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US Physical Therapy Inc. (NYSE:USPH)

Q2 2009 Earnings Call

August 6, 2009 11:00 am ET

Executives

Chris Reading - CEO

Jon Bates - VP and Controller

Larry McAfee - CFO

Glenn McDowell - COO

Analysts

Larry Solow - CJS Securities

David Bachman - Longbow Research

Rob Hawkins - Stifel Nicolaus

Mitra Ramgopal - Sidoti

Operator

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy second quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Chris Reading, Chief Executive Officer. Mr. Reading, you may begin your conference.

Chris Reading

Thanks. Good morning, everyone. I want to welcome you to U.S. Physical Therapy second quarter 2009 earnings call. With me here in Houston, are Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; and Jon Bates, our Vice President and Controller.

Before we begin discussing our results for the quarter and the year, we have a brief disclosure statement that we need to cover. Jon, would you please do the honors.

Jon Bates

No problem. This presentation contains forward-looking statements, which involve certain risk and uncertainties. And these forward-looking statements are based on the company’s current views and assumptions and the company’s actual results can vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Chris Reading

Thanks, Jon. Before I ask Larry to cover the financials in detail, I would like to review and explain our progress for the quarter as well as the year. We’ll look at what has improved as well as where our opportunities lie, providing a little color relating to the results for the quarter. Finally, I would like to discuss what we need to do to continue to grow our company in the future. For those of you who have been on the calls before, I’m going to do this a little bit differently than normal, so just kind of bear with me. I’m going to do this in kind of a story format more than anything.

About a year and half ago, really early I guess late in the first quarter of 2008, a friend who’s significant in this business, well known invited me to a CEO conference and while I wanted to see him and we actually had a business deal that we were working on together which did come to provision, I really didn’t want to go to this conference, and part of the reason was, the keynote speaker in this conference, who’s going to speak for several hours was an economist, and I wasn't sure that with everything that I had to do at that point in time, that I wanted to sit through that. In any event there was more compelling reason to see this gentleman than there was not to go, so I went. What I got out of that, after listening to this respected, well known economist, talk about their company's, their research institute's predictions for the coming years, not only the economy for this country, but around the world.

And he did it in such incredibly detailed, understandable, and compelling way, predicting much, with startling detail, much of what’s happened to us, beginning in August and September of last year and continuing through this year. I came back from that and we talked about it and we made some fairly material adjustments, anticipating if the things that were predicted come to fruition that we would have some challenges this year. In fact, we have had, and the industry has had, and the country has had. In an effort to try to get ahead of those, which we believed would be more difficulty in generating significant volume and potentially significantly tighter purse strings among our clientele and other things.

We kind of laid out a program that we began to work on early summer of last year that really had a fairly significant positive impact for us this year. And so, I want to cover those. In an effort to try to get a ahead of the curve, we set some internal goals, relative to a variety of different things. One of those being, trying to enhance the value proposition of what it is that we do for patient in our referral sources and in all of our customers.

So we set our talking first with our biggest partnerships and then subsequently with all of our partnerships about a series of programmatic improvements, service offerings, communication differences, emulating our most successful partnerships in the company, and making some material changes in how we do things.

One of the other things that we did was, we set out to materially increase our net rate per visit through contract enhancements, service offering and programmatic enhancements and expansions and we were able to do that as well. And in a period of what has turned out to be fairly significant economic stress, we’ve been able to see the fruit produced through these actions.

As the economy has played out, one of the things that this economist predicted was that, unemployment would get somewhere over the 10% range, and in anticipation of that late last year as that begin to play out we made some fairly significant changes in our sales and marketing program. I’m not go into exactly what those changes were, but safe to say that it has allowed us in a very cost efficient, cost effective way to enhance and expand our sales program. As recently as the later part of this most recent quarter, we added approximately 20 additional sales reps and in a very short period of time being able to track those reps specifically. They had a very significant impact on our business in June, the month following when the majority of these reps came on.

