US Physical Therapy Inc (USPH) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the U.S. Physical Therapy fourth-quarter 2003 year-end results conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to Mr. Roy Spradlin, Chairman and Chief Executive Officer.

Thank you. Good morning, everyone. Thank you for joining us for the fourth-quarter, year-end 2003 results. At this time, we would like to take a couple minutes and turn the floor over to David Richardson, our Controller, in order to read an opening statement.

Thanks, Roy. This conference call contains forward-looking statements, often using words such as believes, expects, intends, plans, appear, should, and similar words, which involve numerous risks and uncertainty. Included among such statement are those related to openings 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 forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but 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 a result of actual results, changes in assumptions, new information, future events, or otherwise. I will turn the call back over to Roy now.

Thank you, David. U.S. Physical Therapy operating model continues to be very successful. It continues to produce excellent cash flow and high returns on equity. As management, we have taken operational objectives of driving increased visits. We are impacting the partners' desire, willingness and enthusiasm and ability to drive new business through individual consultations and working with them on a market location. We are improving the schedule, employee utilization rates. We're decreasing cancellation and no-show rate. We are significantly improving our staff volume efficiency, staffing the reductions to reduce cost per visit in the process, target reductions in payroll, both in full-time and part-time employees, as well as PRNs. We are improving contract negotiations and we are expanding services that we are offering with each of our facilities.

To achieve the increased visibility in each of our individual patients, we have done a number of initiatives. One, Chris Reading, our new COO, has been spending a great deal of time increasing marketing efforts with our partners, in association with them, as managers and business developers. The impact initially shows positive returns with the increase in visits for February over January of 2004. Full-time dedicated sales force to generate referrals in selected markets has (indiscernible) some initial positive results. Since their arrival in Austin, we have increased 15 percent on a per-day basis on the number of visits. In Houston, we have increased 28 percent on per-day on our volume. In Kansas City we have increased 35 percent since the arrival of the sales people in that particular market.

The partners, the directors, in association with the sales force, have increased their calls on other relationships. Along those lines, we have signed a contract with a national company to provide testing for their injured workers prior to employment, and after injuries before returning back to work. The Company's growth strategy through new partners, satellites -- that is backfilling in markets we are already in, and the identification of company store markets will continue to position us for the future. By having the right therapists, by providing incentives, by bonus and profit-sharing with these individuals, we are seeing no indication of any reduction of interest in our facilities or our model from the physical therapists. In fact, of the 48 clinics that we opened in 2003, 19 percent of them came from Health South, 15 percent came from hospitals, 6 percent came from Select Medical, 11 percent came from private practice, 2 percent came from physician-owned practices, 4 percent came from Benchmark, and 43 percent of them are satellites of existing partnerships that we have. In 2004 right now we have 75 leads. 15 percent of those are coming from Health South, 33 percent those are coming from hospitals, 9 percent are coming from Select Medical, 13 percent are coming from private practices, 3 percent coming from physician-owned practices, 8 percent are coming from Benchmark, and another 19 percent (indiscernible) are satellites.

We plan on opening 20 facilities over the next quarter, too, that we have already identified, and 10 percent of those are from Health South, 20 percent are from hospitals, 15 percent are from Select Medical, and 55 percent of those are satellites off existing stores. We continue to finance all growth internally. In the fourth quarter, we opened 8 new facilities, bringing the total opening of 48 for the year, netting 40, due to the fact that we closed 8 facilities throughout the year. Of those, we own 71 of those facilities wholly. 162 of those facilities were opened prior to 2001.

Management, in consultation with the Board, has decided not to give earnings guidance at this time, however. Our net rate continues to be very strong. We have a very strong balance sheet, no debt and the highest cash in the history of the Company. At this time, I would like to turn the conference call over to the Larry McAfee, CFO.

Thank you, Roy. On January 20th, the Company announced that based on our preliminary internal financials, we expected to report 10 to 12 cents in earnings per share for the fourth quarter and 59 to 61 cents in EPS for the year. The final figures released today are at the upper end of that range. First, I would like to review fourth quarter and then full-year results.

In the fourth quarter, net revenues rose 8.4 percent to 26.7 million from 24.6 million in the fourth quarter of 2002. This was due to an 8 percent increase in patient visits to 280,000 from 259,000, combined with a 1 percent increase in net patient revenues per visit, up to $93.34. 22,000 of the visits increase came from clinics opened in 2003; 14,000 from clinics opened in 2002; while clinics opened in 2001 or earlier, or what I will refer to as the mature clinics, experienced a decline of 15,500 visits.

Clinic operating costs increased to 73.5 percent of net revenues compared to 69.4 percent. This was as a result of average visits per day declining from 20.7 to 18.7 visits per day. A decline in average daily visits for clinics opened in 2001 or earlier, the mature clinics, plus the startup of 48 new clinics in 2003 were the reason for the increase in operating costs and operating cost percentage. Operating margin for the quarter was $7.1 million, or 26.5 percent.

