Thank you for joining us for the U.S. Physical Therapy Q3 2020 Earnings Conference Call. All participants are currently in a listen-only mode. I would like to turn the call over to Chris Reading, Chief Executive Officer. Please proceed.

Thanks, Natasha. Good morning and welcome everyone to US Physical Therapy's Third Quarter 2020 earnings call. With me this morning include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, our Chief Operating Officers; Jon Bates, our Vice President and Controller; and Rick Binstein, our General Counsel. Before we begin our discussion today, I just wanted to remind everyone this will be Larry's last official earnings call with us prior to him embarking on his long-scheduled retirement here very shortly. I've had the distinct pleasure of working alongside Larry for the past 17 years, and we've enjoyed a great run with this company. Although Larry will be metaphorically riding off into the sunset, we are not done yet with what we expect to achieve further. We publicly thank Larry for the significant contributions that he has made, and I want him to know that I expect him to catch a lot of big beautiful fish in the coming months and years and to not be a stranger. Next week, Carey Hendrickson will start his new role as our CFO, and we will begin working on the transition that we have planned for a long time now that we are back on terrific footing. So, before I begin to provide some color on the quarter and the year, I think we need to cover a brief disclosure. 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, I'd like to start with some perspectives. Let's just back up a little bit prior to the quarter and look back to June when we were making substantial improvements with our pandemic-affected volumes. The June volume had jumped materially from May to 21.8 visits per clinic per day that further progressed into this third quarter with July coming in at 24.4, 25.9 in August, and 27.1 in September for a full-quarter average of 25.8. We finished the quarter within about one visit per clinic per day from where we were at the same point in 2019, which is a huge recovery from where we started post-pandemic just a few months earlier. For the quarter, our net rate was $105.91, ahead of the same period in 2019. In the area of cost control, our team of partners, our ops team, and our support group in Houston have worked tirelessly together to effectively manage our costs through this difficult period. I want to take a minute to thank the many people, our people, who without complaint or blame very professionally worked with us to trim hours, which in many cases caused personal furloughs or significant salary reductions during this period. Your commitment and sacrifice have not gone unnoticed, and without it, we would not be in the very good shape that we are in today. Most sincerely, I want to tell you, thank you. For this third quarter, our operating costs as a percentage of revenue, excluding closure costs, were reduced by 460 basis points. Total salaries and wages in our combined business were similarly reduced by 410 basis points. In spite of the challenges this pandemic has produced, we were able to grow our gross profit this quarter by 11%, and our gross profit margin was 27.9%, an improvement of 460 basis points compared to the third quarter of 2019. Our Physical Therapy Gross margin improved to what feels like a high point as far back as I can remember, to 28%, which is a 410 basis point improvement over the prior year. In our injury prevention business, we also grew this quarter, with margins improving by 870 basis points, from 19.9% a year ago to 28.6%. For a complete view of financials in just a minute, I'll ask Larry to cover our financials in a little bit more detail. Prior to that, I do want to take a minute to recognize what a huge lift this has been for our entire team these past 7-8 months. Nothing has been normal and this has been a battle the whole way, and we are not through to the end of it yet. What we have gone through, though, has taught us a great deal about ourselves, our resiliency, and tenacity, and has given us the confidence that we can deal with whatever comes along at this point. We believe we will still find a way to grow through any of those challenges. I am supremely proud of our entire team at every position and level in the company, across the entire country. Right now, we're seeing community infection rates climb again. Our clinical services team, along with our compliance leadership, have worked tirelessly to ensure that our clinics have what they need to protect themselves and our patients as we care for those who need our services to work and to function. Until we return to fully normal, whatever version of normal we return to, I remain very confident that we have the right people and resources in place to get us to that point in the most efficient, safe, and effective way possible. Speaking of pushing towards normal, I'm pleased to convey that our development engine is again running and beginning to bear fruit. Earlier this quarter, we announced our first deal since the pandemic began, and we have more opportunities in the air right now with a good deal of positive activity that we expect will help us as we round the corner into the New Year here very shortly. That concludes my prepared remarks. Larry, a few words for us.

Thanks. Chris covered a lot of margin items. So, I'm just going to give some highlights rather than go line by line through the release. Earnings per share from Operating Results excluding relief funds were $0.85, the most profitable quarter in the company's history. The analyst consensus estimate for the quarter was $0.51. Thus, the company beat expectations by $0.34 or 67%. With regards to revenue in the third quarter of 2020, $108.9 million recorded topped the analysts' consensus estimate by $5.4 million. Operating income for the third quarter was $19.9 million and an increase of 18.5% compared to the third quarter a year ago. Operating income as a percentage of revenue increased by 400 basis points to 18.3% in the most recent period. By comparison, in the second quarter of 2020, operating income in the third quarter increased by $9.6 million or 94%. In terms of other financial measures, in the third quarter, adjusted EBITDA was $19.9 million versus $17 million a year ago. Excluding relief funds, adjusted EBITDA was $19.5 million. This is not in the release, but if you look at the balance sheet, debt has been reduced significantly this year. If you included Medicare advanced payments and deferred payroll taxes of $17.7 million, our third-party debt obligations have been reduced by $20.8 million or 41% from $51.1 million at year-end 2019 to $30.3 million at September 30 this year.

