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Edited Transcript of USPH earnings conference call or presentation 21-May-20 2:30pm GMT

Q1 2020 U.S. Physical Therapy Inc Earnings Call

HOUSTON Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of U.S. Physical Therapy Inc earnings conference call or presentation Thursday, May 21, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Reading

U.S. Physical Therapy, Inc. - President, CEO & Director

* Graham D. Reeve

U.S. Physical Therapy, Inc. - COO of East

* Jon C. Bates

U.S. Physical Therapy, Inc. - VP & Corporate Controller

* Lawrance W. McAfee

U.S. Physical Therapy, Inc. - Executive VP, CFO & Director

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Conference Call Participants

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* Brian Gil Tanquilut

Jefferies LLC, Research Division - Senior Equity/Stock Analyst

* Kevin Thomas Gade

Bahl & Gaynor, Inc. - VP

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

* Michael John Petusky

Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy Q1 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Chris Reading. Thank you. Please go ahead, sir.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [2]

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Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy's First Quarter 2020 Earnings Call. I'm currently in our office with Larry McAfee, Executive Vice President and CFO. With us on the call include Graham Reeve and Glenn McDowell, our COOs. Jon Bates is here with us in the office as well. Jon is our Vice President and Controller; Rick Binstein is on the line, our Vice President and General Counsel. Sorry for the background noise. I'm next to a firehouse.

Before we begin to cover our results for this more complicated-than-normal first quarter, I'll ask Jon to cover a brief statement.

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Jon C. Bates, U.S. Physical Therapy, Inc. - VP & Corporate Controller [3]

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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.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [4]

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Thanks, Jon. For my comments this morning, I'm going to try to paint the picture of our early quarter pre-COVID for the purposes of this discussion, pre-COVID period, which will be the January and February months, and a post-COVID period, period of March. Importantly, I'll discuss the steps we took quickly in advance to prepare us for the impact we began to feel acutely as communities began to ultimately adjust in early to mid-March. I'll also discuss how the steps have meaningfully and positively impacted the safety of our staff and patients; service to our partners; our aggregate financial performance, including our visits; revenue; and especially important, our cash position and overall trajectory.

To be sure, this has been a supremely challenging period. However, I'm so very, very proud of how our teams have led throughout this COVID-19 experience.

First, January and February. Volumes started off strong again to begin the year, and in fact, same-store volumes picked up again from what was an excellent same-store year in 2019. We began the year in January and February with 5.9% same-store visit growth. Visits per clinic per day improving from 26.5 in 2019 to 27.7 in the first 2 months of 2020.

Our revenues increased for this period approximately 8.3%, after adjusting for the sale at a single partnership that we transacted on and sold last June. And our overall volumes grew by 9.7%. Despite the impact related to community closures and stay-at-home orders, which began to accelerate in mid-March, we grew revenues on an adjusted basis 2% for the quarter overall. This was in spite of an estimated $8 million revenue and contribution margin loss in the month of March, secondary to the COVID-19 pandemic.

In our industrial injury prevention business, the revenue was up for the quarter, over 43%, and the revenue impact in the quarter was much less than in our physical therapy business. One exceedingly bright spot in the first quarter relates to several of our large Briotix Health clients signing expansions of their existing contracts, which we began to step up for as things began to unravel in other parts of the economy.

Costco has been exceedingly helpful throughout this time. This graciously expanded our service location footprint with them in order to assist us in keeping our workers active, resulting in significantly less furloughs in this part of the business. There have been a number of other bright spots as we have worked our way through the early stages of this pandemic. One of those has been our team's rapid deployment of telehealth, which has been widely adopted and utilized by our partners. That was especially important during the height of the shelter-in-place orders, where telehealth quickly became a meaningful and effective bridge for those who were unable or unwilling to come to our clinics for therapy.

Special thanks to Ben Keeton, one of our very important partners, for his assistance with this program, that we expect to become part of the fabric of our alternative care delivery as we move forward.

Another bright spot was the across-the-board designation of physical therapy as an essential health service, which allowed us with care and with appropriate cautionary safety measures to keep the overwhelming majority of our facilities open throughout this time. We remain actively working through our APTQI Alliance and a recent investment in lobbyists with APTQI to keep the progress and ground we have gained with telehealth and other positive adjustments as we work our way through to a more normal post-pandemic period at some point.