Corporate office costs as a percentage of revenue were 13.6 percent, compared to 12.2 percent in the quarter for the previous year. As compared to the third quarter of 2003, corporate costs actually declined 167,000, and as a percentage of revenue declined from 14.2 percent down to 13.6 percent, based on initiatives we took late in the third quarter and early in the fourth quarter. Earnings per share for the quarter were 12 cents as compared to 17 cents in the fourth quarter of 002.

For the year, net revenues rose 11.4 percent to 105.6 million. That was up from 94.7 million a year earlier. This was due to a 10.7 percent increase in patient visits to 1.1 million and a 1 percent increase in our net patient revenues per visit. Of this increase, 40,000 of the visits increase came from clinics opened in 2003; 103,000 came from clinics opened in 2002; while clinics opened in 2001 or earlier experienced a decline of 36,000, or 3.7 percent.

Clinic operating costs were 70.7 percent of net revenues for 2003 and 68.1 percent for the prior year. Clinic wages, employee benefits, and payroll taxes grew approximately 7.6 million year-over-year, with $2.6 million of that increase coming from clinics opened in 2003, and 4.5 million from clinics opened in 2002 that were still increasing staff to meet their ramp-up needs. Clinics opened in 2001 or earlier had an increase of a few hundred thousand dollars. The problem was not the dollar amount of that cost increase at the mature clinics, but rather those costs were not cut concurrent with the decline those clinics experienced in visits and revenues. We are now addressing this per Roy's comment earlier. Corporate office costs for 2003 were 13.2 percent of net revenues versus 12 percent in 2002. EPS for the year was 61 cents, compared to 67 cents in the prior year. EBITDA for 2003 was 15.6 million, or 15 percent of revenues.

Even after funding the opening of a record number of new clinics in 2003, our cash and short-term investments more than doubled, from $7.6 million at the beginning of the year to $16.8 million as of year-end. Our cash balance increased 13 percent in the fourth quarter alone. Cash and investments net of debt exceed $14 million today. Return on average equity was 19.4 percent for the year. A frequently asked question we get on these calls is what is your current payor mix; we will go ahead and address that. As of year-end, the Company's major payor reimbursement sources were as follows. Managed care, which is primarily PPOs, was 30 percent. Private insurance, which includes Blue Cross and indemnity plans, was 28 percent. Medicare was 21 percent. Workers' comp, 16 percent. And other, 5 percent.

Our AR days outstanding decreased during the year from 71 days as of year-end 2002 down to 68 days as of December 31, '03. Bad debt accrual for the quarter was 223,000 and 932,000 for the year, or roughly 1 percent of net revenue, and our bad debt reserve as of year-end was 20 percent of our receivable balance net of contractual allowance.

Thank you, Larry. In closing, U.S. Physical Therapy is positioned for the future, as outlined both by the objectives of operations and the development of new locations. At this time, we will open it up for Q&A. Please only ask one question per queue.

Thank you. (OPERATOR INSTRUCTIONS) Ryan Kilstein (ph) of Marathon (ph) Partners.

A quick question about the sales initiative that you mentioned that Houston and some other Texas cities. What is the rollout going to be for other cities expecting to implement a sales force? And what kind of tactics do the sales force take to boost visits in that area?

We are in three markets. Two are in Texas and one is in Missouri. We are evaluating the appropriateness for sales force in all of our locations where we have a concentration. It takes a concentration of probably four or five clinics in order to sustain a marketing person. What we are looking at is an increased visibility to the physicians and to any entity that can refer a patient to us, whether it be a case manager, whether it be a nurse practitioner, whether it be industry. So those are all the initiatives that we're taking and that is the direction that we are giving the sales force. Also at the same time, as we talked about in the operational objectives, we are looking at the efficiencies in the clinics. This is driven by the fact that we feel we may be able to have a higher level of efficiency as far as treating the patient by maximizing the utilization of the time of the director or the lead person in that facility and allowing the sales person to do 8 hours a day constantly knocking on doors, looking for new physicians for referrals.

Okay, and then what about using the practitioners' existing relationships with physicians in the area?

We're not eliminating the directors or the partners from the visibility. What we're doing is making the best use of their time; so the sales person will basically set up times and do a lot of the legwork. That way we maximize the therapists when they go out. We do believe in a very much of a team approach between the sales and the clinic directors and the clinical people with the physicians. All the sales people are originally used for is that initial contact, and they only bring in the therapists in order to maintain and establish the relationship.

Okay, thanks.

(indiscernible) of Sidoti.

I just wanted to get a sense in terms of on the expense lines, both salaries and G&A, in terms of what we saw in the fourth quarter -- clearly there were some accounting fees, severance costs, etc. How much of that do you think, if you were to back it out and try to get a sense of what a normal rate would look like for '04?

