Thank you all for joining us today for the U.S. Physical Therapy Q2 2020 Earnings Conference Call. I would now like to turn the call over to our speaker, Mr. Chris Reading, Chief Executive Officer. Please proceed.

Thank you, and good morning, and welcome, everyone, to U.S. Physical Therapy's second quarter and year-to-date earnings review for 2020. With me include Larry McAfee, our Executive Vice President and Chief Financial Officer; Graham Reeve and Glenn McDowell, our Chief Operating Officers, East and West; Rick Binstein, our Vice President and General Counsel; Jon Bates, our Vice President and Controller. Before we begin to discuss our results for the quarter and year-to-date, we need to cover a brief disclosure statement. Jon, if you would, please.

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.

Thanks, Jon. So what I'd like to do here is to quickly take you through the actions our team took for the quarter, highlight some milestones along the way that I think will be important for you to understand and touch briefly on the outcome of those early actions. And finally, to provide a very brief update of where we are beyond the second quarter in a few key areas. I want to begin, however, with a heartfelt thank you to our entire team. If there was ever a great team effort that stretched every nook and corner of our company over the past four months, this was it. We had so many people taking quick action early on in making what were extremely tough and emotional decisions. Tough because of the magnitude that I will share with you in just a minute and emotional as well because of the difficult human impact, the magnitude of the sacrifices made by our employees, our partners, and our support team and the sacrifices that continue in order that we might exit this pandemic at some point in a very healthy position. I commend our team and those who were directly impacted as a result of this pandemic for the way you have acted, the way you have consistently responded and carried yourselves in light of this unique and very stressful environment. I could not be prouder than I am to be a part of this team. Immediately when this pandemic in the U.S. began to be better understood, in and around the second half of March, we made some very significant cost-related changes across the entire company. We took out an estimated 38% of our people-related costs in the way of salary reductions, time reductions, furloughs, and other methods and all those were sacrifices that were made quickly without objection by our teams around the country. In short, our people really, really stepped up. Over the course of the second quarter, we also had partners as well as our development and legal departments working on rent abatements and deferrals. For the second quarter, that amount was approximately $1.6 million. For the week of April 11, we had hit bottom at approximately 45% of our pre-COVID volume. From there, things stabilized and working locally with our tremendous network of partners and staff, we were able to climb forward once again. Telehealth early on was an important bridge to many of our patients who could not or were afraid to come into our facilities for their normal hands-on care. At the peak, this amounted to approximately 3,000 telehealth visits per week. As volumes have continued to pick up, which is good, those telehealth numbers have receded; however, telehealth will remain an important part of our care offering for those patients to stay connected and be progressed when they are unable to come. In May, our volumes increased from the 50% into the 60s. And even with that low volume, we were able to eke out a small profit in May. In June, volumes further increased from the 60s into the 70s compared to our pre-COVID volume, and we produced a very strong finish in June to solidify the quarter. Once again, my sincere appreciation to our partners, ops team, and the entirety of our corporate support teams working together to produce what I feel like was an outstanding result. And in July, visits have further improved from the 70s into the mid-80s by month-end. And although the rate of forward change has begun to flatten in recent weeks with the increase of the infection rates nationwide, I'm hopeful we can continue forward. For the second quarter, we were able to produce a slightly higher net rate - net patient revenue per visit rate as a result of several factors. These include: slightly improved units per visit as a result of our ability to spend a little bit more time with patients, slightly lower Medicare and Medicaid percentage or payer mix likely as a result of some reticence on the part of older patients to come to the clinic or come as often as would be normal, and continued strong collections combined for an improved or what I would consider a more normal net rate compared to the first quarter of this year. For the quarter, net rate per visit was $106.97 compared to $107.16 at the prior point last year. At the end of the day, the strong cost control and the ability to drive returning volumes resulted in PT gross margins of 21.7% for Q2, and our overall combined gross margin at 23.1%. And that was buoyed by our industrial injury prevention business, which held up very well despite the COVID-19 effect. At what we are calling the peak negative impact of our IIP business, we were down about 25%. And we've been able to recover more rapidly due in part to some excellent partner support from Costco, which voluntarily added additional facilities to help further prevent staff furloughs during the height of this health crisis. That, combined with another excellent cost control effort by our Briotix Health team, allowed our gross margins to exceed where we were on a same quarter basis a year ago, up in the second quarter to 32.9% in spite of the impact from the pandemic. And the total gross profit contribution from the combined Briotix team was up year-over-year from $3 million to $3.2 million this quarter and up for the six-month period to $4.8 million compared to $4.5 million in the same period in 2019. I'm going to leave the further granular financial details to lay out here in just a minute. I want to close by saying that we've all been in a great fight over these past four months. There have been a great many decisions along the way impacting our people and impacting our business. Without a pandemic playbook of prior experience to lean on, I once again want to give our entire team a great big thank you for their tireless work during this difficult time. From every level, at the clinics, to our home office support team in Houston and around the country, the communication, leadership, and responsiveness of this team has been exemplary. We're not done fighting the spike, and we hope to continue making progress. Last week visits increased again albeit at a slower pace than compared to a few months ago. We continue to examine our staffing, our resources, and our protections for our patients and staff and we will do the very best to preserve our opportunity to come through this difficult time so that our company is well positioned to carry on our mission to serve our existing customers as well as to grow with new opportunities. For our shareholders, we thank you for your trust and support during this period. We don't take our responsibility lightly, and we're not done working hard on your behalf. And to our staff and partners, we will continue to do everything in our power to support you, to help you to be safe, informed, and well-armed for whatever comes next so that you can continue to make a difference in the world one patient at a time. That concludes my prepared remarks. Larry, there's still a lot of detail left to cover. I hope you would, please.