Part of pandemic accelerating in the U.S., we went through a preparatory drill of sorts to evaluate our readiness to function remotely should it come to that, and of course, it did, which we have been doing now. We've been functioning remotely for the majority these past few months. The early start we got enabled us to purchase needed equipment computers, which has allowed our team to make a rather seamless transition to remote work to ensure the safety of our Houston team, most of whom work in a large central office, where we provided the needed communication, service and support to our partners, who are fighting the fight on the front lines as they came in and care for our patients each and every day.

Today, I would say that we will be back in the Houston office on a rotating shift basis for the near term until we better understand the science around the progression in transmission of disease as society begins to reopen. To date, our clinical services team has done a terrific job keeping us all abreast the latest updates and thinking around the science. We, in turn, have kept our partners and staff informed so that we've been able to remain operational with a very minimal amount of exposures and infections. Because we're able to act quickly and make adjustments to staffing through a variety of measures, including reductions to wages, hours worked, furloughs and other means, along with making some strategic decisions to close a good [dearth] in a small percentage of our facilities. As a result, our cash position has remained strong and certainly stronger than we initially projected. And along with the advanced payments by Medicare of approximately $12.5 million, CARES Act payments of approximately $5.7 million to date, our cash position is currently approximately $110 million. At the same time, we are seeing weekly improvements in new patient referrals and overall patient volume. We are now solidly above 60% of our pre-COVID visit levels and still trending forward.

At this point in time, we are beginning to bring back select staff as volume warrants. And we are doing that for the most part in a PRN as volume dictates basis.

Additionally, Briotix has continued to do well. While some of our client companies have been closed or operating with restricted hours for personnel that has curtailed our revenue somewhat, our team has been able to offset some of those reductions with new or expanded business. Currently, we estimate that we are off in our Briotix Health business somewhere in the 10% to 15% range compared to our pre-COVID levels, but that is an improvement over prior month.

Our partners and our Houston teams have both done well throughout these past difficult months. We are ready to ramp back up safely, and we look forward to what we hope is a gradual progression back towards ultimate normalcy.

That concludes my prepared comments. I'm going to turn things over to Larry to cover financials in more detail.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [5]

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All right. Thanks, Chris. Normally, at this time, I would go line item by line item quarter-over-quarter, but honestly, that would be like comparing apples to oranges. So I'm just going to hit some highlights.

Included in the quarter were closure costs of, I believe, $3.8 million. Just -- and we talked about it in -- there's a bullet point on it on Page 3 of the release. About half of that was noncash charges relating to write-off of goodwill, trade names, et cetera. The remainder is equipment that we couldn't salvage, severance and what the remaining lease obligations are.

The other thing I'll talk about is the average net patient revenue in the first quarter was lower than a year ago. There wasn't any one factor. We looked -- investigated that at length. And it wouldn't surprise me if the rates are a little higher going forward. Sometimes, it just moves around quarter-to-quarter.

One thing, though, that was probably significant is the Medicare sequestration was in place in Q1, and that cost us over $1 a visit. That has been lifted, I think, in May.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [6]

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I believe that's so.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [7]

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In May. So I expect our net rate to be higher going forward.

Something else I'll talk about is cash. As Chris mentioned, we have about $110 million in cash at present. We have our credit line fully drawn down, $125 million. We just did that to be on the safe side. We were in compliance and are still in compliance with our -- all the covenants under our credit agreement. Additionally, we received the Medicare advance payments. Obviously, our billings and collections have gone off, gone on, on a timely basis and much, much better than I expected. I thought we'd see delays in payments, but that really hadn't happened.

I mentioned the credit agreement. We -- as we run our forecast, we might actually still be in compliance at the end of the second quarter as bad as it's going to be. But that said, we've been in discussions with Bank of America every week. They couldn't be more supportive, and they offered to put in amendments in place that will keep us in compliance long term. So we will do that sometime in the next few weeks.

