is we have a good team that's doing a great job and we'll continue to look at what makes sense as we go forward.

Okay. And then the last one would be again, Chris alluding to the development opportunities on the PT side ramping up in the back half of the year. Do you think relative to the first half of the year, where you did not complete as many detail – deals, is this at all time line extensions from new competition in terms of these partnerships or folks that you traditionally would look at having discussions with potentially other players out there that maybe they wouldn't have had before? Or is this again simply just a timing issue?

Yeah. I think as much as anything, we're lumpy and we have some ebb and flow in how these come through. I think generally speaking, we're seeing more new brokers in the market. We're seeing more deal flow in the market right now. In terms of some of the other parts of your question, I'm not really sure I followed all of it. But it's as busy as – we're busy with meetings and discussions as we've been in a long time. And whether that continue in some indefinite way or that's just the season we're in right now, I don't really know. But it's good right now. And I expect we'll get some things done.

Okay. Thanks.

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

Hi, Mitra.

Yes, Hi. Hi, Chris. Just wanted to follow-up a little in terms of it seems like you're seeing some heightened activity on the de novo side. And I'm just wondering, if it's more case of potential partners approaching you or you just doing a good job also of identifying some opportunities that you might not have seen before.

Yeah. No. On the de novo side, so just to be clear, we're not doing any new de novo partnerships from the ground up. We stopped that probably four, five years ago. The de novo activity, all of that 100% of it, is additional satellite opportunities within predominantly, our most successful partnerships, our largest partnerships around the country. And so those take a little while to develop. And develop staff. And find the location. And get things going. But the second half, of the year will be a busy half. But that is as a result of staying focused on it, in the first half of the year. They just take a little time to come to fruition.

Okay. No. that's great. Thanks for clearing that out. And also on the, same store, again tremendous numbers, I think the best you've seen. And I was just curious, in terms of driving that. Is it a case also, on the sales force investments, you've made? And do you need to do anything more on that front, to drive even further gains?

I think that just, we continue to look for opportunity, right? And so whether, that's a fractional person or a full-time person or just the right person. But that's ongoing. That's not anything new or different than it was, a year or two ago. It's working well right now. We'll continue to try to keep that, ball rolling forward.

Okay. No. That's great. And Larry, just on the -- when you look at potential acquisitions, especially on the IIP side versus the traditional PT side, I was just curious in terms of valuations and the differences between the two segments.

Well. We've only done three deals. But they were all almost, exactly the same multiple.

In the lower multiple, than we paid for PT, yeah.

Okay.

Whether that continues or not, I don't know. But that's how it's been so far.

Okay. No. That's great. And then finally, Larry, I don't know if you have the payer mix handy.

Yeah. So, private and managed care, traditional insurance business, was 46.8% of revenue. Workers' comp was 15.1%. Medicare and Medicaid was 30.6%. We had a little pickup in Medicaid, because in some states like Texas and Florida, it's not a bad payer. So we're doing a little bit more Medicaid though. In many states, we don't take Medicaid. And then, other was 7.6%.

Okay. Thanks again, for taking my questions, great quarter.

Thanks, Mitra.

[Operator Instructions] And I'm showing no further questions, at this time. I'd like to turn the floor back over to management for any additional or closing remarks.

Okay, everyone. Thanks so much for your time this morning. Thanks for your attention and your questions. And have a great day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.