That impact has continued during the period, as many of you know, in the summer, when we typically slowdown and doctors and staff and patients alike go on vacation and turn their interests to other areas other than elective surgery and procedures. That’s had a very significant impact for us. We expect to continue to add a very solid number of reps through the remaining part of the year, particularly as unemployment continues to be where it is, so that we can continue to try and move market share disproportionately.

Now, many of you have asked in the past about Michigan. We have a significant concentration of facilities in Michigan. And as everyone knows, the economy in Michigan is probably in more shape than any other place in the country. Last year and 2008 was a record year for us in Michigan from an overall income standpoint. We have a significant number of long tenured partners in Michigan, kudos to them, they are doing unbelievable job.

We expected, although we didn’t talk about, that we might have a little bit of a difficult time in Michigan this year. I am very pleased to say that as a result of our partners’ efforts and a number of the changes and adaptations that we’ve made, that our Michigan facilities through the current period and continuing through the second quarter are ahead of where they were even last year, which was a very, very solid year for us.

So while there are still many, many challenges in Michigan and around the country, so far we’ve been able to stay a little bit ahead of those and adjust where we needed to adjust. We’ve been able to increase our net rate to over $103 per visit, where at this time last year was in the $97 and $98 range.

We’ve been able to continue to take out costs without impacting care. We’ve done that through a variety of very creative programs, focused on lease renegotiation, various vendor programs. We’ve been able to consolidate resources in other areas, and as a result, our costs, which Larry will go over in some detail, has begun to come down, and it has allowed us to expand our gross margins and our net operating margins fairly considerably.

Again, these changes for the quarter helped us to grow our operating income by nearly 2 million or 29.4%, compared to the 2008 quarter. Our operating income margin increased approximately 260 basis points to 16.4% for the quarter. Net income rose, approximately 27%, and diluted earnings per share increased from $0.24 to $0.31 in the comparable quarters.

We continue to see some challenge on the same-store side. Although we did see improvement in the second quarter, we are able to get same-store revenues into positive territory, with some continued slight pressure on visits offset by an average rate improvement of approximately 5%.

Cash flow continues to be very strong for the company, and this has allowed us to pay down additional debt for the quarter, while at the same time, buying in our own shares under the share repurchase program. Development for the year through June has produced nine de novo centers, including three for the quarter.

General M&A activity, which was considerably more quite earlier in the year, seems to be picking up. You could expect us to continue to add partners, partnerships through acquisition selectively as we have done in the past. The deals that we have done we’ve looked at very closely. They are in a variety of markets that has been hit to different extent in this economy and they have held up very, very well. We’ve been able to grow the majority of this partnerships organically in most cases add significant metric improvement along the way.

Shifting gears a bit, I will say that I think that we’ve got great opportunity as we look forward we have as you do continued questions, about what some of the healthcare impact, policy, some of the policy impact will have on us and that’s going to have to continue to play out. We’ve been able to make the necessary changes along the way in order to allow the company to continue in grow and thrive in another wise difficult market, and we expect to be able to continue to do that.

And with that, I would like to Larry to please cover the financials in more detail.

Larry McAfee

Thanks, Chris. I'll go over the second quarter results and then for the full six months year-to-date. In the second quarter, revenues increased 9.3%, 51.8 million due to a 3.5% increase in patient visits, coupled with an increase in our average net rate of $5.07, which is 5.2%. Our gross margin increased 310 basis points to 28.4%; clinic operating costs were 71.6% versus 74.7 a year earlier. Likewise clinic salaries related costs fell to 51% versus 52.4. And then rent, clinic supplies, contract labor and other costs were reduced as well to 18.8% from 20.6. The provision for doubtful accounts was pretty consistent between the two periods.

Corporate office costs were 12% of revenue for the 2009 quarter versus 11.5% a year earlier. This further describes the details there in the 10-Q, higher corporate costs was partially attributable to increased incentive comp accrual. Our operating income as Chris mentioned was up substantially increasing 29%. We're just under 2 million to 8.5 million. The operating income margin increased by 260 basis points to 16.4%.

