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Edited Transcript of USPH earnings conference call or presentation 1-Nov-18 2:30pm GMT

Q3 2018 U.S. Physical Therapy Inc Earnings Call

HOUSTON Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of U.S. Physical Therapy Inc earnings conference call or presentation Thursday, November 1, 2018 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

* Glenn D. McDowell

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

* 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 - Equity Analyst

* Jacob K. Johnson

Stephens Inc., Research Division - Research Associate

* Lalishwar Mitra Ramgopal

Sidoti & Company, LLC - Healthcare Sell Side Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* 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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Good morning. My name is Tammy, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy 2018 Third Quarter Earnings Conference Call. (Operator Instructions)

I will now turn the call over to Mr. Chris Reading, Chief Executive Officer. Please go ahead, sir.

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

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Okay. Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy's Third Quarter Conference Call. With me on the line include -- and here as well, include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, Chief Operating Officers, West and East; Rick Binstein, our General Counsel; and Jon Bates, our Controller.

Before we begin today's call, we need to cover a brief disclosure. So Jon, if you would do that, please?

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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. 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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Thank you, Jon. I'm going to keep my initial comments relatively brief before Larry reviews our numbers, which really tell our performance story, but that story begins and ends with a lot of good people, so let me begin with that.

In just a couple of days, I will celebrate my 15th anniversary with the company. Larry celebrated his 15th a couple of months earlier, and Glenn a month before me. More importantly, though, the vast majority of our early partners continue to celebrate anniversaries with us year in and year out. In between those anniversaries, they make a tremendous difference in the lives of our patients, and they invest, along with us, in the communities which we serve around the nation. People like John Cascardo, Jeff Sirabian, Mike Scandin, Sue Hale, David Thibodeau, along with our very capable groups in North Texas, Bob Clair, 19 years and going strong; Kevin Dorf, Vijay Parikh, JP Sims, Tony Michels, all here long before we arrived 15 years ago and still going at it every single day. And so many more, including many young partners, who stepped in and stepped up to ownership within these partnerships. And our acquired partners, Mark Laurinaitis and Jaime Caceres, from our very first deal back in 2005, still going hard. Got to see Mark a few weeks ago and we had a partner meeting, still excited about what he does every day. And our dear friends and partners at Star, our largest and very successful partnership, now with 13 partners in delivering record years of serving their community at home and even as far away as China, where we staff a pediatric therapist in a group of orphanage run by Show Hope, where we're able to make a difference in the lives of some incredible little children, where they wait to get stronger and await their adoption. To some of our newer partners like Richard and Anna Jackson, Ben Keeton, who are absolutely on fire in Northern Virginia, and our many partnerships in the Pacific Northwest where among them, new trails are being blazed and the lead athletes like those from the U.S. ski and snowboard teams come to get healthy, faster and stronger. And to our friends and partners at Briotix Health, one of our newest partnerships who have, in a short period of time, positively impacted our company while their teams work tirelessly every day with the large and growing portfolio of blue-chip clients in more than 600 locations, working to effectively reduce and eliminate injuries and create better, healthier work environments for the employers and employees they serve.

So thanks to all those partners and many, many more who worked hard along with our ops and support teams to produce what has ended up being a very good summer quarter for us. Normally, we have a seasonal slowdown in the summertime of school being out and vacations for doctors, clinicians and patients. Although this year, we have been able to bypass the normal dip and power through in really good fashion right back into the throes of fall sports season, which is generally a pretty busy time for us. That result doesn't happen by accident. It takes a strong focus and a lot of work by our clinical teams to pick up the slack when somebody is out in order to provide the level of care that our patients need regardless of the season. So I hope our team listens to this call once today and understands how much we appreciate their continued efforts.

For the quarter, our volumes were generally pretty strong with a good same-store number. Industrial prevention has been a sunny spot for us as well with really strong growth and margin expansion all year. And obviously, the cost control on the PT side, especially in the Mature Clinics, coupled with good volumes, helped to push margins in the right direction there as well.