That's all I got, Chris.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [8]

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Okay. All right. Thanks, Larry. I know you have a lot of questions. Before we open for questions, we just want to talk about what we're comfortable discussing. So we certainly want to discuss the quarter and where we are right now. We want to try to avoid any future guesswork around looking forward or estimating things relative to this pandemic, just because of the uncertainty. So appreciate your interest and understanding as we open the line. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question in the queue is from Larry Solow with CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [2]

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Good to hear your voices. I hope your families and everybody are doing relatively okay. So just, I guess, a couple of questions. Obviously, volume is down a lot. And not really looking too much forward, but just sort of the trend down and the trend up, is it -- are you seeing more improvement today or a little bit better patient volumes as some of these restrictions open up? Is it -- I guess my question is, is it more due to restrictions or you're also seeing just patient psyche and whatnot? I imagine there are different levels of demand in terms of I have to get to the physical therapist or versus sort of somewhat discretionary. So I'm just trying to get an overall picture of how -- you've mentioned different areas, there's obviously variance among volumes and regions. Is that based on -- obviously, in the Northeast, it's probably a lot hit a lot harder than maybe in some other parts of the country. So maybe you can just give us a little more color on that.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [3]

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Yes. So just a little perspective. So our volumes bottomed. The Northeast was hit harder. Our volumes bottomed there around April 12. Our volumes bottomed in the western -- central and western parts of the country a week prior to that. Since they bottomed, they're picking back up each week.

Now understand in the bulk of that period, I have a lot of friends who are [PT] surgeons. They sat at home. Their offices were closed, unless you're a trauma -- on trauma call, which is clearly not elective. You weren't doing any elective surgery. So unless you're doing cancer-related tumor work or trauma, you are sitting at home with everybody else. And so things have begun slowly on the elective surgery side, varies across the patch work, but have begun to open back up. And as they've opened back up, I mean, anecdotally, I got a note yesterday in San Antonio, and we got literally dozens of referrals in the first couple of days of this week because the surgeons just started back in their surgery centers. And so I don't think our volume, where it is right now and it's picked up each and every week, referrals have picked up each and every week, I don't think it's related to people being afraid. I think it's been more related to the restrictions that are in place and the fact that while we were essential and remained open, a lot of the rest of the health care environment was deemed nonessential and has been closed. And so it's going to take some time. It's going to be community by community, state by state. But so far, we're -- each week is better than the week before.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [4]

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Overall, we bottomed out at 45%. We say in the press release, we're running at 60%. As Chris mentioned, it ticks up each week. Good news is that referrals are growing faster than visits, so it should accelerate. In the models we did, we didn't assume we'd be at 60% at this point. So we are ahead in our financial models.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [5]

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On Monday, volume on Monday is one of our busiest days, but every Monday is our busiest day of the week, and that was closer to 70% in both parts of the country this week. So it wasn't quite there, but it was close. So definitely picking up.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [6]

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Also, I would -- especially investors that aren't -- because we have a lot of people on this call today, about twice what we normally do, I would urge you to look at our map on our website and see what states we're in. We're not in California. We're not in New York. And we are in states like Pennsylvania, Michigan and New Jersey that have been hit hard. But the fact that we're in 40-plus states and so many different communities, frankly, has been very helpful. It's given us a portfolio effect, so we didn't just get creamed by being in one or 2 locations.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [7]

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And you guys mentioned you've closed, I think, 35 clinics or maybe a couple more subsequent to the quarter or 35 won't reopen, I should say, in your plan. Are most of these -- can you just sort of characterize these clinics? Are they -- were they mostly modestly profitable? Cannibalizing other clinics? What's sort of the longer-term view to close so pretty expeditiously? And can you also just touch on -- we've gotten some questions on the put option. Can you just refer -- review that again? And if there's any risk to the company in terms of terminated employees being able to require the company to buy the clinic back?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [8]

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Well, remember, we -- normally, we closed -- permanently close 20 clinics a year. And those are -- and for the most part, the clinics we closed this time were one-offs. Some of them were very old. They either had some losses or were modestly profitable. And we -- when we ran the math, if they come back and they're not running at what they were before, obviously, they were going to lose even more money. Some of them had the leases up for renewal anyway. Some of them are already dark, temporarily closed, so we didn't even have severance costs associated with them.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [9]

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In aggregate, they were unprofitable.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [10]

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Okay. Okay. So is there a risk? So we've gotten the question from many investors, just trying to clarify, is there are any risk from a -- maybe not so much closed clinics, but from -- I know you've terminated a lot of employees. Have you terminated -- have there been any partners terminated? Or is there any risk partners require you to buy back the clinic?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [11]

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Yes. So first of all, we -- other than maybe a single site partnership that was unprofitable at the time we elected to close it, we didn't have a partner so we terminated it as a result of this, none that I can think of. And so -- and thankfully, we haven't had any partners leave us in this period either for any of our partnerships. And so we have a structure, a deal structure that after a predefined whole period, usually 4 or 5 years, these are after we do transactions. A partner, if that partner terminates his or her employment with us, can put their interest to us. We have to repurchase it. And so we've been fortunate, I think, that our partners, the vast, vast, vast majority, and I think I won't say every single one because I don't know, I don't talk to every single one every day, but they expect to be around for the longer term. And they know that they believe, as I believe, that the business is ultimately going to come back. And so is it possible that we have some of these? I think right now, we're aware of one repurchase that we can handle within our current facility. But other than that, I mean, we're heads down working our way through this. Our partners are doing the same, and it's working the way that it's supposed to work.