Net income attributable to common shareholders rose by just under 27% to 3.6 million and diluted EPS was $0.31 versus 24. Same-store revenues increased slightly and our same-store visit decreased by 3.4%, which was less than the decline in the first quarter while the average net rate increased by 4.8. During the second quarter, we opened three to de novo clinics and closed two, so we ended the period with a total 366 clinics.

Now, for the first half results, for the six months ended June, 2009 net revenue increased by just under 8% to approximately $100 million due to a 2.7% increase in patient visits an increase in our average net rate of $4.33 or 4.4%. Our gross margin improved by couple of 100 basis points to 26.6% and clinic operating costs going to accelerate some related cost, rent, clinic supplies et cetera were all reduced as a percentage of revenue.

The provision for doubtful accounts was consistent between the two periods. Corporate office cost for the six months were 11.6% versus 11.3% year earlier. Operating income increased by 21.5% or 2.6 million to just under 15 million. The operating margin percentage of 15% was a 170 basis point improvement over 2008. For the six months net income attributable to common shareholders rose by 21.7% to 6.4 million. Our EPS increased to $0.54 from $0.44.

Same-store revenues were flat. The volume decline was offset by the revenue or rate increase. During the first half of 2009, the company, as Chris mentioned, has opened nine clinics and closed three for a net addition of six clinics year-to-date.

We've produced extremely strong cash flow in the first six months of 2009. Our adjusted EBITDA for the quarter was a record $7.9 million, a 20% improvement from the second quarter of last year. Our adjusted EBITDA for the first six months was $14.4 million. Our net debt year-to-date has been reduced by $1.7 million, despite nine new clinic openings and purchasing approximately $5.6 million in common stock. The company's day sales outstanding for accounts receivable have been reduced to 45 days, as of the end of June, as compared to 51 days at the end of 2008.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Larry Solow with CJS Securities.

Larry Solow - CJS Securities

Could you maybe discuss a little bit more, it seems like your efficiency rates likely improved based on the revenue rate per patient. Can you maybe discuss the units per visit, and the daily visits per therapist, how those are trending?

Chris Reading

Units per visit have continued to trend up modestly, not significantly, but modestly. We've also gotten traction with some contract renegotiations in a number of areas. At STAR the net rate per visit has gone up from about $88 up into the low to mid-90s since we did that acquisition. A lot of that had to do with rate negotiation coupled with units per visit change. Glenn, on the productivity side, you want to cover that?

Glenn McDowell

If you look at Q2 of this year, we came in at almost 11.4 visits per clinical FTE, compared to Q2 of 2008, when we were at 11.04. So we've had a nice increase in visit per FTEs.

Larry Solow - CJS Securities

On the rising revenue per patient, do you think, albeit at a slower pace, but do you still see more room for growth there?

Chris Reading

I don't know that I want to predict. I think that June, I will say for the quarter, was a very, very good month. I don't know that it will be dramatic, but I think we've got a little room. In terms of what things look like next year, I can't say yet.

Larry Solow - CJS Securities

I mean, said another way, do you think the increase is sustainable, or is it possible that it is a little bit of an aberration or it could even turn back modestly?

Chris Reading

I would look for it to be stable through the year.

Larry McAfee

It should be sustainable. The only wild card would be, if there is a change in Medicare pricing.

Larry Solow - CJS Securities

Which, obviously, wouldn't occur. Any potential change wouldn't be till 2010, right?

Larry McAfee

Correct.

Larry Solow - CJS Securities

The industry is scheduled to be on the physician fee schedule, I guess, a deduction in 2010?

Chris Reading

There's a statutory reduction on the books. There's been a lot of discussion about whether that's going to happen or not or to what extent, but that's correct.

Larry Solow - CJS Securities

That's been rolled back I know the last couple years, right? As far as now, what you see, where you stand today in terms of that and just general healthcare reform, are all the balls still up in the air or any thoughts on that?