Yes. Thanks, Chris. For the second quarter, the company's net earnings from operating results was $10.9 million or $0.85 a share, including CARES Relief Funds as compared to $10.3 million or $0.81 a year ago. Without the Relief Funds, earnings from operating results was $5 million or $0.39 per share. The analyst consensus forecast for the quarter was a loss of $0.18 per share. So depending on which way you want to look at it, our actual results were anywhere from $0.57 per share to $1 higher than expected. Revenue in the second quarter was $83.9 million, obviously down substantially because of the pandemic as compared to $126.4 million a year ago. Revenue from physical therapy operations was approximately $72.3 million versus $113.4 million in the second quarter of '19. Revenue from the industrial injury prevention business was $9.7 million, down slightly as compared to $10.3 million in Q2 '19. I'm now going to talk about costs. And I mean, honestly, Chris has already talked about it. The actions our management team took were simply remarkable. In the recent quarter, total operating costs, excluding closure costs, were $64.5 million or 32% less than the second quarter last year. Adjusted for the operating costs related to partnerships that were sold in the second quarter of '19, the reduction was $26.9 million. Total salaries related costs, including physical therapy operations and the industrial injury prevention business, were 51.8% of revenue as compared to 55.9% in the second quarter last year. Gross profit for the second quarter, excluding closure costs, was $19.3 million. The gross profit percentage was 21.7% as compared to 24.7%. The gross profit on physical therapy management contracts, which is a small part of our business, increased to 26.9% in the most recent quarter as compared to 15.4% a year ago. I won't go through the PT and Briotix or industrial injury prevention margins because Chris already covered them. In the second quarter this year, our corporate office costs were $9 million, down $2.5 million or 22% as compared to the second quarter of '19. Operating income in the second quarter was $10.3 million. Operating income as a percentage of revenue decreased from 15.7% a year ago to 12.2% in the second quarter this year. I think it's noteworthy though that in the second quarter this year, our operating income as compared to the first quarter increased by $6.2 million or 55%. As noted in the release, included in other income was a gain of $1 million in the second quarter resulting from a sale of 11 previously closed clinics and a gain of $5.8 million resulting from the sale of previously closed partnerships that included 30 clinics. Also included in other income in the most recent period was $7.9 million of nonrepayable CARES Relief Funds from the federal government. In terms of other financial measures for the second quarter, the company's adjusted EBITDA was $19 million as compared to $24.9 million in the second quarter last year. Our adjusted EBITDA, excluding the CARES Relief Funds, was $11.1 million. As I noted in the press release, our net cash flow has been exceptional and borrowings under our $125 million bank credit line were paid down to $33 million at the end of the quarter. Additionally, as of June 30, there was $44 million in cash on our balance sheet, that's $20 million higher than six months ago.

