US Physical Therapy Inc (USPH) 2004 Q2 法說會逐字稿

Good morning and welcome to the U.S. Physical Therapy's second quarter results conference call. At this time, all participants have being placed on a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Livingston Kosberg. Sir, you may begin.

Thank you. Good morning all. My name is Livingston Kosberg. I'm U.S. Physical Therapy's Chief Executive Officer and we are very pleased to have you participate in our second quarter 2004 earnings conference call. I have with me today, Larry McAfee, our Chief Financial Officer, Chris Reading, our Chief Operating Officer, and David Richardson, the company's Controller. Before my opening comments, we need to inform you of the following so David will you do that?

This presentation contains forward-looking statements such as risks and uncertainties. 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. Please see the company's filings with the Securities and Exchange Commission for more information.

Thank you David. I think most of you have heard that statement before. I thought I would begin by giving you a little of my background. Many of you know me, many of you don't and so its important to give a little of my background and the relationship with this company, in our company.

I founded the company. It was my concept that we began in 1990 and continue til this day as a foundation of our company, CEO of the company until August of 1995. I continued as Chairman of the Board until May of 2001 and then I stayed on the board for about a year longer so I've been off the board for about two years. We have as you know, a unique operating model and a unique partnership philosophy and it is one that has carried this company in good stead and one that we are proudly continuing.

When we founded the company and I founded it with my financial partner, Mark Brookner back in 1990, it was really difficult for us. to imagine that the company would reach the size today but now that we have, we're looking at this as a new beginning for the future prospects and we think they are brighter than ever.

At this time, I'd like to turn the meeting over to Larry McAfee to give you all the financial highlights of the company.

Today the company recorded $2.3m or 19 cents per diluted share. This figure included a pre-tax charge of $717,000 for severance and recruiting fees for the CEO position and a pre-tax amount of $450,000 from the sales of today. Excluding the charging gain the company would have reported $2.4m or approximately 20 cents per share. Both the 19 cents recorded numbers and a 20 cents as adjusted figures are quarterly records. In fact, revenues, operating income, net earnings EPS as recorded and adjusted were all quarterly records. I'm not going to go through the entire press release obviously because you all have read it but let me just hit on some of the highlights and then ask Chris to talk about some of the operational drivers that make these numbers.

Our net revenues rose 13% during the quarter compared the second quarter last year to $30.6m and that's our first $30m revenue quarter ever. We realized that increase on a 8% increase in patient business combined with the 5% increase in our net rate per visit. As Chris will talk about it in a minute, during the first and second quarters we successfully reduced our operating cost and that has compared to both the second quarter last year and the first quarter of this year.

Corporate office cost as a percentage of revenues increased in the period but that was primarily attributable to the $700,000 charge. By the way we were not able to book all of that severance and recruiting charge in the second quarter. There will be approximately another $250,000 that we anticipate we'll recognize in the third quarter and we'll give additional description to that in 10-Q to be followed shortly.

Our cash and cash equivalent totaled $3.4m or approximately 19% during the quarter so we continue to have exceptional cash flow. As of June 30th of cash and equivalent of represented about 30% of the assets on our balance sheet and during the quarter the last of the company's convertible subordinated notes were exchanged with the holders for stock resulting in the company no longer having any funded debt. At this point I'll turn it over to Chris.

Thank you Larry. Chris Reading, U.S. Physical Therapy's Chief Operating Officer. Earlier this year we took a good hard look at our operating performance and we set out to develop a series of things to help improve our performance including new reporting systems, some very specific actions plans were implemented both on the regional as well as the facility level. These included new marketing plans, a very focused renegotiation of our (inaudible) contracts, both existing contract and new contract. A focus on our core operations are getting things like cancellation rates down, improving our scheduling, improving our efficiencies in terms of staff to volume ratios. We also developed a series of common benchmarks or metrics and we focused very hard on our communication of those to the field as well as our communication in general. These benchmarks that we focused on and communicated, we do monthly, we send these out to the partners and to the partnerships along with the financials and it's really in a form of a scorecard format which gives the facility month to month grading as to how they perform against these benchmarks. We have seen substantial improvement across all 11 of these benchmarks and I will highlight a few of these areas. Our net reimbursement per visit has increased approximately 5%. We focus very hard on our personnel training in terms of charge methodology, clinical efficiency and those type of things and we have seen some nice impact there also as a result of our peer contracting focus.