Larry McAfee

I don't think anybody knows. I mean, we were scheduled for a rate reduction this year, we ended up with 0.5% increase. But unfortunate thing for us is the Medicare is only approximately 20% of our business.

Larry Solow - CJS Securities

All right.

Chris Reading

And then I don’t think anybody knows at this point Glair, honestly.

Larry Solow - CJS Securities

Correct. I agree 100%. And in terms of the corporate office expense. I mean I assume and you mention that there is you are accruing, some of you intend to see and I know the dollars earnings per share, I guess kind of would take it to a threshold where you've got 12.5% growth over three years, and I guess with another leg that kicks in on that $1 per share earnings. So are you accruing as if you assume you've reached some of the incentives and how does that kind of play itself out.

Chris Reading

We are not accruing; similarly we are going to make a $1 a share and that’s outside our guidance range.

Larry Solow - CJS Securities

Right.

Chris Reading

Some of the earning growth is part of the long-term incentive plan, looks like it will be in affect this year. So we include that, and so there isn’t really kind of a catch-up accrual that occurred in the second quarter.

Larry Solow - CJS Securities

Then just last question, I know the same-store visits are down, while our revenues are up a little bit because of your rate. But if I just look at average visits per clinic that you have today, that's actually still rising. Is that because I know like [Antonio] your clinic you acquired was a bigger, more volume clinic. Does that come in to play and perhaps some of your closers over the last couple of years, is that helping just average visits on a per clinic basis.

Larry McAfee

I don't think they are changed a while, really. They move around a little bit between quarters. San Antonio views only four locations that I don’t think that would have the ability to move on for.

Chris Reading

I think what you are seeing is a continued and then we have done it very selectively, paring out of our weak facilities and relative stability across the rest of our portfolio. It hasn’t gone dramatically up or down and either direction, it's been pretty stable.

Larry McAfee

I am just looking, we don’t have it for the quarter, I have it for the month. Year-to-date through June sort of for the six months, we averaged 20.6 visits per day per clinic, which is exactly equal to the same time last year. So the bottom line is we have more clinics than we did a year ago.

Larry Solow - CJS Securities

So even I guess 20.6 per clinic is still I guess pretty good in this environment. I mean we are not really loosing volume on a per clinic basis.

Chris Reading

That’s correct.

Larry Solow - CJS Securities

Then just last question then I will get back in the queue. I think you kind of discussed, but it looks pure sequentially in the last quarter, things actually were even improving as you exited June and how about if you have any color to add to how July kind of shaped up?

Larry McAfee

No. We don’t have any pruned up financials down in July, and I don’t know that we want to provide tremendous color as of in, things are steady. So, so far so good.

Larry McAfee

June, July, August are, we are going to December doldrums as Chris was talking about, but I think it's actually June, it's better than expected.

Operator

Our next question comes from David Bachman with Longbow Research.

David Bachman - Longbow Research

Very nice job this quarter. Just a housekeeping note on kind on following on from that last call. There were 64 working days in the quarter, is that correct?

Larry McAfee

Hang on. We've got it here. We have 64 compared with.

David Bachman - Longbow Research

I know you don’t want to give a lot of detail about what's happening on the sales and marketing front. But obviously you are doing an extremely good job there and it sounds like trying some new things and innovative things. I just wondered if there was any additional color that you can provide on that front, what you've been doing it's really been working.

Chris Reading

I probably can't. I don’t know that I want to. It's safe to say that we've added about 20 reps this last quarter. We hope to add that number maybe a little bit more between now and the end of the year. We've changed the model a little bit and it continues to look like it’s going to pay dividend in an otherwise though economy. So, that’s about all the color, I want to give you at this point in terms of detail.