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Operator [12]

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Your next question in queue is from Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [13]

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Hope everyone is okay. I guess I'll just follow-up first on Larry's question on the closures. So obviously, like you said, Larry, some of these facilities are closed anyway, like you closed 20, 25 locations a year. But from a modeling perspective, should we assume that the drop in revenue for 2021 would be worse than your typical impact from the regular store or unit closures that you do most years? And I guess my follow-up, Larry, would be just from a back-office perspective, is there a corresponding decline that we should be modeling?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [14]

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I'll be honest with you, Brian. I don't know how you would model 2021 at this point.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [15]

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Yes, not yet. I can say the facilities that we have decided to close, we'll certainly lose visits and revenue from those facilities, but we won't lose profitability in aggregate. We're going to have to rightsize our corporate office accordingly. And we have to date, and we'll have to keep it that way. But I agree with Larry. I don't know what '21 looks like yet.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [16]

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No, that's really helpful. That's totally understandable. And then, I guess, to your point, Larry, earlier on looking at the map, Tennessee obviously is one of your biggest states. The state has reopened. I think they've been open for 2, 2.5 weeks now. Do you mind just walking us through the experience that you've seen in terms of the rewrap in those operations? And then how are you thinking about -- you said referrals are coming in above volume. So how are you thinking about expanding capacity to take advantage of the increase in referral flow outpacing volume growth?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [17]

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Yes. So Brian, I'll handle that. So I couldn't be any prouder than I am of our team in Tennessee, our Star Group. Those guys have done a remarkable job. The leadership has been incredible. Responsiveness has been incredible, how they adjusted their staffing for their volume and how it was accepted. Now we're now ramping back up and doing it the right way. They've, as a partnership, found a way thus far to remain profitable through all this, even though their volume had been impacted just very significantly like everybody else's. But they're ramping back up. And I expect, as we have the last -- really since the April 12th week, we've begun to pick back up.

When we talk about new patients being ahead of our currently our volume growth, it's going to take a little time. Remember, we had such a low inflow of new patients during that substantial period. We have some patients that we need to discharge to. And so there's some balance between patients who've been hanging around for a while and it's time for them to go and the new patient inflow. And that's going to, for a little bit, mute on a one-to-one basis the growth of visits, but it's picking up. It's picking up nicely and it's picking up each week. And I can't predict even 3 weeks out at this point, I don't know. But so far, it's been steady forward march.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [18]

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No. That's very helpful. I guess, Larry, just housekeeping. I know you showed growth statistics, but would you be able to share the same-store numbers for the quarter just for our model?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [19]

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I think, well, Chris gave it pre-COVID, 5.7%? What was it?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [20]

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5.9%.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [21]

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5.9%.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [22]

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5.9% pre-COVID. I know our overall volume for the quarter was 2%, but that's not necessarily same store.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [23]

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Same store. I mean, honestly, it would be -- again, I would say it's apples and oranges. How can you compare March of this year to March of last year?

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [24]

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Yes, it's fair. Okay. Yes. No, understandable. And then I guess, Chris, just my last question for you. As I think about the same-store trajectory, right? I mean if I look back at your business, you definitely benefited from the strength in the employment picture. And then as I look back to your kind of the '09 to 2012 time frame, volumes were challenged during that time. How are you thinking about -- as we stare down a recession heading into 2021, how are you thinking about your volume outlook? And then I guess the other thing I would ask you is, as I look back to the last recession, rate growth was positive, and that offset the volume headwind. So obviously, in the last few years, we've seen rate growth flatten out. So putting all those pieces together, how are you thinking about the revenue outlook for the business?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [25]

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Yes, there's a lot packed in there. So -- no, that's okay. It's all right. It's all right. I'm just trying not to miss anything. So you're right, we're in a flatter rate environment. I would say through -- from '08 through '12, while there was probably a year or 2 where our same-store was flat or even maybe in the worst of those, slightly negative, we were able to eke out some same-store in the remainder of that period. It may not -- it wasn't as high as it is or has been in the business lately.