So Larry is going to cover those details in a lot more granular fashion. Well, I close by saying one more time to our team how proud I am to work alongside so many great people, 15 years into what has been a great and rewarding personal journey for me. Larry?

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

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Thanks, Chris. Well, you got me all worked up now. So our operating results for the quarter increased 34.9%. We are in $0.64 per share. Consensus estimate was $0.58. Obviously, it was a solid beat. That $0.64 compares to $0.48 at the same time last year. For the 9 months, operating results have increased 22.6% to $1.93 as compared to $1.59 a year earlier.

All right, I'm going to hit the highlights of the third quarter first. Our revenue increased $10.1 million or 9.8% due to an increase in patient revenues from PT operations from both internal growth and acquisitions, an increase in management contract revenue, which was primarily attributable to some acquisitions and an increase in the revenue from the industrial injury prevention business, which again was both internal growth and an acquisition.

Patient revenues from PT operations increased $7.1 million or 7.4% to over $103 million in the quarter due to an increase in patient visits to 7.1% and an increase in our average net rate to $105.48 from $105.26. Of the $7.1 million increase, $4.2 million related to New Clinics and $2.9 million related to Mature Clinics. The industrial injury prevention business revenue increased 66% to $73 million -- I'm sorry, $7.3 million.

We did a good job, as Chris alluded to, in cost control. Our total costs were 76.9% of revenue, down from 79.4% in the same quarter last year. Of the increase of $5.2 million, $3.7 million was attributable to New Clinics and $1.4 million to the industrial injury prevention business. While at our Mature Clinics, which were experiencing good revenue growth, we actually reduced operating costs by $0.1 million.

The gross profit for the third quarter grew by 23% or $4.9 million to $26.1 million. The gross profit percentage of 23.1% in the recent period represents a 250 basis point increase from a year ago. PT operations increased their margin to 22.8% or 190 basis points better than 20.9% in the third quarter '17. And the gross profit percentage for the industrial injury prevention business more than doubled to 29.7% as compared to 14.1% a year earlier.

Our corporate office costs ran at 9.4% of revenue in the third quarter versus 8.1% last year. Our operating income increased by 19.7% to $15.4 million. And the provision for income taxes was 27% in the recent quarter as compared to 37.8% a year ago before the tax reduction.

Same-store revenues increased 4.6%. Most of that was attributable to volume, which increased by 4.5%.

I'll now hit the highlights of the 9-month period. Our net revenue increased $31.7 million or over 10%. Patient revenues year-to-date from PT operations have increased 7.8%, primarily due to an increase -- nice increase in patient volume. And of the $22.3 million increase year-to-date, it's interesting to note that the majority of that, $12.7 million, is attributable to Mature Clinics versus New Clinics.

Our revenue from industrial injury prevention business has obviously gone up a lot since we just got in the business in the first quarter last year. It's up 79.5% to $18.4 million. Our total operating costs year-to-date of 77.3% are down from 78.2% a year ago. Our gross profit year-to-date has increased by 15% or $10 million. The gross profit percentage of 22.7% compares favorably with 21.8% a year ago. The PT operations gross margin has improved from 22.2% to 22.6%. And the industrial injury prevention business gross profit year-to-date is 24.2% versus 14.5%.

Our corporate office costs year-to-date are 9.2% versus 8.4%. Our operating income has increased 11.6% to $45.5 million. And year-to-date, the income tax provision is 26.3% versus 35% last year.

For the year, our same-store revenues were up 4%. Visits have increased by 3.5%, while the rate has increased 0.4%.

In terms of other financial measures, for the third quarter, the company's adjusted EBITDA grew by 14.1% to $15.6 million. And year-to-date, it's increased 8.4% to $46.6 million.