Larry, thanks a lot. With that, operator, we're going to go ahead and open it up for questions.

Your first question is from the line of Larry Solow.

So I guess I was guilty as one of those part of those consensus estimates that totally missed your profit, but a very commendable job, in that, what have you learned? Obviously, sort of a pretty herculean effort to roll back costs so rapidly. And I realize a lot of this, hopefully, will come back as volumes improve. But perhaps, what have you learned with this, and especially on the industrial side, where gross profit improved a lot, and I assume perhaps maybe some of that can actually linger or stay on in a good way, any thoughts to that?

Yes. I mean, I think our - we've learned a lot. We rolled out a telehealth platform from scratch in record time with wide adoption. We've learned that we can mobilize quickly and efficiently when we need to. We're stronger than ever, I think, with our partners and our partners recognize that. We all recognize that. We probably were operating with some costs that were above what we absolutely needed and above what was essential. You're right, some of that cost is going to come back. I mean, we're, frankly running people really hard and a little bit thin, and we've been bringing people back, as I talked about when I was at your conference a few weeks ago. We're bringing a lot of people back on a part-time basis, and then gradually working them back in. And so that's allowed us to help maintain a close alignment with volume and cost. But I think we've been in a fight, and we've learned we can trust each other. We can trust our partners. We can navigate, really, I feel like just about anything at this point. I'm just really proud of our folks. And on the industrial injury rehab business, we did that business. We entered that space for a reason. We felt like it would be almost counter-cyclical to some of the aspects of our PT business. I think that theory has held up pretty well. We have increased margins there. I think the team has done just an outstanding job. And while we will have some costs come back in, as volumes grow, I think we'll see some margin improvement compared to where we were running pre-COVID. So I think the team is excited about that as well. So there've been a lot of good things come out of this. It's been tough, but there have been things that will carry with us forward.

All right. Okay. Good. Just on the revenue per patient, you mentioned a couple of things that could prove temporary with the mix shift. Could you just remind us, I guess, a couple of questions on that? What sort of drove it a little bit down? It had come down from sequentially over the last couple of prior quarters, a couple of bucks on average still to 103-ish, as you mentioned? Yes.

As we said in the first quarter call, that was - Q1 was kind of an atypical quarter in terms of net rate. It does move around a little bit based on a number of factors. What caused it to be higher in the second quarter this year is that our Medicare and Medicaid percentage went down from 31.3% to 29% or 2.3%. And then our units per visit went from 4.3 to 4.5. So those two items account for more actually than the swing in the period.

Got you. And then just lastly, you mentioned visits obviously are - have improved significantly from their lows and probably seems to be maybe stabilizing a little bit now. I guess, nobody knows how long COVID will last, but it does seem like, I guess, in sort of the new norm, I'd imagine there will be some patients, right? Maybe you can never get that last 5% to 10% or something until there's a vaccine or something? Is that sort of how you look at it from a high level without giving - quantifying exactly what that piece might be that doesn't come back so fast?

Yes. Well, you're right. We will not be able to predict. I think when society is fully back, particularly the things that are impactful to us are schools and sports, club sports, and the activities that people do and the gym and on the weekends that, over time, fortunately or unfortunately, when you're trying to stay healthy, you also can get injured. And so those activities, I expect that until those come back, we're not going to be 100%. But I do think also the team - ops team and our partners have done a great job looking at opportunities in local markets to move market share and to move key people and to hire key people and maybe create some new alignments. And so we'll see where we end up. It's early to tell. We've each week made gains by and large through this since April 11. Those have slowed somewhat, but most recently, we've been about 85% of pre-COVID volumes and probably a little higher than that compared to where we were seeing a month a year ago because we made some gains last year as well. So we're still fighting our way forward. It's going to take some time until this settles down.