Look, we follow some strong economic groups that aren't predicting a recession in '21. Maybe -- and still are. Maybe they're not right, we'll see. But one of the things that we've learned here, and it's been interesting and it's been tough as well, but we know who our A players are, and we have tried our best. It's not perfect by any stretch, but we tried our best to stay in touch, those people we've furloughed, to stay in touch with our doctors who are at home. And to do this the right way. I know I have a lot of examples right now where we're getting calls from people who have referral-based followings who have previously worked for somebody else who were unceremoniously dismissed and nobody contacted them over a multi-month period, and they're now looking to join our team just because of -- they believe they'll have a better long-term opportunity and work with the group that is able to -- going to be able to care about them and the business they bring. So I'm in no way, shape or form knowing what '21 is going to look like on a same-store basis.

What I will tell you is we're very, very focused. This has been a gray time, but we've gotten through the worst part of it, I think and I hope. And we're going to grind it out.

And the other thing I'll say is our competition, if you think about it, hospitals who have had their hands incredibly full and who are really interested in getting their surgery, their imaging and those things back open again, maybe not as interested in PT because that's a lot further down the line, so we compete with them. We compete with a lot of small practices, and we've got more resources that are focused on this business than both of those groups. And so we may have to move some market share, but we're ready to do that. We're going to work at that. So we'll see what happens. I can't predict, but we're focused on it, and we're focused on overcoming at this point.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [26]

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I appreciate that.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [27]

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I would add on to that, that 8 of the 10 largest companies in the sector are private equity-backed and are levered 5 plus times to 1 versus our pre-COVID 0.6:1. So in terms of financial strength and flexibility after this, I think we're going to be in a much better shape than they will.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [28]

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Larry, since you mentioned that, I guess -- sorry for my last question, you talked about the leverage and the credit facility and covenants. I think you're showing in the filings, you have flexibility to be above 2.5x leverage and then 1.2x on a fixed coverage. So if you don't mind just walking us through how you're thinking about that? And what the discussions are with the lenders in terms of your ability to adjust the covenants?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [29]

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No. I mean, we have $110 million in cash today, $125 million in debt. Normally, we would carry $30 million in cash. So that one means you could reduce your borrowings by $80 million if you do the amendments to the credit agreement. So it put us at $40 million to $50 million in debt, maybe a little higher with operating losses during this period. I mean we -- the business has always thrown off good cash flow. We've downsized, including corporate costs. I think we're solid for the foreseeable future.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [30]

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And we expect on the end of this to be able to grow again and grow means organic openings and acquisitions and the other things that we've done on the many prior years before this happened. So we expect to get back to that.

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Operator [31]

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Your next question is from Matt Larew with William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [32]

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Great. Larry, I wanted to ask a little bit about that last comment. And you've noted in a couple of 8-Ks that you expect to incur losses during this time. But you also noted in the press release today that you've identified about $87 million of annualized cost savings. And I think you said that the 60% was a heavier plan in terms of volumes. So could you just maybe give us a sense? Of that $87 million, what is sort of run rate savings on the back end of this versus things that you've been able to reduce with the lower volumes?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [33]

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So the $87 million is if everybody we furloughed or terminated did not return to work. That's why I said would be, not...

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [34]

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For the rest the year. Go ahead.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [35]

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Yes. Well, no, on an annualized basis.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [36]

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On an annualized basis. You're right.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [37]

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So as we -- as business gets better, we've started to bring back clinical staff. I think we've added -- brought 30 people back from furlough in the last couple of weeks. And we'll continue to do that. We've only brought back one person in corporate, and we're down 40% in corporate. So again, we're going to size the business to what our run rate is. If our run rate is 10% or 20% or whatever less than it was before, then we'll have at least that much lower in staff. But I mean, I can't tell you what things are going to look like in June, much less at the end of the year.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [38]

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Sure. Okay. And then I wanted to actually ask about -- Chris, about telehealth. Just what has the experience been like? Are you getting paid for visits on telehealth? Do you think longer term, this is a step change in the way that you're going to be delivering services? Yes, if you could help us there.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [39]