Our payroll expense per visit has been reduced to approximately 13% we focused on improved scheduling and efficiencies at the front desk. We have also initiated and have completed staffing reductions in approximately 80 facilities that largely involve support and related staff but will allowed us to continue to give a very high quality of care. Our expense rate both fixed in variables has been reduced 10%. Our cancellation rate have been reduced from 11.6% down to around 9%and a relative improvement of approximately 18% and our visits for full time equivalent or FTE's have increased approximately 18%. Having said that I think we still have some opportunity in our productivity and our efficiencies. Our clinicians on average see about nine visits per day which still gives us some room of both in terms of quality and against the industry average which is substantially higher than that. I'll turn it back to Larry.

The positive impacts of the actions discussed were demonstrated in the second quarter results. Our average daily visits per clinic, which had been declining sequentially for a number of quarters improved. We went from 18.7 visits in the first quarter on average per day per clinic to 19.3 in the second quarter. At the same time we are able to increase the net rate in the first to the second quarter from about 95.49 to 97.33 and we reduced our clinic salaries and related costs per visit by 6% quarter over quarter. As a result of all this operating margins pre- corporate are once again north of 30% and I discussed with a number of you since I joined the company that because of the number of factors combination of visits and costs, our operating margins had shrunk to the mid - twenties where historically they had been in excess of 30% and in some periods of time that's almost 35%. So in the second quarter for the first time in a while we were getting north of 30%. In fact, we on a normalized basis had a margin of just under 32% for the period. With that I'll turn it back to Livingston.

Okay thank you Larry.

When Rory Sprandlin, (inaudible) and CEO to the board, the board was most fortunate not only to have the partners and the employees in the company but to have had Larry and Chris come on board within the last year and they are the kind of leadership that every company would like to have and for many coming back in it has been a really pleasure to work with these gentleman as well as many of the partners that I know and many that I haven't known.

The company has decided to take advantage of the change of management to go back more to our traditional roots. It was built on a partnership model. The company has slightly gotten away from that perhaps in the desire for meeting numbers, X number of clinics opened one year, Y number of clinics opened the next year, we moved away from only the partnership model to company stores. Company stores can be good and we will continue to do some of them however, the problem with company stores, One, it takes a much longer ramp up, longer than perhaps previous, management beliefs here but it takes a much longer ramp up. Two, in a tightening therapist market, company stores are the ones that have vacancies in position. Partners come on and when they are ready for another therapist they have someone right in their hospital that worked with them before or they know in the community to bring and historically partners have had less temporary therapists than company stores. Three, company stores require a significantly disproportionate amount of time for management, for middle and senior management. Time that could be better spent helping our partnerships which are, generally ramp up much faster and are more profitable. So they clog up the system a little bit.

Having said that we will selectively add a few as I said but we are going back to focus on doing more true partnerships and to do that we are beefing up our recruiting efforts, making a few technical changes in the department and we are confident that we will do more partnerships that will end up doing more visits per day and more, and create more profit for the company than if in fact we blended them with a high number of company stores. Hence, as you have read in the release we are changing the '04 number of clinic openings from the 45-40 down to 38-43 and virtually all of those, I believe all of those, were the elimination of proposed company stores. With this I think that you as our shareholders will find and should be looking at, peer, closely at the number of visits per clinic, that is the key item and that will show that our, there is more company stores, there's more partnerships and we will be focusing on that item. It will take a little bit of time to ramp up, it may, I will be looking at that the beginning the quarter of '05 and I will continue to look at that, that and the revenue per clinic and that too is higher in our partnership model, is what will create the earnings per share for you the shareholders.

At this point let stop and catch my breath and put it up for any question. I am always sure that there is one question if Mitch is on the line.

Thank you the floor is now open for questions. If you have a question please press star one on your touchtone telephone at this time. Please hold while we pause for questions.

Thank you and our first question comes from Ross Damoth, Sir please pose your question.