Next question is from the line of Matt Larew.

This is Dan Lawler on for Matt Larew today. I wanted to follow up on visits in the quarter. With visits per day coming down to around 22, but still above the historical range of 26 to 28, is this a function of some markets coming back online quicker and some others still recovering? Or might this be a new normal visits per day, given the need for social distancing or PPE?

So the visits per day have nothing to do with our need to spread patients out or protective equipment or things like that. It's a function of, I think, society being fully open. I don't expect this post-pandemic to be any sort of new normal. I expect to get back to where we were before and continue to grow forward, but this is a stop along the way. We've increased business per day sequentially each month through the quarter. And since this started, again, from April 11, when we bottomed at 45% of normal, now we're 85% of normal, and that's the math around visits per day. It's going to take a little bit more time, but we're moving the ball.

Normally, in the summer, a year ago, we were averaging about 27 visits per day per clinic. Right now, we're somewhere between 22 and 23. So that's the 80% to 85% figure.

Okay. All right. Great. And then I wanted to ask if you could give us the same-store visit growth number and the same-store net rate in the quarter? And then if you have a sense for how elective versus nonelective patient mix is recovering in the quarter?

I don't have the same-store.

It's kind of irrelevant at this moment.

It's apples and oranges. I mean, obviously, our volume per clinic was down. Geez, I mean, for part of April, we were almost close to zero in a number of markets. So I don't have that. Elective surgeries have picked up. I mean...

And we don't measure, and I've explained this on a number of investor-related calls, it's a good question. We don't measure elective. What's elective for me may not be elective for you. There's not a bright line. And frankly, it's kind of historically been irrelevant to us whether it's a necessary surgery or an elective surgery, but surgeries have picked up in general. I think even though case volume in this pandemic has grown substantially from where it was in April, people's seeming willingness to go out and pursue things that are more normal has increased along the way as well. And so I expect that case volumes will begin to come under some control as states are trying to get their arms around this, states like Texas, where we are. And I think things will continue to normalize over some period of time.

Also, I think there's some misconception as to doctors doing elective surgeries. It's true that a number of hospitals have or are now, again, temporarily not doing elective surgeries in the hospital. But in most markets, surgery centers remained open and a lot of sports medicine surgeries are done on an outpatient basis most.

All right. Great. And then shifting quickly over to IIP. It looks like you've been running at around 90% of normal since May. But as some folks start to return to work in some areas and others were impacted by the resurgence in July, how should we be looking at that ramp towards pre-COVID and maybe back at 2020?

Yes. Don't know yet. I mean, honestly, I'd be making up a story that I'm not going to make up to tell you what the coming months are going to look like. What I can tell you is we're doing more with less than we were before. And as we get back to whatever it is, the final normal looks like, whether that's 100% or some factor greater or less than where we were before; I think we're going to be more profitable. We are more profitable right now and so I think we're in a good spot. We've got to focus on sales because a lot of these big events that we used to attend from a sales perspective are no longer happening. So the team is working hard on that. And I have great confidence that we'll continue to slowly make our way forward, but I can't predict what it's going to look like.

Your next question is from the line of indiscernible.

Just a couple for me. Just wanted to get a sense in terms of, obviously, driving volumes is dependent on the situation normalizing. But just curious from a competitive standpoint, given how difficult or challenging it has been for the industry, if you have seen maybe some potential benefit from competitors not being able to cope or survive in this environment?

Yes. We know one of our competitors - we have lots of competitors, different competitors in every market, ranges from hospital competitors to smaller mom-and-pop shops, to larger companies like ours, many of whom are piggybacked and highly levered. So I think at the peak and maybe still in some markets that are hot markets. I think hospitals are focused on job one, which is their staffing and their COVID response, probably not so focused on physical therapy right now. And I know that at the peak, there were hospitals and clinics in many of our markets that were closed, and we remained open in the vast majority of our facilities. And so I do think that will help us and has helped us recover a little bit more quickly and maybe a little bit more completely when this is all done because our folks have hung in there. And they came in and they made sacrifices. And so it's market by market, and every market is a little bit different, but I feel like we're in a good spot. Obviously, there are some regional differences. The northeast has been kind of the slowest area to come back and the central region has come back really strong. The west and many of the other parts of the country have made a really nice recovery. And so I think we'll see where we end up, but we've made good progress along the way.