David Bachman - Longbow Research

Fair enough, and then again just back on the healthcare reform. I know no one has a crystal ball there, but I'm sure that kind of just looking at the broad strokes fair of expanded coverage and so forth that at least there is a couple of the scenarios in your mind of how that impacts the business. I guess [the recent] general terms and just wondered if you have any sort of any further comments just on how expanded coverage overall would benefit or what changes could be there for your business?

Chris Reading

Well. I won't make any predictions, because I actually don’t know. I will say that anytime you have expanded coverage particularly in our business. I think that’s a good thing. I think in this business, because a lot of what we do see is [elective]. People with out coverage don’t come through our facilities. We see extraordinary low percentage of what you and I will consider to be innocent patients. So any time we have expanded the coverage I think that’s potentially the positive. How it gets paid for and where it comes from and how all comes together I don’t know at this point.

David Bachman - Longbow Research

Then I guess just maybe following on that, on both of those points. What is the opportunity to continue to just position in what you and your partners do as a relatively low cost and effective treatment modality, is that in this time of looking at ways of trimming healthcare cost. There is opportunities to be part of the solution versus part of the problem and being able to go to market with that?

Chris Reading

We’ve had some fairly significant dialog in Washington with some key people and I think they understand that our company and this sector in general is a low cost provider that produces some pretty significant dramatic outcomes in terms of restoring function to people whose other options are really much more expensive and draining to the system. So, I think that people understand that and I think in terms of us uniquely and individually as a provider, I think one of the things that we have proven to be able to do is to provide a pretty good home to a certain type of therapist that has relationships, that wants to help control his or her destiny, and benefit from the body of work that they have built up. So we're still attracting very good people. We're still attracting very good private practices. And I think we'll continue to do that and continue to differentiate ourselves in that regard.

I think we've proven in a really difficult economic market that we can continue to go forward. I think that's attractive for a variety of reasons. It's clear that it's a cheaper alternative than surgery or much more expensive diagnostic workups that may not impact function in the same way.

Operator

Our next question comes from Rob Hawkins with Stifel Nicolaus.

Rob Hawkins - Stifel Nicolaus

I wanted to get a little bit more into the margin and the cost side of things, or maybe not, depending on how the market played out. So you've got this 310 basis point improvement in the margin and some nice movement on some of the expense side. First of all, how much of it was same store or was the margin pretty much the same there?

Then how much of it is related to the price, or I should say the net revenue per visit, and then how much was it related to the operating costs?

Then finally, I couldn't tell how you answered this question. You may have already kind of addressed it. The non-controlling interest look like maybe some things went off balance sheet or a change there that might have pulled some things out of cost and moved them into the non-controlling interest line?

Larry McAfee

Well, there's nothing that went off balance sheet. We don't have anything off balance sheet.

Rob Hawkins - Stifel Nicolaus

When you closed some things, maybe that's went out. I just couldn't tell from the way it was shaking out.

Chris Reading

No. We only closed a couple centers, even in the period. There wasn't anything on the balance sheet side. Our minority interest as a percentage has grown a little bit, I mean, on a year-over-year basis. It's just because they're more profitable.

Larry McAfee

They're making more money.

Rob Hawkins - Stifel Nicolaus

That's the answer I was hoping to hear.

Larry McAfee

It's a win-win.

Chris Reading

There's absolutely no (smoking mayors), and there's nothing that isn't absolutely consistent from period to period from an accounting perspective.

Larry McAfee

And if you look at our cash, our cash is even better than our revenue, so there's nothing funny there whatsoever.

Rob Hawkins - Stifel Nicolaus

No, I didn't mean to put you on defensive. You've got a 200 basis point change in the clinic and supplies, and non-controlling went up. I thought, well, maybe that you moved something to more of a JV or a change in ownership structure. There are a couple little things that could have happened there.

Larry McAfee

Now, a lot of that is explained by the revenue increase.

Rob Hawkins - Stifel Nicolaus

First of all, on the same store, was there much difference, Larry?

Larry McAfee

No. You have to realize same store is going to be the vast majority of our business, because we haven't opened that many clinics in the last 12 months. So when you see our numbers, the same store is the vast majority of that number.