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Yes. I don't think it's a step change. I think it's an added augmented service. Look, there are times, if we can all think back to what life was like 3 months ago when we were all on planes, trains and automobiles running around doing our thing and going to ball games and doing all that. Sometimes, the life happens and patients can't make it -- physically make it into the facility. On those occasions, we -- a lot of those people might be able to do a telehealth visit. Sometimes, you just -- you wake up and you don't feel good. Or somebody who's a little bit older, they worry that they might be getting a cold. And so they're going to cancel. We can do a telehealth visit in those cases. So I don't expect that we're going to convert existing patients and say, "Why don't you do telehealth?" That's not the case. But there are going to be lots of times and circumstances, and this period has been one of those magnified, where telehealth is really a nice adjunct to be able to get to somebody that you wouldn't be able to get to otherwise. And so the receptivity by the patients and our staff has been very, very high. We're going to continue with it. We are getting paid by the vast majority of our payers, including Medicare for our PTIP facilities. We're in discussion. About 50% or 60% of our facilities are certified rehab agencies, and Medicare isn't currently paying for telehealth for those facilities, which I'll be honest, makes literally an absolutely 0 cents. There are a lot of providers, Select Medical, many others who are working those angles and fighting that fight for that to make sense. But we just found out this week, BlueCross Tennessee has decided telehealth is going to be a permanent offering for them. And so for some, it's been indicated like Medicare that telehealth is going to be for physical therapy and other places that didn't have it before during this pandemic period. Whatever that means, none of us know how long that is going to be.

And then we're working on the Beltway in D.C. and with CMS for that ultimately to be permanent. We think a lot of commercial carriers will allow it to be permanent, but it's uncertain on a complete basis as of yet.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [40]

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And if this were to become permanent, is this something that would require some additional investment for you to scale up a platform? Or has it been relatively easy and plug-and-play for your clinicians?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [41]

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Right now, we're completely plug-and-play, and there's been no -- honestly, and this is going to sound crazy other than the -- and I don't know that we did this at the clinic level, we didn't have to buy laptops because we already have them. But to date, we have had to make an investment. At some point, depending upon how this plays out, and it won't be in the immediate or even near future, if we go to a different platform that would require some investment, we would let you all know what that looks like ahead of that. But right now, we're okay with where we are in the platform that we have, which is compliant with all the rules and regs and simple and easy to use. And we're going to be on that platform for the foreseeable future without having to make an investment.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [42]

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All right. That's great. And just a final one here. You mentioned the potential for M&A on the other end of this as many of your smaller competitors maybe are under pressure. Have you started to get additional calls already? Or has the Medicare advanced payment and CARES relief funds helped kind of stem the tide? And then the second piece to that would maybe just be in terms of your referral sources. A number of other nonhospital providers have indicated they've seen an increase in referral sources as smaller competitors have struggled. I understand your referrals have been down, but have you started to see that as they have reopened?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [43]

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Well, if I understand the question, referrals are picking up. I don't have optically yet the ability to tell whether we're getting a lot of new referral sources and where those referrals are coming from. I do expect one thing, and I guess this is a prediction or maybe an expectation. I think physicians who own physical therapy business who've had to go home and sit and furlough these therapists, and I think some of those are going to look at that business and say, "Is it really worth it?" Because it's not their primary, they don't do it as well as they run their main business. It's not their primary thing. And so I think some of those are going to go away or will go into management agreements or other areas that's completely anecdotal.

But the rest of it, I expect -- again, expect referrals to continue to pick up from a variety of different sources. One of the deals that we have on the sidelines right now focuses on hospital management of physical therapy services. Graham has a background in that area. And so we're anxious to get to the point where we can get that completed and focus a little bit more acutely on that. And then in terms of the calls, I have had some calls. And in fact, I've been on -- been asked to speak on 2 national widely distributed conferences, Zoom-based conferences. And obviously, a part of that is what things look like post-COVID and how that will affect M&A. And I've gotten calls from people that we've been in touch with over the period. And they know we're not ready now, but at some point, we are and we will be. And people, I think, are going to look at what they've been through. And a lot of them are going to want to be in a little bigger boat than the one that they've been in this storm through. So we'll see.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [44]

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A couple of things. One, the hospital deal where we're looking at is an outpatient deal, not an on-site hospital management contract.