Hi, first of all big congratulations. This was a very good quarter, more than I anticipated so congratulations and I guess my question is just sort of very generally we are now operating in an environment of better than 30% you know pre-corp operating margins, is that sustainable, I mean can we start thinking in those terms sort of over 30% from hereon out for a while?

This is Larry, long term we would like to see consistent 30 plus percent quarters. That said, the second quarter is seasonally, normally your top quarter so I would not be surprised if we fell off of that I think the main thing is that on an average, it's not going to be a 2004 event but going forward we are on an annual average basis we record north of 30%, but it will still bounce around a little bit quarter to quarter As long as we can continue to drive the visits and keep our cost under control 30% is certainly achievable and we're looking at from just a few quarters ago a 7% improvement which is almost a 20 plus percent improvement.

Ok, Ok and then on the corporate cost I know that one of your goals is sort of over time to manage that down sort of as a percentage of Revs, what sort of where are we now and how much further do we think we can go.

On a normalized basis if you took out the charge we were at 13.7% for the quarter and for the year I think we were at, I don't have the figure but I mean I think we were 13.2 or 3, something like that. We were as high as 14 1/2 a few quarters ago when I joined the company so it's definitely come down. There's two ways to get those numbers down. There's cost controls which we did early on and then there is revenue increases and I think probably going forward the way we will keep that cost figure down is through revenue increases. We are adding staff and living expenses speak to that. I will tell you in the second quarter we did have some cost, that will be more detailed in the queue. We took some addition accrual of accounting legal a lot of which related to Sarbanes-Oxley as we are working on getting in compliance with that and we took a bonus. accrual for the first time in a long time. We had the best quarter in the history of the company and we went ahead and did some bonuses with that.

Let me add to that, in our new model which will be a much higher level of partners and we are going elephant hunting, as we did before for our partners, we are looking for partners who are going to be producing significant visits. In order to do that we are going to as I mentioned before, we are going to beef up our recruitment effort, it will be important for Chris to make sure these are managed well. So I would not be surprised if there is a gap in corporate expenses but eventually we're going to enjoy that on the revenue side. As far and earnings per share the company stores that we are eliminating would probably not have added, in fact might have detracted from our earnings per share, for the foreseeable future, so I'm not sure that there will be any difference, it will probably together be somewhat neutral but in the long run we will generate that revenue and we will leverage our corporate.

Okay very good and quick final question at times in the past three has been some discussion of some broadening a little bit of what you do. You've even mentioned surgery centers and a couple other things are you now focused exclusively on physical therapy or will you consider broadening just a little bit what the company looks at.

The board is at this point looking for a permanent CEO, I have the pleasure and it is a pleasure with the people I am working with to come in for a period of time until that person is on board. The board has great confidence in Chris and in Larry, in this particular business, now there are some siblings to this business that feed in and we will be looking at those energetically my guess is that the board will choose a broader CEO in experience and that generally speaking if the right person comes aboard. He or She would probably present opportunities for different areas, but not out of the field, not out of the relationships of what we do generally. I don't think we are going to do blood collection centers for instance, or things of that nature.

I am personally - and I am back on the board and will stay on the board, I personally enjoy what we have done but at this stage in order to drive the company forward - and our new CEO will have that as his mandate, to drive the company forward, not recklessly but using this as the foundation. I am not overjoyed with a one legged stool, no matter how strong the leg is.

Okay that is very helpful, thanks.

Okay our next question is from Richard Rangothal. Please pose your question.

Yes good morning guys, a couple of questions. Larry I don't know if you have the pair mix for the quarter?

Yeah well I have it for year to date. It is as follows five (inaudible) for 28.0%, manage care which was 30.3% Worker's comp with 16.6%, Medicare, Medicaid which as you know is almost all Medicare was is 20.6 and another is 4.5%

Thanks, In terms of the clinic openings, I know that Livingston, you mentioned cut backs on the company owned stores and focusing in on the partnerships and as a result the 38 to 43 clinics for '04. If you can give us sense of what the pipeline is in terms of recruiting partners looks like, and also I guess if we had to assume going forward is 35 to 40 openings reasonable?

Let me turn that over to Chris for that comment.

