US Physical Therapy Inc (USPH) 2003 Q3 法說會逐字稿

Good morning and welcome to the US Physical Therapy quarterly earnings release conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time it is my pleasure to turn the floor over to your host Mr. Roy Spradlin, Chief Executive Officer. Sir you may begin.

Thank you. We are pleased to have you in attendance of our third quarter results. Before we get started I'll like to turn the call over to David Richardson our controller to read the opening statement.

Thank you Roy. This conference call contains forward-looking statements also using words such as believes, expects, intends, plans, appear, should, and similar words which involve numerous risks and uncertainties. Included among such statements are those relating to opening of new clinics, availability of personnel and reimbursement environment. The forward-looking statements are based on the Company's current views and assumptions and the Company's actual results could differ materially from those anticipated in such and are not limited to general economic, business, and regulatory conditions, competition, federal and state regulations, availability, terms, and use of capital, availability of skilled physical therapists to become partners of the company and weather. Please see the Company's filings with the Securities and Exchange Commission for more information on these factors. Management undertakes no obligation to update any forward-looking statement, whether as to the results, those actual results, changes in assumptions, new information, future events, or otherwise. I will now turn the call back to Roy.

Thank you David. As U.S. Physical Therapy continues to operate the facilities that we have under partnership, we believe that our operating model has been successful for a dozen years and is not broken at all. Quite to the contrary we continue to produce excellent cash flow and high returns on equity. We've evaluated the need for increase visibility in eventual locations and initiated a number of initiatives in these particular areas. Most prominently would be the full time dedicated commitment of the sales force in the Houston, Kansas City, Austin, and presently recruiting in the Chicago market.

Our partners in association with the sales force are increasing our calls on physicians, case managers, industries and other therapists and are reestablishing relationships with past patients. Chris Reading our new COO and I will be spending a great deal of our time and continue to increase marketing efforts with our partners in association to develop them with managers and business developers in this particular market and looking for opportunities that will drive US Physical Therapy to the next level. The company's gross strategy into growth through new partners satellites back selling in existing markets that we already in so we have higher level of market presence and dominance and allows us to be able to cater to the positions that are referring to us also filling the needs of the particular markets they are in, not only from the industrial but also from the payers perspective. And also identifying new companies to our markets where we'll put in initiatives of putting in four or five stores as we have in the Kansas City market.

We've opened three stores already and we'll open two more by the end of the year. Hiring a sales person in the market to drive it and coordinating and blending the sales person with the therapist with the positions to maintain the relationships in those particular markets. This goes back to the basic fundamentals of how the company was established in the beginning, and that is having the relationships with the positions in the market and identifying the means in order to service the market so that we have a strong hold and at the same time identifying new opportunities. So, we come back and have a greater presence in these particular markets.

By having the right therapists and creating incentives and bonus and profit sharing, we continue to execute a model that has proven itself out year-over-year for a number of years. Right now, we are seeing no indication of reduction in the interest. And in fact other therapists that were opened this year at the 47 locations, 19% of these come from Health stock, 15% of them come from hospitals, and another 6% from Select Medical, and another 11% from private practice, and the remainders from other entities. Right now, we presently have over 80 leads going in to next year, the leads of 25% are coming from health staff, another 23% from the hospitals, 15% are from Select Medical, another 15% form private practices, and the remainder of them are from other entities. We're also looking at approximately 19% growth and the lease that we have for next year coming from satellites that we've identified and as we talked earlier about doing back fills in those particular markets.

We continue to finance all of our growth with internal cash, we planned on opening of the 47 new facilities in 2003, 17 will be open in the third quarter of ranks to a total for the year at 40. We presently have 235 facilities in 35 states. Another five or eight facilities we opened in the latter part of the fourth quarter. That will bring us to the 47 plus total that we are anticipating for the 2003.

Our board has adopted a policy as to spending giving quarterly guidance, the dynamics of our business are such that short-term predictability is difficult to forecast. We continue to have a strong net rate, we continue to have a very strong balance sheet. And in fact, we have the highest cash in history of our company.

We will also be taking a close look at our cost structure, now that Larry is on board as our new CFO. We in the minutes of our 2004 budgeting process, and we'll closely examine our cost structure both at corporate and in the field. We have a new purchasing initiative about to get under way, whereby we will standardize purchase equipments and supplies and reduce our number of vendors, which will enable us to leverage our purchasing power.

At this time, I would like to turn the conference call over to Larry McAFee our CFO.

Thank you Roy. I am here to announce some of the financial highlights from the quarter and pre year-to-date. Revenues in the third quarter were $26.8m, an increase of 13% from the same quarter a year ago as more fully described in the press release, most of that increase came from Clinics opened in 2002 and 2003. Our operating margin pre corporate expense continues to remain strong, it was $8,300,000 for the quarter or 30.8%. Net income was $1.9m. And earnings per share fully diluted were $0.15 as compared to $0.16 a year earlier.