Okay. That concludes our prepared comments. Operator, if you would open the line for questions.

Your first question is from the line of Larry Solow with CJS.

Good morning, everyone. Larry, congratulations and best wishes for your future endeavors. I appreciate all your support over the past 12 years. I have a few questions regarding the impressive margin performance this quarter. I understand revenue trends are improving, possibly quicker than expected, but your EBITDA margin is above 18% this quarter, which is a couple hundred basis points better than any other quarter in the last decade. I'm trying to understand if this performance is sustainable and would appreciate any insights you can provide on that.

We haven't reached a steady state yet, Larry, and we're working through that. Most of the clinical staff is coming back, and we're very close to the daily visit numbers we had before, but we're aiming for growth and same-store increases. We've managed to keep costs down, thanks to the operations team and our partners who have been attentive to the situation. I hope we can maintain a good portion of what we've regained. During the quarter, we did see some cost increases as we brought staff back and filled positions, especially in Houston, where we've really pushed our team. I would suggest giving us another quarter to see how things settle. Volume has stabilized recently, with minor fluctuations. Our goal is to control costs as much as possible while providing the necessary service to both our patients and partners.

I know you didn't provide a same-store sale number last quarter. Could you share some information for this quarter to give us a rough idea? It seems like sales on a same-store basis were down, possibly in the single digits or some mid-single digits, or even less.

Honestly, we didn't generate it for the second and third quarter because it really doesn't mean a lot. Yes, they're down; I mean we've been focusing on trends, and it's been marching upwards, so I'm sure in the fourth quarter we will give that data again. But as I said, we didn't even generate it this quarter, it almost doesn't really mean anything.

What about visits? I know you mentioned visits improved to an average of 27 a day in September. Did you say it was down by one year-over-year, and was it up for the full quarter or just for September?

A month. That was for the month of September.

So it's still down a little bit. Okay, so just looking at volume, is it still down probably somewhere in the 5 percentish range, plus or minus to keep sort of...

That's about right.

Right, okay. Great, thank you, I appreciate it.

And in September this year, it was 27.2 visits per day per clinic; in September 2019, it was 28.2, so it was down 1 visit.

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

Hey, good morning, this is Jack Slevin on for Brian. Congrats on a great quarter, guys. I guess, right now, I just want to kind of project out a little further, get your thoughts on 2021 and how we should be thinking about that particularly as it relates to further M&A opportunities from some of the announcements you've made recently.

In terms of our capacity to do deals, the balance sheet is literally in the best place I've ever seen it in 17 years. We have over $100 million in unused availability under our credit line, and so I don't think there's anybody in this sector that is positioned better from a capital standpoint to do M&A.

Got it. I guess as a quick follow-up, any color on what valuations have been looking like recently in some of the discussions you've been having?

Yeah, it's too early to tell on the new stuff, I expect good valuations will be sub-peak, peaking late 2019. Not enough data yet to give you any worthwhile color on exactly how that's going to look as we go forward.

Got it, okay and one last one for me. You guys have talked about how there would be challenges getting maybe that last couple of points off of your pre-COVID levels back with some related to activities in schools and sports, could you just provide an update on what you're seeing on that front and maybe how it is different across geographies?

It is different across geographies. So we have some markets that are fully back and a little bit better than fully back; we have other markets that are still off somewhere between 5% and 10%; again, kind of following the pattern we had originally, with the Northeast being more greatly affected, the West being maybe in a little better shape, and some parts in the middle of the country and the south-central portion of the country also in pretty good shape. So it varies literally state by state, market by market; almost the aggregation gets us to within about 5% right now, and we're still hopeful we can move market share and get the rest of the way there.

Got it. That's it from me. Thanks guys.

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

Hey, Matt.

Hi, good morning. This is Dan Lawler on for Matt Larew. Thanks for taking my questions. One of the first, it looks like you sold your interest in one closed clinic in the 3rd quarter, so can you give us a sense for how many of your closed clinics you've reopened to date, and then maybe how we should be thinking about the recovery ramp in these reopened clinics?

I think we've reopened 30 clinics and permanently closed 40.

We've sold about 15 of those 40, and that is a top of my head number, but most of the reopenings have occurred months ago, and so they're all open and returning during the portfolio with our aggregate numbers, but they're returning toward normal like the other facilities.