I think 35 to 40 is certainly reasonable, in terms of the pipeline we are in the process - we have a very solid pipeline and however we would like to expand that pipeline considerably through the process right now and have begun several weeks back of interviewing for additional recruiters, partner recruiters specifically beefing up, our development side of the business and we are going to look at a leader for that area, so that we can really have the development side to this, be the engine that really drives our company, but I think there are a lot of good people out there. I think a return to a true partnership model, which I think has a lot of attractiveness personally and there are a lot of people in the physical therapy area, that have been interested but maybe we haven't been able to bring over because we haven't had the equity model as we will look at that, I think whatever we can to be set up.

And I assume, I think you mentioned you closed one clinic in the quarter and sold another given the base that you have we should assume I guess going forward to see the occasional closure or sale.

We had said earlier in the year that we have anticipated we would close 4 or 5 clinics this year and mid way through the year we have closed a couple, so - we always try not to close a clinic, as you know after a certain amount of time your locations maybe be just bad or something else, so we will continue to close the clinics but not a large amount.

Plus let me add to that, and I wasn't - haven't been here when the clinics were closed, but, but if we developed clinics, partnership or otherwise, if every one of them are doing great and don't need to be closed then our screen is to narrow and on the other hand if we developed ten clinics and we have to close five, our screen is too wide.

So, I think I would echo what Larry has said and we will - -yes, there'll be continued closings but it will be the balanced evaluation of our partnerships.

And to put it into perspective we 254 clinics now. We closed one during the period. So this is - -it's very infrequent that we close a clinic. We bend over backwards to make the clinics works with our partners even if we have to wait a long period of time to get them out.

And I think it shows. I mean, you guys have done a very good job in terms of recruiting and finding that right person. Finally, in terms of the share repurchase, I was wondering if you bought back any shares in the quarter, and given your cash position, if that's something you might consider guys.

We did not buy back any stock during the quarter and I think probably that was - - what - - a 20/20 hindsight based on the bump in the stock today, looks like we should have bought it back. But with what was going on it probably would not have been fair to the marketplace for the company to be in the market during the last few weeks or month and a half.

We talked - -in every board meeting, we talk about share repurchases. We have an authorization to repurchase, I think, over 300,000 shares, so that's something -- we have a board meeting next week. In fact we'll talk about it next week and obviously, the company has stepped in several times in the past and bought some shares back.

I would like to add to that. With the growth that we're expecting in tangential areas and with a CEO that will ultimately come in here with a mandate for growth - - I think the company, perhaps for the first time in several years, will find better utilization of it's cash than in buying it's shares back.

Having said that, if something happened to the shares - - we feel strongly about our company and would be opportunist.

You know, with over $20m on the balance sheet in cash now and no debt, it's kind of a high quality problem and when we look at our core business and ancillary businesses, the returns are so significant, it makes sense to reinvest that money in the business.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Jackie Wood, pose your question.

Hi, congratulations on a nice quarter gentlemen.

Wondering if you could comment on the metrics you had given at the beginning of the conference call relating to declines in cancellation rates. Does it [Indiscernible]. What are some target rates that you're looking to get to? You know, what should we - - what numbers should we be looking for in terms of you know, - - is 9 visits per day going to ramp up to 10? Is that what you're looking - - is that where you're looking to be at to optimize profitability?

Well, Jackie I don't know if we want to tell you all our internal targets - - they're not trade secrets but they're not something that we'd probably want to share with the industry.

I think a couple of them I will share with you. I think Chris mentioned - - business per day in the industry typically run 12 to 14. We have been running less than 8 for a while. We've improved that, I think a target around 10 or something Chris.

Yeah.

Is that reasonable?

The company's had a longstanding target of 10 but no real movements until recently and I think that's something that we're focused on right now and we can get that right away. You know our cancellation [indiscernible] at 9% still has a little bit of room. I think - - I think right now we're seeing some summer vacationing impact even in June and that number has been down around as low as 8% there for a while.

So , that'll bounce around seasonally a bit but I think we've got some room there - - I want to say our partners have been incredibly responsive and I've been extremely impressed since I've been here. These folks have gone out and they've done everything that we've asked them to do, generally and they've been very responsive to communications and benchmarks and we just have a great group.