I'd like to talk in a little detail about some of the costs that impacted us during the quarter especially corporate costs. We had some unusual charges during the period, those include recruiting and severance fees with the total just over 200,000 pre-tax.

We also had increases in our outside accounting and legal expenses first increased cost relating to DNO insurance premiums. Those cost us another 200,000. So, these unusual one-time items were just over 400,000 offsetting that was the fact that we were able to adjust our bad debt allowance downward that adjustment was about 390,000 pre-tax. The reason we are able to do that is through an aggressive collection effort we have been able to get our days outstanding down year-over-year from 72 to 67 days, also part of the increased cost we are incurring respectively stepped up our billing and collection efforts and as you can see through the reduced days that's paying off.

Our cash balance at the end of the period as Roy mentioned is at an all-time high right at 14.7m year-over-year that's a 64% increase. Our return on equity and EBITDA remained excellent. EBITDA for the quarter was just over $4m and our return on equity was 18.7% for the quarter and is over 19% year-to-date. As Roy mentioned, our net revenue rate continue to rise and was up about 1% for the period to $93.14. Roy mentioned we are up to now a 235 clinics and one other things that hurt us during the period was our average visits per clinic of lot of which is attributable to all the new facilities we have opened this year meaning that your fixed cost is spread over a lower base. Average visits per clinic were 19.6 in the third quarter versus 21.7 a year ago and down slightly even from the second quarter of this year we had averaged 20.7.

Thank you. In closing, US Physical Therapy has positioned for the future in anticipation for the economic environment to return to normal. At this time we will open up for Q&A and please only ask one question per queue.

Thank you. The floor is now open for questions. If you have a question, please press the number one followed by four on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in order in which they are received. We do ask that while you post your question that you pick up your handset to provide the best sound quality. Please hold, as we poll for questions.

Thank you. Our first question is coming from Jackie Vorderman of [Inaudible]. Your line is live.

Hi, good morning Roy, good morning, Larry. I had a question about your pay resources for the quarter. I am wondering if you could provide a breakdown and I am wondering if there is slight increase in revenue per visit in the quarter is attributable to any particular source? And if you could comment on trends going forward in your payer mix and also just comment on the mid 1590 cap in Medicare and how you are handling that? Thank you.

Jackie, it relates to the revenue mix for the quarter. Private payers represented 27.5%; Managed Care 30.7%; Workers' Comp 16.9%; Medicare/Medicaid 20.2%, Personal Injury 3.6% and Self-Pay 1.1%. That's not a material change in mix as compared to prior periods.

And we are not seeing any specific payer that's giving us - the rate increase is just an overall efficiency of the different payers and also they focused on the specific markets that we are going into as we are opening up new stores, because we are getting a higher net reimbursement in those particular markets, it is allowing us to experience a higher net overall.

The trends in payers, we are really not seeing any specific change, we are focusing in on the higher end payer mixes by particular look out, they will differ, some will be a from a work comps, some will be from private insurance, some will be from private pay. So, there is a number of things or dynamics if you look at on, specifically get into that arena.

Concerning the 1590 cap right now. We are still going forward with the assumption that the 1590 cap will be in place next year we have heard rumblings that there is a possibility that the more time will place for 2004 but we are running the company and looking to budgeting under the assumption that the cap will be in place. The cap went into place at September 1 of this year and it is going along as we had anticipated about the experience of the number of people who will hit the 1590 as we are in this four-month period. You only have a short amount of time, so you will have a small percentage of -- we'll hit it, but for the most part we won't have that many individuals who hit it. As of December 31 and then we'll all start all over again if the cap remains in place at 1590 caps though we were seeing a patient this year, and we would get to December 31, the cap will start all over again January 1, we should continue to see the same patient.

Thank you.

Thank you. Our next question is coming Ryan Kilstein of Marathon Partners, your line is live.

Hey, guys. Quick question, you alluded in the press release to an increase in mature clinics from revenue and visits and you attributed that to the clinics that were opened from '99 and later offsetting the mature clinics I guess that are older than that? Is there going to be increased scrutiny on the mature clinics to potentially close under performing clinics or maybe just swap up the therapists that is currently operating those clinics?

That is true. We are analyzing each of the facilities to see what they're performances is and see if there is an opportunity in that specific market. If there is a opportunity in the market and we can't get the -- we don't foresee the management in those facilities taking it to where it needs to be then we will definitely switch out the individual. Right now we have the majority of, all of our partnerships are on annual renewal agreements.