In the release, we announced that we're again raising earnings guidance. We initially gave earnings guidance in the first week of March and had raised it in August, and we're raising it again. We currently expect that the company's operating results for the full year will be in the range of $31.7 million to $32.7 million or $2.50 to $2.57 per share.

As I noted in the release, despite having made expenditures for acquisitions and dividends of $27.7 million, over the past 12 months, we've actually reduced our net debt, meaning debt less cash, by $18.1 million as our cash flow from operations has been excellent. And finally, our fourth quarter dividend of $0.23 will be paid on December 7.

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

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All right, great. Thank you, Larry. With that, operator, I'm sure we have some questions, so let's open up the lines and we'll be happy to address them.

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Questions and Answers

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Operator [1]

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

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

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Congratulations to you, Larry, Chris and Glenn, 15 years, fair enough. I think we've been -- got 12 years ourselves with you guys, so it's been a good run. Congrats to that. On a -- I think the really impressive thing in the quarter, besides the good sales growth, was clearly good improvement in the margins. And I know -- I think a year ago at this time, you sort of began fine-tuning your organizational structure and whatnot. Can you maybe just give us a little -- some -- what sort of drove that big improvement this quarter, not only on the salary side, but on your supply side was pretty low for sort of normally a seasonally slower quarter at least? So any further details on that. And is there more room to go on that side?

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

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I'm going to probably tread a light on the more room to go. We'll see. A year ago -- they say you win some, you learn some. And a year ago, we were doing some learning because we were struggling just a little bit on the cost. And I think what we learned is we stretched people a little too far. And so we're trying to be mindful of that. And so we added to the team here. We added not only at an upper level with Graham coming on, but also within our operations teams, at the director of operations level. And those folks, particularly the additions, have really focused on our sales opportunities and working with our sales team. And I just can't say enough about how those folks have meshed with the team. Everybody has done a great job. We made some hard decisions last year and into the early part of this year in some investments. And those investments, we're getting good traction with. I just want to say this. On the industrial prevention side, our margins have really improved a lot. I would caution you to not take this most recent quarter's margin and just project that forward. As we win and learn -- what we've learned is we're growing really, really fast in that business and we also have to be mindful to invest in the infrastructure around that and the people and create some redundancies. And so it's as yet unclear where our margins are going to settle there. I don't know that they'll stay where they are, but we'll see. But I'll just leave you with that piece of information on the prevention business. And guys continue to work very hard, and so I expect we'll see a little wage pressure with the economy continuing to be as good as it is. But so far, we have been able to deal with that effectively with the volume that's been driven, and we'll do our best to continue to do that.

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

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I think it's only fair to note that in the third quarter last year, we suffered from 2 hurricanes. So our same-store visit growth is about 4.5%. If you take out the hurricane factor, it still would have been around 4%, which is obviously very strong. And then in terms of earnings, I think we reported, what, $0.48 a year ago. It would have been $0.02 or $0.03 better, if it weren't for the hurricanes. But still, you're talking about whether you look at earnings or patient volume or just about any measure, even allowing for that factor last year, we've had just very, very strong growth.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [5]

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Absolutely. And I think you had said when the hurricanes occurred, I think it was like a 1% impact, right, on the same-store? So yes, I think so. Still -- and you only grew a whole percentage point last year. So obviously, a little bit of an easier comp, but the 4% year-to-date is a good number. And I guess, borrowing -- the strongest thing for you guys, obviously, outside of doing a great job, whether clearly on referrals and driving your own business, but on a macro level, I guess, the low unemployment has to really help, right? I mean, that's the driving factor for this, I assume?

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

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Yes. I don't know. I mean, employment has been pretty good for a while. It doesn't hurt for sure. I think the addition, and I think, our partners' focus and I think our responsiveness from an operations perspective has helped as well. But we were just in Nashville, Glenn and I, a week or so ago. And I will tell you, our sales team down there, they're just -- and we've had -- there's some challenges in the market and some dock realignment and some hospital realignment. And despite all of that, they've really done a great job in growing business, and we're seeing that not just in Nashville but around the country. So our partners have done a really good job, and so hats off to them.