So, I am confident we can continue to [Indiscernible]

Okay. - - do you have any idea, you know, in terms of the overall restructuring and the changes that you have been making, how far you are through things? You know, have you picked a low hanging fruit and now we can expect continual improvements but at a lower rate?

Jackie I'm still - - being here just 7 or 8 months, there's still things that I am learning on some of the nuances of our partnerships. I think we have - - you know, some of the rate issues. I don't know that we expect to see the kind of increase in our net rate thus far. I think that's certainly some low hanging fruit that we make good work. In some of the other areas we're just not - - I'm not - -I will continue to try to move it forward and we'll continue to do that as quickly as possible, but in terms of the percentage change from this point forward, we'll just have to see.

Okay. Congratulations, nice work.

Thank you.

Thank you.

Thank you. Our next question is coming from Nicky Brevick [ph]. Please pose your question.

Hello. With regard to your dollar per net patient revenue at $97.33, what is, like, the national average reimbursement from, like, manage-care or medicare? I'm just trying to gauge where that number could go to?

I don't know that I have ever seen a national average - I know select medical and a couple other companies report their rates, I think select the last big rush (inaudible) which few months ago was low to mid 90's, so our rates are not dramatically higher than theirs and probably maybe a little higher than industry average, but because we do less Medicare, less HMO and no capitated plans, probably makes our net rates higher than the industry average is.

I would like to add - since Chris has been here, we've had a significant increase and I think a lot of that goes to - for Chris and the various partners we've had, and it has to do with making sure that every service we provide we get paid for and then it also has to do with the patient mix, and making sure that if we're going to see 20 patients in a clinic for instance, that as much as possible they're the right 20, and management and partners have done a really good job and those two factors have probably been the main ones that have driven the rates up so far. As Chris alluded to and said, there - how much less - in that, probably not as much as we've been able to impact in the period he's been here.

Historically the company has always focused on the quality of the visit in terms of - in what the mix is, there are a number of other operators that see 50 patients a day but if you have a lot of HMO or Medicare, Medicaid or capitated plans, your average rate per visit is so low that you're confusing activity with productivity, so we are very select about the payers we'll enter into contracts with and its not unusual for us to drop out of a payer for a while and we may come back to them, but we think its important to be selective to provide a high quality of care and then get re-imbursement out of it.

Okay. I also notice your average visit per day was down for amount of patient per day per clinic form last year, why is that?

Well there's two reasons and we - this is something we've had to talk about unfortunately for a number of quarters sequentially, this is the first quarter in a while that we were up from the first to second quarter that we've done year over year. There's two reasons, one - I think last year the impact was primarily because of the tough economy and maybe we weren't as good as we used to be at marketing, the other thing is too, since December of 2001, we've increased the number of clinics we have, by something like 56% -57%, and a number of those were company stores or frankly, you know, maybe not as good a director or partner as maybe we would have included historically because we got caught up on how many, so that makes - we were opening and had to report that number. So you've got a - probably a younger on average clinic as a base than you did a while back, and a clinic typically takes three years to ramp up, so all those clinics you opened since December 2001 are only at most are 2 1/2 years old, so they haven't reached their full ramp up rate even, so that's brought your average down, and we've done a lot of statistical analysis on that recently and that certainly is at least one of the factors.

What would be your target after three years and what would be ideal?

Our (indiscernible) - our average clinic at the end of three years is 28 or 30 - inaudible - 24 businesses a day on average after three years, some of them do a lot more.

Okay

So that's an average clinic, in fact to give you an exact figure, if you to our website and turn on the investor presentation, there is an exhibit in there that shows you a typical clinic and how many business its doing at the end of the first, second and third years.

But as we - as we and as I mentioned earlier - as we move forward with more partnerships and partnerships -we're very hopeful that would be equity that will be equity partnerships we should begin to enjoy both for the company and the shareholders and - an increase in that number, and I think that's a key number to look at, and the fact that we are not under pressure now to put in a lot of company stores in order to meet a numbers target as was in our recent history, will also increase that number.

Okay well thank you so much.

Thank you.

Thank you our next question is coming from Michael Martin, please pose your question.

Hi good morning and congratulations, at the current clinics what number are company clinics?

How many clinics do we own outright, is it 80?