Okay, great. Thank you. And then just a quick follow-up, do you expect maybe any additional clinic closures in the 4th quarter with the ongoing case surge?

I don't believe that the situation in the fourth quarter will necessarily relate to any specific case, as we have leases that are coming due and other factors to consider. I want to avoid the notion that because we've had more closures than usual, we won't experience any more in the future. We will still have closures from time to time when it makes sense, but I can't say yet if there will be any in the fourth quarter. We're not overly concerned about the current case situation; I dislike the rising virus numbers, but we are managing it effectively so far, and I don't anticipate any major announcements coming out.

We have 550 clinics open today. We might close a few because we close a few pretty much every quarter, but we're also opening new clinics again and have maintained a good pace, so I don't see the clinic count changing significantly other than for acquisitions.

And that'll take place.

Thank you. And then just lastly shifting over to the IIP segment. You noted that it's currently running slightly below pre-COVID levels compared to around 90% in July. So can you give us a sense for as employees are returning to work and maybe the case surge this summer, how that impacted recovery, and then how you're looking at a return to pre-COVID levels and margin performance in the fourth quarter?

IIP has performed quite well. We did not decline nearly as much as the PT business, and the recovery has been relatively flat during this time. Early on, a couple of our largest customers became busier and were able to move more staff into their facilities, which helped us during that initial phase. For the most part, things have returned to normal now, meaning those employees have been reassigned back to their original customers, and operations have stabilized. Our opportunity and challenge moving forward will be to secure new contracts while we navigate this period that is still not fully normal. Like in the PT business, we've achieved significant cost reductions, and I expect margins in that segment to revert closer to their typical levels. This is a growing company, and we need to bring on additional resources, particularly in technology infrastructure. I anticipate margins will return to where they were before, perhaps slightly better. In the PT business, however, I expect a larger margin gap because of our greater scale, which enables more efficiency on that front.

Your next question is from Mitra Ramgopal with Sidoti.

Yes, hi, good morning. Thanks for taking the questions for us. Congratulations on a great quarter. Just wanted to follow up a little on some of the benefits you're seeing as a result of COVID. Last time you had talked about a Telehealth platform as something you could really start taking advantage of, and I was wondering if some of the business is going to be transitioned there more on a permanent basis and kind of drive some efficiencies going forward for you.

Yes. So, Mitra, Telehealth has been important for us, particularly early in the pandemic, and it's going to continue to be an offering that is available to our patients. We do not have a perspective of where we want to transition current business to Telehealth, that's not something that we're interested in doing. What I mean by that is, I would rather see the patients in the clinic if they can come. Now, the reality is that with or without the pandemic, there are times and instances when patients can't get there and would normally cancel an appointment. For those times, Telehealth will become an important way to get a visit. For example, maybe somebody has kids stuck at school, and they can't make a time, but we can connect with them on a Telehealth basis. So it's going to be another service offering as we're piloting an in-home or at-work solution. We're getting ready to kick that off in the Houston market place, and so we'll see how that goes. We're trying to afford patients the most flexible opportunity; our preference is going to continue to be to serve people in the clinic, but when we can't, we'll have other venues and ways to do that.

Okay. That's great. I don't know if you talked about some of the cost coming back, obviously, especially, I would expect them, things like salaries, etc., but on the rent side, I noticed a significant reduction there relative to 1Q and even a year ago, and I was wondering if some of the benefits you're seeing there, if they are really more short term in nature or do you think you can sustain that going forward?

It's closed clinics.

Okay, that's changed.

And as a percentage, it is coming down because the clinics you closed are running at lower revenue levels. So their rent and utilities as a percentage of their revenue were higher.

Okay, okay. No, that's great, thanks. And then I was wondering if you have any update for us on the reimbursement front, obviously with a proposed cut for next year. I don't know if there's anything new on that front for you?

Yes, we do have a bill that has a good amount of support. We've formed a coalition across various specialties, including those that are doctor-based. We're receiving strong backing from the hospital association and similar groups. This bill would ensure no payment reductions for two years. However, with the upcoming election, we are likely in a holding pattern for at least another week until we see the election results and can assess if we can gain final traction before the year begins in a couple of months.

Okay. No, that's fair. And I think Chris, on the M&A front, you sounded a little more bullish in terms of maybe some opportunities, especially near term, etc. Just wondering if that is a result of maybe COVID having an impact on some of your competitors out there, and you're finding more opportunities than normal or anything else. Maybe just the due diligence you've been doing?

Yeah, I would say Larry's earlier comments should resonate with everybody. Just the fact that we are so under-leveraged and others potentially may not be in as good a shape, but we're different. We're a different solution for people; we are a place where people can come in and stay for the next decade and really invest in their company with a lot of resources. The people that we're attracting aren't afraid; they've done well through COVID. The people that we're having conversations with expect that they will see in their market some opportunities to pick up small providers, single site, maybe onesie, twosie kind of clinics. So we continue to attract those folks, and I don't think this is going to be a run from scenario. Although I have talked to plenty of people who say if this were to happen again, they would rather have a big partner to carry some of the load. I think it will move people directionally toward considering a different solution or partner, and I think we're the company that people look to when they think about partnership, so I think we'll have plenty of opportunities.