So, that would just mean that you go in to areas where the clinics already operating and seek out therapists through the same kind of due diligence from recruiting efforts?

That correct. In fact we done in a number of locations and I would say a high percentage of the time we are very successful in turning the facility around over a period of time. We do a take dip when we do this, switch off but over a twelve-month period we start to see the turn around when we have the right candidate in place.

Okay.

The facilities that are closing or could potential close we look at that, as part of the budgeting process there is only a couple we are talking about at this point. So, that's not expected to be significant and as Roy mentioned in certain markets we are supplementing the Director's with the dedicated sales people.

Got you. Thanks.

Thank you. Our next question is coming from Mitra Ramgopal of Sidoti. Your line is live.

Yes. Hi, good morning guys. I don't know if you can give us sense going forward what we should expect from the bad debt line? And also may be if you can comment in terms the recruiting you are getting from Health South, Select Medical etcetera what do you think is attracting you to potential new therapists?

While I speak the bad debt and then Roy can handle the recruiting efforts. One of the things I did when I got in here frankly was to make sure that there weren't any continuecies or other liabilities out there and in fact there were none. The balance sheet was extremely clean and as we looked at our actual experience in terms of collections it was better than the bad debt allowance reflected such that we were able to reduce the accrual slightly and also bring the allowance down a couple of hundred thousand dollars. The other thing that's important is that the company has stepped it's collection efforts and more people are dedicated to billing and collection and frankly we've been more aggressive in writing stuff off. It doesn't really do you good, any good to keep a big bad debt around that you never torch the things that really bad off against it. But in fact the last 12 months, we've charged off much more in that period than we had in any other preceding 12-month period in the company's history. So, I am very comfortable with the bad debt allowance, I think it is more than adequate. Historically the company reserving with a more than a half to 2% of bad debt, with this increased focus on collections it probably will not be that high on a go forward basis. Though I can't give you any exact percentage, but frankly that depends on experience.

In regards to the candidates that we are experiencing coming over from the different entities. What are the things, having Chris Reading, who is coming from to us from Health South and we've also hired another VP of Ops from Health South. They have relationships and they had a - the respect of their peers and the people that reported to them within their structure so this did give us a lot of credibility in helping us from that standpoint. But even prior to their identification of coming to us because of the things that have gone on both within Health South and the other competitors, they, people are looking for other opportunities and are looking for opportunities where they can be compensated and rewarded indirectly for the efforts that they are putting in these facilities and at the same time it gives them a feeling of independence and that they have input into how the facilities are run without having to go through a huge bureaucratic system.

Thanks.

Thank you. Once again that's one followed by four for any questions at this time. Thank you, our next question is coming from Derek Dobacky of RN Wood Capital Management. Your line is live.

Thank you. Good morning. How long does it take for a new clinic to mature and at maturity -- what's your targeted operating margins for a clinic?

Usually takes three years for the facility to totally mature that's where at the what point we started looking at it as than from a budgetary standpoint of more just a flat line. We do have a small increase, but when you get to that it is like a McDonald's you get to the point where only so many people that are come to that store and down the road they put another one in. The other thing is as physician's are coming and going and things dynamics are changing and markets you are replacing old business that departs with new business though you are in a cost and dynamics from that standpoint. The margins that we are looking at are usually running in excess of 20%. You have a harder number?

I mean if you talk about pre corporate our operating margin this last period it was 30.8%, historically a mature clinic would do at least that well or better pre corporate.

Okay. And then of that I could hear first 235 or 239 clinics that you currently have, what kind of guestimate percentage are `mature`?

It's 235 and we opened and we will have a net of we will open 47 facilities this year and I would say that I am just guessing here on the total that are mature because over the last year, last year we opened 40 and than we opened 47 this year, so we are up to 40 now, so there is 80, and in the year before that we were 30 clinics, so a 110. So I would say a 100, 115 -- 125 of the facilities are mature.

Okay. So, what a room for operating margin improvement, once these things mature. The use of cash of I mean granted its not a lot of mean a little bit over a buck a share. What's your plan intend there? Is that more for kind of current core business of cash needed to open up clinics and do the sales and marketing and issues that you have in mind or more is it financial, be it share buyback and or dividend?

Well the cash flow, I think our cash flow per share is totally becoming huge has carried more enough cash internally fund development and new facility, whether they are normal partnerships or company stores, and then we will continue to do that also from time-to-time we have had sufficient cash to step into the market for buyback shares. So, at this point everything remains self-funding. We really haven't had a need to go out side the company for capital.

So, I mean is it - I would presume as clinics mature even in “these tougher times”, you are still generating good cash flow from operations. So, I would presume that the cash flow balance will increase, increase. I am trying to get a sense of what - are you going to enhance buybacks, make something and again I don't know if you have a formal authorization to maybe increase that potential look at dividend, or do something that I don't think people would want kind of go outside of your core business from an M&A perspective, given I know you may just renew back on so much more on the M&A side?