Rob Hawkins - Stifel Nicolaus

I wouldn't have thought they would have, but your comments were kind of like, hey, these last few ones we've been buying have really improved the metrics there a lot. So I thought well maybe you bought some and maybe did something to shift. Maybe the difference would have been 200 instead of 300 or something like that.

Chris Reading

I mean, keep in mind STAR in another month, it will be two years. They're on the same store numbers as well.

Larry McAfee

The two acquisitions we did in the last 12 months that were PT deals, and they are not that large. So they didn't have a significant effect on any individual line item.

Chris Reading

It's really a pretty homogenous effect across the whole company. It's been pretty consistent.

Rob Hawkins - Stifel Nicolaus

There's nothing wrong with saying you guys are amazing operators.

Chris Reading

We are just trying to be, we are not saying that. We are just trying to be (inaudible).

Rob Hawkins - Stifel Nicolaus

Well no, I mean it just looks really great. You guys managed business in a tough economy. Well then, okay let's talk then about that revenue piece. And I know you are answering a couple of questions related to this, and you said it’s sustainable on the revenue per average visit. But I guess two things kind of comes in mind, and one component of it is, the ability to get therapist to start thinking about the whole patient not just maybe what the complaint is and that leads to picking a stronger look and maybe doing more units per visit, If I am getting my terminology right?

Chris Reading

You are.

Rob Hawkins - Stifel Nicolaus

And then there is an opportunity rather than just sustainability because you guys have been very good about moving best practices across these clinics but you got a lot of clinics?

Chris Reading

Right.

Larry McAfee

Let's talk about units per visit. Let's get into some detail, because I don't want people to think that something whacky happened.

Rob Hawkins - Stifel Nicolaus

Well I mean firstly, whenever I bring it up with folks, the first thing you think is, that it's a fine substitute and it's not the way it works. I know, I have been on the side of it. There is a best way of doing things medically. So I would just like to hear more about that.

Larry McAfee

Let me think generically, I think and this goes back to our focus on value and then I will ask Glen to speak actually to the metrics. Generically we've had a very strong focus on improving customer service and enhancing value of the company this year.

And I think it’s resonated with our folks, and they understand that if you want to get somebody back and all those things that they want to be able to do, you have to treat the whole person not just that microscopic point of origin in whatever tissue's been affected, because it might have been affected a year ago and people have adapted and accommodated in, in what's been a negative way of that period.

So we are trying to make a difference for people, a significant difference in the symmetric impact to that. But it's been progressive and steady and consistent. Well it's not what I would call dramatic, and a few of these improvements both on the cost side, and the revenue side I think they are definitely sustainable, and it's been incremental. Glenn.

Glenn McDowell

I mean, I agree with Chris. We have focused a great deal from a clinical standpoint. And, what we are doing with patients especially the last half of their visits to focus on, an aggressive, progressive approach to moving patients along the clinical spectrums.

If you look at units compared to Q2 of 2008, we were 4.1 in Q2 of 2009, we are at 4.2, a tenth of a unit move for us. These are fairly significant impact, when you look at it on both the net revenue basis and what we are doing from a patient standpoint.

Larry McAfee

So, the two metrics that really, just besides the contract payor rate, the other two metrics that would drive these kind of margin enhancements, visits for therapists year-over-year increased from 11 to 11.4 and units per visit increased from 4.1 to 4.2. Those are dramatic percentage changes.

Chris Reading

And, then you have to the cost taken out and variables expenses ran leases and a variety of other things, and we did that in anticipation of a lot of the things that we are in the middle of right now and we got out so early enough that it had an impact this year.

Larry McAfee

And the other things is we've really stepped up our marketing. There is no questions that we've probably taken market share in this environment, unfortunately there's not a lot of macro data to prove that, but I think it’s a reasonable assumption. We take in significant market share. So, that combination has factors along with sustaining our average visits per day, per clinic is driven pretty dramatic increase to bottom liner.