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

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Okay. Just lastly, some of your efficiency measures sometimes give us a little bit more light on the improvements, yet you happen to have those. I think it's the patients per visit per clinic or the units per visit.

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Glenn D. McDowell, U.S. Physical Therapy, Inc. - COO of West [8]

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Yes, I've got that. This is Glenn. Visits per clinical FTE in the third quarter was 10.77, which is a little bit better than it was last year at the same time. Units per visit were 4.41, which is about where we've been averaging, and our durations or visit per referral is running around 10.7.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [9]

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Yes. The visits per day per clinic were 26.6, and I don't know -- that's in the third quarter. And I don't see the numbers for a year ago. Do you have them, Jon? I know they've improved.

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

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Yes, it sounds pretty high actually. Yes.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [11]

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They were in the 25 range, but I don't know if they improved a whole visit or what.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [12]

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Yes. They got over 27 in September and visits all year have been steady and very strong. So we've been able to grow and that's been a high point for sure.

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Operator [13]

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

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [14]

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Chris, just on the PT business. I mean, obviously, you have been seeing strong volume and macro has been driving that. But is there anything you can point to that's more company-specific that you can say this is the reason why we're gaining share right now or more structural or more sector-specific that you're seeing that's driving that sustained healthy organic growth?

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

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I got to believe that the focus with the sales team and the extra support is helpful. We do a lot of training here with both new directors, partners who sometimes have been with us for a while, particularly focused around sales. And obviously, we've continued to work on support for that group and then on hiring and finding the best people. And again, in today's world, there's a lot of noise. There's regulatory noise and there's challenges that our competitors have to deal with. And our partners have the resources and the backing to be able to deal with those things without taking their eye off the ball. And so I think that makes a difference. But that's -- I don't have any one thing that I can point to, but I think it's a number of things.

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

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No. I appreciate that. And then, Larry, as I think about salaries cost, I mean, that's been stable despite the growth. Are you worried at all or do you see any potential for unexpected inflation? And how does the increase in minimum wage that we're seeing because of Amazon and all these other places, I mean, does that affect you at all like at the very low level of labor?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [17]

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Well, in -- the way we had controlled costs over the last year, to some extent, is through attrition and then the margins improved because with the same staff, you're able to do more patient volume. We are seeing higher cost for hiring new therapists. And what's happened on the low side with the -- we don't normally pay minimum wage. But on the lower paid side, turnover is higher with the strong economy. So it hasn't necessarily been -- had a huge inflationary impact, but we definitely have seen higher turnover like in our front office staff as a result of the strong economy.

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

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And then, Larry, I also noticed the doubtful account provision ticked down a little more. Is there anything to call out there? Or do you think that's the right number to be using going forward?

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

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I mean, normally, we used to say it was going to run at 1.5%. It's been lower than that. I would say 1% is probably going to be about the average. It varies from quarter-to-quarter.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [20]

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Okay. And then last question for me. Free cash flow was the strongest we've seen. This is, I think, your record quarter. Anything to call out there? Any one-timers? Or is this just really the business humming along and you guys are generating good cash as well?

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

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Yes. There's nothing to -- well, I mean, because of the changes in the tax laws, we're getting 10% more at the bottom line than we used to in the free cash flow. Our average age of our receivables has not changed from a year ago. It's running about 38 days, so you didn't have a bunch of cash coming in because you tightened up your receivables collection. So it was just -- I mean, we are just throwing off a lot of cash right now.