Well, I mean the company continues to focus on what's bother to this point, which is growing it's own stores. We do share buybacks from time-to-time; we do have an authorization in place that was affirmed earlier this year. We remain opportunistic, but basically the company is going to stick to its needing.

Okay, understood it, and then just a follow up to Jackie's question about the 15-90 cap. Assuming that's in place January 1, what sort of impact in say there's no more authoriitorium as to next year. What's the potential impact dollars would sense to that if that's - I am trying to get a sense of how many people actually hit that 1590 per year?

The thing that -- as we have put in our queue was the fact and that we would have the potential for I think it was about a $3m, if worse case, we do nothing in 2004, I think was part of it we had estimated is an impact.

Is that a topline or bottom line?

Topline.

Okay, $3m topline revenue worse case, okay.

Yeah, worse and like I say that's we are doing nothing and no [Inaudible] or anything to it.

Yes, and that's if there's no more thorium. If you look at our average patient revenue per visit of $92.

Yes.

And then Roy what's our average business per patient typically?

It's about 11. So, if you run the math you are taking about $1000 versus the cap. So, somebody hitting the cap is absolutely the exception, not the norm.

Okay, great, thanks, guys.

Thank you.

Thank you. Our next question is coming from Mike Morgan of the Small Capital Report.

Hi, good morning, a couple of questions, first of all I believe, it may be mentioned that after you complete your budgeting process you may give guidance for 2004, is that correct?

No, we haven't said that.

Is that your intention or -- I am sorry can't hear you?

No.

No, okay. Next question on the deterioration in the average visits per clinic, which is 10% year-over-year and minus 5% quarter-to-quarter. Can you give us a sense of what it takes for that deterioration to stop in terms just assuming we have a modest recovery in employment. What it takes inside the company?

Well, the thing about it is this way. If the economy starts - as we are indicating are hearing right now that the economy may be stabilizing, then people are returning back to work, and then with people returning back to work again go back into increased injuries. People have availability of insurance. And the ability to go and get some of the elective things done. And most of the hospitals even like Tenet reported that it was a fact that they weren't having, you know, the number of people admitted and that is a lot of the times is the those electives as components. If you have a trauma, or if we have a oncology or cardiac or something, nothing can you put that off, you have to deal with it at the time. So if you have a slight knee sprain or you need if any of your knee scoped, or your shoulder scoped, sometimes you live with the pain for a period of time until you get, you have the economics in order to afford the elective components.

I am not sure, Mike where you got those percentages, that you were telling about 10% and 5%

Well, I believe we gave the average visits per clinic were 19/ 6 versus 21/7 last year, which is about a 10% decline. And then it was 20.7 in the second quarter, which is about a 5% decline in quarter-over-quarter.

Well it's not just our old clinic you had a number of clinics opened during the period, I think we had about 17 for the quarter, obviously there are not at a full ramp rate on day one, that's going to bring your average down. We did see some decline in some of the older clinics, but it wasn't anywhere near 10%, and in fact if you look at clinics we have the same-store figures, which means, they have been opened at least a year and those are actually up. So, I don't to want to throw around a number like 10% as the change in old clinic business, that's not what we incurred.

Okay.

Thank you once again that's one followed by four for any questions at this time. Thank you. Our next question is coming from Mario Okabelle of Madison Partners. Your line is live.

Yeah, hi. Just wondering, could you tell us a little bit of what you're hearing from your feet on the street on the material side, you have seen some declines any observations anything they say that you seen or heard consistently. I will be interested in any detail.

With what we are seeing a little bit is, we are seeing copays being increased by employer taking in on different insurance plans, so maybe instead of having of $10 co-pay maybe you got a $15 or $20 co-pay. We are also seeing where physicians are employed by hospitals, that we are seeing means more communicative with the physicians that they need to refer back the main shift. And then we are also seeing a slow down in orthopedics offices and which is one reason why a lot of the sales initiatives are not only just to maintain the relationships with larger orthopedists. But also to go after those physicians who may only have maybe one referral a month or two referrals a month, rather than just looking for the big hits, coming in from the orthopedist or the physiatrist, rheumonologist or you know kind of occupational management physicians.

Gentlemen I am sure there are no further questions at this time.

Alright, I want to thank everyone for joining us today on the third quarter call, as you can see we are very enthusiastic about the company and we definitely feel the model is proving up and will continue to be a very strong and stable go forward model that we will continue with. I want to thank everyone for attending today.

Thank you, that does conclude this morning's teleconference. You may disconnect your lines and have a wonderful day.