And then I got a text from one of our team members. Certified rehab agencies are 40% of the business, not 60%. PTIPs are 60%. So 60% are qualified for reimbursement from Medicare now.

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Operator [45]

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Our next question is from Mike Petusky with Barrington Research.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [46]

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So Chris, I was wondering, just in terms of the -- I guess, the patient experience and the PT experience in treating, working with the patient, whether it's changes to physical building, changes in the waiting room, changes in terms of PPE, can you just speak to what's different today versus 2.5 months ago?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [47]

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It's a lot different. Some of it's different. Some of it is, obviously, we're laying out our facilities in a way to continue to have distancing. So that's measured, spread in terms of chairs and seating and plinths in the gym area and bikes, where we have multiple pieces of equipment in close proximity. So it's that. It's scheduling and making sure that we -- while particularly, it's needed. And while we can, we've got appropriate people spread through the day.

In terms of PPE, it's plenty of sanitization solutions and equipment to make sure after every contact, things are wiped down. We have plenty of hand sanitizer, that we have masks. We were able through Graham's previous hospital connections and his deskwork, we were able to -- when people were struggling, come up with meaningful quantities of masks that will do us for the near term and may do us for the complete term of this. We'll see how long it lasts, the monitors and other things. So yes, there are differences. We continue to be able to be hands-on with patients. Patients are wearing masks now. In our facilities, our clinicians and our staff wear masks. And then otherwise, we're going about our business, and we're getting people better and we're able to do hands-on work and exercise-based work and movement reeducation and pain intervention techniques just like we were before. It's just a little bit more involved in the thoughtful preparation to pull it off the right way.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [48]

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And I guess, Larry, just to follow-up on that. Does the cost of any of that, whether it's cleaning materials, PPE, that sort of thing, I mean, does that reach materiality in terms of sort of the incremental spend there? Or not really?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [49]

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Well, I mean, obviously, you have some spend, but I don't -- I mean, it depends on what you consider material. I don't think we spent $1 million on it.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [50]

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I mean, masks are -- Graham, what do masks cost us now?

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Graham D. Reeve, U.S. Physical Therapy, Inc. - COO of East [51]

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About $0.46, Chris.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [52]

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Yes, a mask. So despite there's some cost that's there, but when you talk about materiality, there will be a point, I think, I hope, when we get through this, that we don't have masks. But I think at that point, we'll know what our volumes are. Right now, we're in this volume-adjusted period where we have to do some other things. And it's tough to predict exactly what that's going to look like over the next week or month or few months. But we're well positioned to get through it. We just need to get through it, keep people protected, and we'll get out the other side.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [53]

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Just real quick on, are you guys allowing multiple people to sort of be in the waiting room? Or are you having people sit in their cars as they wait to be called in? Or is that sort of a clinic-by-clinic decision?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [54]

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Yes, it depends on the size of the clinic. We've got some big clinics. We've got some smaller clinics. Practically speaking, we're asking patients to come, if they can, by themselves, not with any entourage, obviously, right now. Most of our patients don't have to wait even on a normal basis in the waiting room. They don't normally sit. Sometimes, the person that's in the waiting room is a driver or somebody else. So they come right back. They check in. They go right back. And we're able to do intake over the phone and things like that. So there's not a big waiting room issue. Some are larger than others and if we needed to, could accommodate a few people with adequate spread. But most of the time, our patients are able to check in and come back. And I'm sure if there was or as there might be a more dense arrangement, we would make an adjustment at that time and can ask people to wait for 5 or come back early or whatever keeps them safe. I'd tell you, our clinical team has done a really good job in looking out for our patients, first and foremost, and then each other. And so we've seen our exposures go down significantly. We've seen our volume go up significantly. And I think just as a week ago, we only had one person that was working out a short-term quarantine, and that was down from a much higher number the weeks before. So we're definitely heading in the right direction, doing the right thing.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [55]

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Yes, we've had a lot fewer confirmed cases than I would have ever imagined.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [56]

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Great. Can I ask just a question just on the telehealth? In terms of sort of the volumes in April and May, I mean, can you give any sense, even a ballpark range of what percentage of the revenue in April and May was associated with telehealth?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [57]

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Yes, I don't know that I can give you, Mike, a percentage of revenue. Graham may be able to give us kind of an overview or a snapshot on the visits. And if we took a minute to do the math that we do after the call, we can probably figure out. It's going to be a small percentage of revenue. But Graham, what -- we were doing a few thousand a week?