We'll have to check that and get back to you. I believe we own out right 80 clinics not all of those are company stores. Some of those are stores that we bought from partners that joined us 12 years ago where they you know eventually (Indiscrenible) But we have this year a third of our opening is going to be a couple of stores. Company stores non-partner locations where would somebody in there that is not clinical and that's what Livingston have been talking about - we have a lot higher (indiscernible)

Is there any thought of converting the company on stores to partnerships for some of them?

What we've done historically in this market is an example here in Huston where we had several groups of company stores, invariably what would be our goal would be to have one of those directors step up and take a leadership role, and that's what happened in a variety of these markets. And we've converted the Huston market company stores to partnership base and it has been very successful. It certainly as these mature and as people mature into the market place from a leadership position we certainly hope - and that has demonstrated our willingness to do that where it makes sense.

Great thank you, just one other question. What effect are you seeing from the economic environment and is there any major change in the competitive environment?

Economic environment is certainly better, the quarter rates are up (indiscernible) significantly I haven't heard anybody complain about the economy at least in the last quarter.

But you feel it's given you a significant plus here.

I don't know if it is significant - I mean honestly we've seen some improvement but you know we have 10 or 11 metrics to major metrics go up to major metric in this last 6 months. I don't think that's all due to economy a lot of than I think is for partners out there putting in extra work and that is the contributor to the improvement.

And in terms of the competitive environment are you seeing any major changes?

I think the one are right now that we're faced with is just terrific but it is not unique to us, it that (indiscernible) there is some what of a tightening in terms of the number of business there - that are out there and the quality and the kind of people that we look for our staff or director position. There is some competition (indiscernible) and other wise to get those people. So I think that that would probably continue for a bit. Besides that I haven't seen a dramatic change.

Let me add some thing and by the way as Chris said, the tighter the market gets, the better our partnership model is, the less temporaries you would use. (I have had a couple of other companies trying to emulate our partnership model and I mentioned we should feel flattered. But we've spent 14 years now and we've made all the mistakes and we think we're confident we do it better than any one. And that's in the competition structure and it means that we will have to work that little harder and go after the partner a little better. But when we do that we're confident we can show them that our model has been around a long time and it's the best model for them.

Thanks very much.

Thank you at this time we do have a follow question from Ross Damoth, please pose your question.

Can we just maybe briefly revisit this notion of share repurchases, I mean like any model that you have should show that there are - that they would be highly accretive in your cash flow positive. But when you go back you don't absorb much capital. If you ever needed to borrow money, money is cheap now, you have a great balance sheet. And not withstanding the fact that you would like to have some fire power to do some other things. To me it seems like an opportune time to think about aggressively buying shares back and we not only (indiscernible) good deal but accretive are existing share holders and I know that - sometimes with the - not a lot of liquidity sometimes it's a little you know - not attractive to do this, but you guys already have very good (indiscernible) so liquidity has not been an issue for folks trying to get the stock I'm just maybe wondering if you could comment on that?

Let me take another shot at it I understand what you're saying. The board of directors have taken the opportunity of the former CEO's resignation to refocus itself on a new five year plan. And the new five year plan will be greatly impacted by who comes in as the permanent CEO. I think it's --- well your comment is good and we might in fact go to that. I believe that we want to achieve so to speak our powder dry at this point to make sure that we can implement that 5 year plan and it may take the cash we have plus actually borrowing I don't know. I have no idea where we're going but what we do know is that we want significant growth in the company over the next 5 years both on the top line and the bottom line. And I am sure that when this person that, when he or she in place, and we look specifically at what the plans could be with the issue of share repurchase will come up again at the board meeting.

Okay that's fair and I'm sure you'll talk about it at the board meeting I just hope you can see it is never much fun to buy back shares as it is to but (inaudible) Thank you.

Thank you we will.

Once again if you do have a question press star, one on your touch tone phone at this time. Gentlemen there appear to be no further questions at this time.

Well again I would like to thank all of you for your participation and your support of our company. And these are exciting times for us, it is going to be an exciting future for us and we're glad you are a part of it and we are sure that you will enjoy over the long term and perhaps the short term the future of this company. And thank you again and we will talk to you in the next quarter. Thank you.

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