Rob Hawkins - Stifel Nicolaus

I like two follow-ups on that if you don’t mind. The first one is, I guess maybe for Glen, on the opportunity side has this message as best practice has it worked its way through all the regions already or you're I don’t know and maybe inning six of nine innings getting there.

Glenn McDowell

We’ve gotten this message out across a broad spectrum and we continue to do some what we would call road shows where we are getting in front of people on a clinic by clinic regional basis, but there is still some room I believe for some growth on the unit side. I don’t know if that will be a significant as what we have seen, but I still think there is some opportunity there. On the visit for [FTG] side, again the focus is where we at. I think we still have some continued room in that area, although typically during the summer we see that drop off a little bit just because of vacations and holidays and things that are going on, but again what we are doing now is sustainable, but I think there is still some room for some growth.

Rob Hawkins - Stifel Nicolaus

Now on the market share piece you guys brought up, what’s going on with the doctors in this down turn and the guys who are trying to the primary care guys or the guys who are trying to put a therapist in their office. As this business turns down, are they going away? They are getting out of the business, or are they trenching, digging on the trenches and working harder for the patients?

Chris Reading

I don’t know, I can give you my anecdotal view. I think first of all I don’t see them going away in any water shed amount. I don’t see them necessarily increasing the proportionately in this environment because people have to replace income. I think therapist for most doctors are still hard to find and hard to keep and they don’t really understand the business as well. I think as they are permitted to they’ll continue to do this although I think there is just like diagnostics has come under scrutiny, I think there have been doctors and companies out there not ours but and not any of the good companies that you think about, but smaller regional companies that have been aggressive in trying to [recruit] those types of situations and may be have crossed the line and so I know for fact that the OIG is looking at the issue closer than ever.

Will it come to pass the things change I don’t know, but I haven’t really seen a big shift in either direction, either to doing more of this or away from it necessarily. I think what we've tried to do with doctors is we've tried to bring other through our RMG acquisition that we did a year ago. Other ancillary services to doctors in a creative way that have helped their business and in turn we've have got downstream referrals from it, and we've tried to approach it in a more of a partnering fashion and tried to keep physical therapy out of it for them because I think there are some other things that may be a more central to their business. So, we've really taken that approach to try to move market share, and so far I think in particularly with RMG deal it’s really helped us, it’s worked out and we will continue to look at creative ways to do that.

Larry McAfee

You need to remember that the physician-owned practices or what we call POPs are normally confined to multi-doctor orthopedic groups, and to the extent that we've changed our mix of business from five years ago to the 60% orthopedics to probably closer to 40% now. More and more of our referrals have come from general practitioners internal medicine and other types of non-specialized doctors and they are a huge number of referrals per month, they are very steady and they are normally not a threat to put a therapist off staff.

Operator

(Operator instructions.) Our next question comes from Mitra Ramgopal with Sidoti.

Mitra Ramgopal - Sidoti

First, I believe you mentioned you're expanding your sales force, bringing on about 20-odd and plan to do more by year end. If you can give us an idea of what the numbers of the sales force were, say, a year ago, because clearly, it seems like this investment has paid off very nicely for you.

Glenn McDowell

Compared to a year ago, if you look, even in Q1 of '09, we had 53 reps and 225 locations covered. Now, we've got 69 reps covering over 233 locations. Many of the additional reps we brought on have been in existing markets. If you look at the number of reps relative to 2008 second quarter, we're really around the same number of reps, except for the last 20 that we brought in the last quarter. So we're up about 20 or 30 reps from where we were a year ago. As Chris has said, we're hoping to add another 20 to 30 between now and year end.

Chris Reading

Mitra, what we're going to do in markets where we have a significant number of facilities is we're going to end up with multiple reps in a very focused effort, touching more doctors than we could have ever before, just to move market share.