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Graham D. Reeve, U.S. Physical Therapy, Inc. - COO of East [58]

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Yes. That's correct, Chris.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [59]

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So about 3,000 a week. I expect, Mike, that number actually to begin to go down a little bit as volume picks up in the facility and people are more readily able and capable of coming out or feeling comfortable coming out. I expect that number to wane a little bit. And again, I don't have a good predictive ability to tell you what it should look like. But in the peak period, we were seeing about 3,000 visits a week, I think.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [60]

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And payers were paying sort of -- a visit was $100 a visit. Payers were paying -- essentially, that was the rate?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [61]

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At what the rate?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [62]

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It varied among payers. There were some unit exclusions. For instance, obviously, there's some things you can't do on telehealth. You can't do dry needling. You have to physically be there. You can't do manual therapy. You have to physically be there. So I wouldn't say that I would look at a telehealth visit as being absolutely equivalent to an in-clinic visit because there are a few things that we do with our hands that you obviously can't do through the phone or the TV or the computer. But generally speaking, I think codes, with probably some small exceptions, codes were reimbursed at the same relative level, same for Medicare, but not across the board, not completely homogenous among or across payers.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [63]

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And then just last one. And you may have touched on this earlier. I possibly could have missed it, but I just wanted to ask, in terms of the industry and CMS and communications in terms of '21 pricing, has all this weighed on, on that issue? And if -- is there any incremental, an anecdotal information you can share there?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [64]

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Yes. I know there's a bill right now. I talked with John Duggan from Select Medical. They've done a great job. Our -- Select has us, APTQI, our alliance, APTA, the American Hospital Association, the long-term care associations all have rather acutely banded together to press on CMS, not to enact some of the reductions that were scheduled to come into play in 2021. We have a bill right now. We have a number of sponsors that don't yet know and I won't predict what happens with that. But given the amount of relief and assistance, given how important the health care system is and how important we are to the system and the fact that we've been deemed ahead of a lot of other types of health care and allied health professionals to be absolutely necessary, I think we have a shot, but it's not done yet.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [65]

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Mike, going back to the telehealth volume question. If it were to -- let's say, we run at 2,500 a week forever, which as Chris said, I think a number of those patients will have come in and seen us, so that's probably aggressive. And we should have done at least 750,000 visits in the quarter. It would be like 3%, max 4% of your business. So it's not going to be a material percentage of your PT visits.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [66]

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The nice part is it should help to reduce our cancellation rate a little bit, and we should lose less visits by having that flexibility.

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Operator [67]

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Our next question is from Kevin Gade with Bahl & Gaynor Investment.

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Kevin Thomas Gade, Bahl & Gaynor, Inc. - VP [68]

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And really, kudos to the swift action from management and really the deliberate delivery of information through the 8-Ks, really appreciate it. Kind of off the comments about you being a stronger financially positioned player versus the other, I'd like to open it up and a question maybe more on capital allocation, where you all stand in terms of your priority. I know you mentioned pushing off M&A a little bit. And what -- you're also saying that dividends may be suspended for the upcoming quarter. If you can just expand on those 2 points? If you intend to suspend the dividend? If you intend to pay it? And how long you intend to hold off on M&A?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [69]

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Okay. So we've always said this, we've been very consistent. If you look at rates of return, the highest return is on a de novo clinic, one we've opened ourself. Second would be on acquired clinics, which in turn spin off de novos. And then third, we said we were -- it's hard to judge whether it's better to do share buybacks or pay dividends. We initiated the dividend a number of years ago. We've increased it every year since. In this situation, where there's so much uncertainty, we, like hundreds of -- and hundreds of other companies, have suspended the dividend. Will we resume it at some point? I would expect so. Will we pay one this year? We've already stated that we doubt that we would pay any dividend this year.

And you -- we paid our first quarter dividend. We doubt we'll pay any subsequent dividends this year.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [70]

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But I think there is a good appetite by the Board and certainly, the management team, to get us in a position where we can reinstitute that at a point where we feel comfortable that our capital structure is good and stable and we can do everything we need to do.

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Operator [71]

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And there are no further questions in queue at this time.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [72]

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All right. Listen, thank you, everybody. I know it was a long call. I know you had a lot of questions. So Larry and I are around if you want to have some follow-up, we're available. We thank you for your time and your interest and your support. Take care. Have a great day. Bye.

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Operator [73]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.