There were probably a couple hundred thousand of unusual costs. In almost any period, you're going to have one or two items that will invariably pop up. We had some severance and relocation costs, moving the new COO, new VP of Ops and the new General Counsel. So that plus the severance were the principle costs, but I would not say they were more than a couple hundred thousand dollars.

For each?

No, in total. God, that would have been an expensive move. No, it was just a couple hundred thousand in total.

Because I noticed on the salary line it really increased a lot sequentially and as a percentage of revenue versus what we have seen in previous quarters.

Actually, the fourth quarter -- are you talking about corporate or --?

Salaries and related expenses.

You're talking about the operations. Most of that -- I think I went through this, but most of the related to costs for 2002 and 2003 clinics that were still ramping up. And in fact, yes, they were higher than they had been historically, and it was because the volume was off. It wasn't -- as we looked at it, and I was especially concerned about the mature clinics, their costs were actually flat or only up a couple hundred thousand dollars. The problem was we just hadn't cut them fast enough when the volume fell off, but we are now addressing that.

Okay, thanks.

Jackie Waterman (ph) of Jessup & Lamont.

I'm wondering if we are still on track to see 20 percent increases in clinics in 2004. And also, your best guess at the number of clinics that will be closed?

At this time, we're looking at 45 to 50 new facilities for 2004. That is the guidance we're giving there, which is a 20 percent growth. As far as closures, we have probably identified maybe one or two that possibly at this time will close through the year. That doesn't mean that they are for sure closers or that we won't do more than that; but at this time we think there's possibly one or two.

I don't think any of us expect to have the number of closures we did last year, which was eight; so that on the net basis, we should still be able to hit the 20 percent growth rate.

Okay, thank you.

(indiscernible).

I'm wondering two things, actually. The first is with the start of additions of sales people in clinics or in areas with concentrations of clinics, is your medium-term operating model changing to maybe a different operating margin type structure than what we had before? And what would this new operating model actually be? That's the first question.

And the second question, I have a difficult time understanding the declines in your mature stores -- I mean the visits declines -- in the sense that your competition is still in disarray and employment in the U.S. at the macro level is actually growing. So if anything, I would have expected some strengthening of your visits, and in fact the deterioration has happened. I'm wondering what you have identified as causes.

I will take the first question and Larry will take your second question. As far as the sales people are concerned, no, we are not changing the model. We continue to incentivize and to have the directors as profit-sharing and motivated by financial and also the independence that they get in running the facilities. The sales force is to enhance the time of the directors and at the same time allow us to go deeper into the market with -- as we've seen a number of presentations from different entities over the last couple months or so, and everyone is seeing that there is a reduction in the orthopedic referrals. And what we're looking at is other sources of referrals, whether it be the family practitioner, internal medicine, case managers. This takes a little bit more time because these individuals refer significantly less on a per-physician basis than an orthopedist would.

As it relates further to the decline, specifically, I have seen either in person or seen playbacks of presentations by Health South, Select Medical and Stryker, who are one, two and three in the sector. They have all now said that they are experiencing some of the same things we are in terms of softness in visits. Roy mentioned that apparently overall across the sector there's been a reduction in orthopedic and other referrals. Certainly in some markets we're seeing the increased competition, whether it's from physician-owned practices or independents.

Another thing that I hear repeatedly, not just internally, but in these presentations with our competitors is that higher co-pays, deductibles appear to have caused patients to defer treatment, or if they seek treatment they are less likely to agree to come in as often. And whereas they may have come in three times per week before, now they would rather do two times per week for economic reasons, if no other. And though the economy is clearly improving, you have to look at a market-by-market basis in terms of what that means in employment. I think things are getting better. We've seen, as Roy mentioned, an increase in February over January but it's too early to say whether or not that's really a trend.

On the first question, I would like to follow up, because the cost of the sales people needs to be covered somehow. And I'm wondering perhaps you could describe how much you are paying these guys or what the structure of their pay is to elaborate that point again?

To get into the actual details, it's market by market about what their compensation levels will be and what they will be able to attain. It is based on a base salary and they do have a commission for driving volume. The sales force will just enhance the overall productivity of the therapists as well as being consistently in the field looking for new referrals.

In order to cut that costs, that's what Roy was alluding to, why we need to put them in markets where we have concentrations. Typically we need to have four or five clinics in a market before we put in a salesperson. Otherwise the cost is disproportionate. The other thing is too, if it's a company-owned store or wholly-owned clinic, then the profit-sharing that we typically provide to the directors is a little less, which allows us to have some room in terms of their incentive comp. Plus these bonus structures that we're doing with the sales people are based on increase in visits, so they are not earning any incentive comp unless they're driving more volume.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Michael Martin (ph) of the Small Cap Report.

Could you possibly give us some sense of the magnitude of the increase in visits in February over January?

We can't really speak to current quarter, no.

Okay, thank you.

(OPERATOR INSTRUCTIONS) I am showing no further questions at this time. I would like to turn the floor back to management for any further or closing comments.

We thank everyone for their attendance to the conference call and appreciate the questions. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.