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Operator [22]

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

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [23]

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I just first wanted to start with the IPP acquisition, how that's going along. And given the success or the scale you're building there as you look in terms of acquisitions, if you're getting more interest on that side of the business now?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [24]

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Yes. So as I mentioned on the last call, the deal that we did in May is -- has been integrated into Briotix Health now on a combined company basis and seems doing well. There's obviously work -- a lot of work that goes into that and there's still work to be done. But that's progressing as expected and doing well, and we're pleased with all of that. And as I've said in the last call, we continue to be interested in the space, and we'll continue to invest in the space when we can find the right things to invest in not only to support the offerings that we have, but potentially to broaden some of those. And so we'll continue to be active in the PT space as we've been all along, and we'll selectively be active in industrial prevention space. There's a strong organic growth element in the industrial prevention space that is embedded with these companies that also makes it attractive, and we have a great team to bring those opportunities out. So you'll see us do both.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [25]

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Okay. No, that's great. And Larry, I was wondering if you're seeing any change in light of the recent pullback we've seen in the market. Has it affected valuations as you look at potential opportunities?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [26]

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No. I don't know. The deals that we're looking at, we're looking at the same range we have been paying for several years.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [27]

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Those folks aren't looking at our stock price one way or the other from this side. I mean, nobody else is. So we're blessed to attract really good people, and we continue to have great conversations. And it's a competitive market though right now, and I don't think multiples have changed a whole lot.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [28]

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Right. Yes. No, I was hoping maybe the private equity guys will ease up a little in terms of making things a little easy for you. But also...

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

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I don't know. Higher interest rates probably help us actually from that standpoint. But I saw the other day in The Journal that this year, the average leverage used is the highest it's been in 5 years. So it looks like they're keep piling on more debt.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [30]

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Right, right, right. Okay. And I know you talked about supporting the clinic base, et cetera, in terms of driving business. I'm just wondering, as you look at the 588 you have right now in the network in terms of give us a sense as to the sales force you have and do you think you need to add it on that front to provide additional support?

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [31]

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We continue to add, particularly in the deals that we do. And I'll let Glenn speak to it on a broad basis. Glenn and Graham are happy to speak to it in terms of how they look at their respective territories.

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Glenn D. McDowell, U.S. Physical Therapy, Inc. - COO of West [32]

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Yes. The overall sales number hasn't really changed. I mean, right now, we still have about 87 total sales reps in the company, covering around 475 clinics. That's pretty stable for us. We continue to look for opportunities where we might add additional sales reps. But most of our major partnerships and larger urban markets were pretty well covered, so...

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [33]

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

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [34]

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Yes. This is the third quarter based on revenue by segment. So 49.9% came from private or managed care, really the insurance companies. Workers' comp was 14.3%. Medicare and Medicaid combined were 28.2%. And then other was 7.7%.

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Operator [35]

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(Operator Instructions) And your next question comes from Mike Petusky with Barrington Research.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [36]

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Congratulations on the great 15 years. I guess, I want to start on the industrial business. Larry, is there any thought maybe at some point, maybe '19 or at some point soon of just segmenting out that business?

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

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Well, the way it's growing and if we do any more acquisitions at some point, we'll have to report it as a business segment.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [38]

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Okay. I mean, could that be...

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [39]

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We're trying to get more color. If you look in the Qs and Ks, you'll see more and more information on it.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [40]

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Yes. I mean, could that be even as early as '19 that you can be doing that or...

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [41]

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I don't know. Jon's here. He probably hopes not because so much talk going before to report a business segment. But right now, we don't have to do it.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [42]

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Okay. And then yes, just on that front, I had a sense that maybe there might be a little bit of pause in terms of M&A related to industrial. I mean, do you -- are you still out there like beating the bushes in that area? Or do you have what you need right now to -- obviously, it's growing fast as it is. I mean, how do you think about M&A in terms of that side of the business?

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

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Yes. Look, it's a new -- for me at least, it's a new area. I'll tell you that I'm going to what I think is the largest comp-related conference in the country coming up in December. I'm going to be out there with our team, Briotix Health team and their group, just to get a better handle on the lay of the land. I have got what I feel like is a really good handle on the PT side and I need to develop that same kind of comfort on this side. But no, we're constantly talking to people. I think that's the way to develop opportunities over time. For us, it's about finding the right fit. And so we're not going to stop and start. We're going to continuously look for opportunities and see where that takes us.