Mitra Ramgopal - Sidoti

If I had to look at, again the margin improvement was tremendous, looking at salaries, rent, et cetera. Anything in particular that met the improvement?

Chris Reading

We are just very focused on all the expense items. I will say the one thing that we didn't do, that has been done in the industry, we didn't cut salaries. We didn't cut talent. We continued to invest in our people, and we continued to create opportunity. So it didn't come about at the expense of our most important people, who are our clinicians. It came about in other areas. We were able to do that across a broad continuum of things and the additive effect was material.

Mitra Ramgopal - Sidoti

I guess it's fair to assume in this environment, you're probably able to recruit at more attractive rates than, say, a year ago.

Larry McAfee

I don't know that salaries are lower. If you look at the number of fills we've had recent quarters, they've been higher as a percentage of openings.

Chris Reading

We're actually not paying sign-on bonuses or relocation expense or things like that, like we were before.

Larry McAfee

That was really more prominent even in 2007 than 2008.

Chris Reading

That's right. Honestly, I don't think salaries have come down any.

Glenn McDowell

They have not come down and there are still markets where it's very tough to find clinical staff. In many other markets, it's eased up, but it tends to be a rolling cycle now.

Larry McAfee

We will tell you that, we've been very stringent about new hires and that we look at it closely on a case-by-case basis before we add staff. We make sure that the demand's there. Again, the people have increased their productivity. The visits per FTE have increased slightly.

Chris Reading

I think we're seeing, in the industry, there's a very good home for good people. They know we're going to be stable and that gives us a little bit of an edge in the market when we want to hire good people. Good people bring business.

Mitra Ramgopal - Sidoti

Sure. I believe you did buy back some stock in the quarter. I don't know if you could share with us the average repurchase price.

Larry McAfee

Well, we initiated the program around mid-March. Through the end of the second quarter, we had bought 518,000 shares at an average price of $10.74, I think. So those shares were bought recently is that price is as high as $13.50.

Mitra Ramgopal - Sidoti

Coming back on the acquisition front, you have obviously done some transactions in the last few years. Is it fair to assume at least the more recent ones that everything is pretty much integrated and you are always looking for opportunities. I don’t know how prices compare again in this environment versus what you might have been seen in recent years?

Chris Reading

I don’t know about the pricing now, but obviously we haven't done anything this year yet. We are talking and looking…

Larry McAfee

I think it’s fair to say though in the sector that the multiples have come down.

Chris Reading

There is no doubt over the last couple of years. It was -- I think for the -- we're really turning the focus more on established larger operators. And when things were at the worst, people didn’t necessarily want to jump up. Particularly, people who were in good market positions. It seems that things are beginning to fall a little bit. I won't predict, when and if, and how many we get done, but we continue to be active and we'll continue to do deals.

Mitra Ramgopal - Sidoti

Right. And finally, again you know if you look at the first half in terms of the EPS run at $0.54 and given the guidance currently you were expecting throughout second half and again, is that really more due to this seasonality of the business versus anything else?

Chris Reading

Historically the second quarter is the strongest quarter seasonally. Summer slows down, there is pick up, once school starts in the fall, then you get into the holiday season and it slows down again. So, the fact that we expect the second half of the year to be slower than the first half, it's not because we are not doing well from a business perspective, it’s just the seasonality.

Larry McAfee

I think this is still some uncertainty about what’s going on in the economy between (travel) rates and other things. I won’t say we are trying to be conservative or trying to be right, but summer is a little bit unpredictable. So far I think it’s held up pretty well, and so we’ll keep our fingers crossed. But people are very focused on what they need to do. So we’ll see where we end up.

Operator

(Operator Instructions). At this time there are no further questions.

Chris Reading

Listen, I appreciate every bodies time, I know it’s a busy earning release time. If you have additional questions, Larry and I and Glen and the rest of the team are available throughout the day. And we’d be around next week. We appreciate your attention and your support. Thank you

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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Source: US Physical Therapy Inc. Q2 2009 Earnings Call Transcript
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