Okay. No, that's great. And then as it relates to, obviously, things are still evolving, but you'd closed a number of clinics and have reopened some since. You've sold a few, etc. Just curious in terms of as you look at your network today, if you feel pretty comfortable in terms of where you are on that front as it relates to potentially shrinking it more?

Yes. Well, look, we acted quickly. I think we - in retrospect, we acted appropriately. Those - I want to make it clear. Those sold clinics, they weren't in addition to ones we had closed. They were our clinics that we had closed that we were able to sell and post a meaningful gain on. I think we'll - and I'm not talking about next month or the month after that, but year-in, year-out, we do have some paring that we do. And I think that paring has allowed us to stay focused on the partnerships and the facilities that bear the most fruit. And so we'll continue to have that. But yes, I think for - with respect to this pandemic, we got what we needed to get out of the road and out of the way, and we're able to monetize that even a little bit. And I think we're in reasonably good shape. But my guess is we'll have one or two here or there that come along. I would fully expect that's going to happen just as it did before.

Of the 30 clinics we temporarily closed, which we noted in the 8-K filing, most of those are open again now. I don't think there's a half a dozen that haven't reopened.

Your next question is from Brian Tanquilut.

This is Jack Slevin on for Brian. So CMS came out with their proposed physician fee schedule for 2021 earlier this week and included a 9% cut to physical therapy. Could you just talk through the impact that's going to have on the business in terms of rate? And then also what it might do in terms of opening up potential M&A opportunities further down the line?

Yes. Well, on the rate, it's math. I mean, it's 9% of what, Larry, a little under 30% of our business and so you guys can do the quick math on that. We have made changes, as Larry mentioned, in terms of our units, and we haven't settled yet for sure, but we have made some changes in our cost structure. And so - and we're fighting hard. In fact, the last few months and particularly the last few days, that rate came out much later than it normally does. We have a bill that we hope gets attached in this relief package. We have - as of last night, we had 14 sponsors and people willing to carry it to the speaker in order to get a two-year cut patch that would forestall any adjustments. And this adjustment is somewhat arbitrary and random and not in keeping with MedPAC's suggestion, so we're still fighting that fight. If it doesn't happen and it comes to pass, we'll deal with it, as we've dealt with rate adjustments in the past and other challenges like the one that we're currently in. So I don't see it having - we've known about it for a while. The runway has been long enough, and we're working our way through, obviously, a series of challenges. On the M&A front, any time there's a challenge in the industry, frankly, it creates opportunities. And smaller providers just aren't as well equipped to deal with these things sometimes and there are a lot of great people out there, a lot of great providers, and I think we'll continue to do well in that regard.

In 2013, there was a 10% Medicare rate cut, and that was a weird one because it was announced during the year. And so we had a - we have more time to prepare for this, if it's going to actually happen. We had a couple of down quarters in '13 and then within three to four quarters, we were back producing record earnings. So...

We'll deal with it.

Great. That's helpful. And then just one more follow-up on that front. They also included a provision to allow maintenance therapy for PTAs. Can you just comment on how that might impact your staffing mix or if it would change your kind of service delivery model or how you're staffing up each one of the units going forward?

Yes. We're not going to tilt our staffing as a result of what Medicare does arbitrarily each and every year. And I don't mean that to be particularly sharp, but it is what it is. Most of our care is provided by licensed physical therapists with some physical therapy assistant support mixed in there as well, but it won't - it doesn't change the outlook that we have for our staffing or our staffing mix.

At this time, there are no further questions.

Okay. Well, listen, thanks, everyone, for your time and attention. We appreciate your support and your interest. Stay safe, and please reach out if you have any additional questions. Thank you. Bye.

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating and ask that you now disconnect your lines.