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

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It's interesting. When we bought Briotix, we thought almost all the growth would come internally and then we let the people at InSite and they were highly complementary businesses. They only had a couple of clients that overlapped. And then as we talked to other groups, it's surprising how regional the business is. It's -- you would think it would be national because of the clients and I think eventually it will be, but a lot of our business is concentrated in certain markets.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [45]

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In certain industries, so different companies have different footholds and strengths in different industries, whether it be transportation or utilities or manufacturing, distribution, things like that. So even though they may have similar product lines, opens up opportunities and other verticals for us. So we're going to continue to look.

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

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Is the integration of those businesses actually easier because you basically leave them alone? Or is it tougher because it's a little different business than the last 15 years of just kind of integrating PT facilities?

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

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I don't think any integration is easy. I think you always have people. And because people matter, you have to pay attention to it and so...

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [48]

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I'd say it's more difficult because we combined Briotix and InSite into one entity, whereas, normally, when we do an acquisition, they stay stand-alone.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [49]

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Got you. All right, last one. Just in terms of outlook for pricing, both on commercial and things that you were hearing in terms of government pricing. I mean, what's your general sense as you look forward over the next year or 2?

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

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Government pricing won't update until the end of the year for the coming year, and so I don't really have a sense of that. I don't even have a good guess. On the commercial pricing, I've been telling people that we're in a relatively flat environment with some what I would consider to be mild pressure, and I have been saying that for 2 years. We offset a little with some regional focus where aggregate pricing is a little bit higher and that has kept us steady, or in this year's case, up ever so slightly. I expect that to kind of continue for the foreseeable future, at least for this year.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [51]

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Got it. So last one, I promise. So Larry, if you're modeling this for '19, I mean, flat to slightly down, is that about right?

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [52]

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We're in the middle of our budgets now, but we normally budget that the net rate -- well, this year, we actually budgeted, it would be down because of the Medicare rate cut. It's actually turned out to be flat to slightly up. I would pre your forecast, use a flat rate.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [53]

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Until he knows for certain.

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Lawrance W. McAfee, U.S. Physical Therapy, Inc. - Executive VP, CFO & Director [54]

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Yes, until we know what Medicare set it.

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Operator [55]

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

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Jacob K. Johnson, Stephens Inc., Research Division - Research Associate [56]

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This is Jacob on for Dana. On the Medicare front, if I'm not mistaken, I think physical therapists will be participating in the MIPS Quality reporting program next year. Is that the case? And then if so, how are you preparing for it? And how could it impact you?

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

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Yes. So '19 is really the first year. We are preparing for that. There's a lot of work that goes into that. That's ongoing, '19. And I'm not the MIPS expert here in the room, so we have our clinical services and our ops and our compliance teams working on that very hard. But yes, that will begin to roll out for us in '19 on a limited basis, particularly with our PTIP facilities and then we'll scale from there.

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Jacob K. Johnson, Stephens Inc., Research Division - Research Associate [58]

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And maybe following up on that. Do you have any sense if some program like that could maybe pressure some of these older physical therapist operators to maybe look to sell their practices in the coming years?

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

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Let's not pick up old guys, I've been here 15 years. So -- but yes, I think age aside, from a regulatory perspective, challenges create some opportunity sometimes. And so the market's certainly in a consolidation phase, whether that continues at the same pace or accelerate, so I think it goes forward. And any challenges for small providers get magnified when they don't have as many resources. So yes, I think it's -- I think that's just the way it is right now.

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Operator [60]

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And there are no further audio questions.

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Christopher J. Reading, U.S. Physical Therapy, Inc. - President, CEO & Director [61]

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Okay. Listen, thanks, everybody. Great questions. Thank you for your time and attention. Have an awesome day. Bye now.

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Operator [62]

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