Okay. Now it sounds good, and again, that's it from me on questions. But again, Larry, I'd like to wish you all the best in retirement. It has been a great 15 plus years working with you, and you've done a tremendous job, you and Chris, in terms of both leading the company and growing it. So, wishing you all the best again.

Thank you.

Thanks, Mitra.

And your next question is from the line of Mike Petusky with Barrington Research.

Good morning.

Good morning.

Good morning, guys. First of all let me join everybody else, Larry, thank you so much. I met you guys first in 2003 down in Houston, and it's been a great ride, Larry. You're truly one of the classiest guys I've ever met, so thank you for that.

Thanks.

I guess just sort of circling back in terms of the proposed Medicare cut. Chris, do you have any view that either just sort of the prolonged difficulties with COVID and particularly the elevation of infections now, I mean does any of that make it more likely that you guys may get some relief as an industry or you know either a delayed implementation or gradual implementation? I mean do you feel like any of that matters or not really?

I believe it does matter. Everyone we've spoken to who is aware of this significant reduction issue, including those in Congress, has not expressed approval or understanding of why this cut is being considered. Instead, they have reacted by saying it is unreasonable and shouldn't be taking place. First, we offer a low-cost solution that helps to avoid much more expensive care. Second, we have remained operational throughout a major pandemic to help get people back to work and support the economy. Fortunately, our representatives in Congress recognize this. It’s a matter of taking the time to gather resources now, and hopefully, once the election is over, we can make this happen by the end of the year.

Neither side is focused on a balanced budget, and in the midst of a recession, do you want to do a rate cut that will force you to lay off people?

Yes, it's in the swings that have occurred with CMS minus nine to plus fourteen and fifteen in any given year. It just doesn't make operational or logistical, or even fiscal sense to swing that high and that low. There's got to be a rationalization of that at some point in time. I just can't absorb that year in and year out.

Got you, okay, great. I was disconnected from the call for five minutes, so I may have missed some information. Apologies if this has already been addressed. If it's detailed in the transcript, I can read it there, but could you share your thoughts on the sustainability of the 400 basis point gross margin improvement? I would appreciate any insights on how sustainable that might be and what percentage you believe could be sustained over time. Thanks.

Mike, look at the transcript that Chris spoke to both PT margins and the industrial injury prevention. After this call, if you want to talk about some more, you're welcome to phone me.

Yes, Mike, you can give one of us a call. We can catch up.

Your next question is from the line of Richard Sokol with Legacy Capital.

Hey, guys. Thank you, and a great quarter. I hate to beat a dead horse, but just want to go back to the Medicare cuts. I just want to know if the law is not changed between now and year-end, any way you can quantify for us what that would do to revenues and earnings? And my second question is, is it just Medicare or are your commercial insurance policies also tied to the Medicare reimbursement rate, so they would be affected as well?

So the easy question first. Most of our commercial insurances are not tied to a percent of Medicare. They're negotiated separately and individually, some not tied on that front.

On the revenue and earnings, we withdrew guidance. We wouldn't normally give guidance for next year until we release earnings in the first quarter, which would be March. I can tell you we're doing the budgets with and without the cut. Obviously, your staffing would be different with the cut, and you do other things to mitigate its impact, but I mean, it would be purely speculative now. Again, you don't know what's going to happen with patient volumes related to COVID, so I think it's too early to tell you what next year is going to look like.

I think we do have a good chance of getting this back. I'm still optimistic. I'm also practically speaking, we've managed the business in a way this year that's gotten us some margin expansion and gotten us to a more efficient place, and that will help to offset some of the reduction if it does in fact come. So we'll continue to do what we can to look for opportunities, maybe leasing rate opportunities and other things as the markets are a little disconnected right now. But as Larry said, I think it's a little too early yet for us to begin to speculate.

I think it was in 2013, was that when we had the 10% Medicare rate cut. What year was it, do you remember Chris?

It was '13 or '14.

In 2013, there was an unexpected 10% rate cut announced in January, and it took us a few quarters to recover from that. However, by the fourth quarter, and I believe the third quarter as well, we were showing year-over-year growth again. This isn’t the first instance of facing challenges like this. While we hope it won't happen again, if it does, the company has successfully managed similar situations in the past.

Okay. Thank you.

At this time, there are no further questions.

Okay. Well, listen, thank you everybody for your time and attention today. If you have additional questions, please feel free to reach out to Larry or me. We hope you have a great day. Stay safe. Thank you. Bye now.

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