US Physical Therapy Inc (USPH) 2004 Q3 法說會逐字稿

Good morning and welcome to your U.S. Physical Therapy sponsored quarterly earnings release conference. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation.

At this time I would like to turn the floor over to your host for today's call, Mr. Livingston Kosberg. Sir, you may begin.

Thank you, Karen. This is Livingston Kosberg. I am the Interim CEO for another four days, so, I'll chair this call. Before I make comments, I want to turn it over to David for the usual disclaimer.

This presentation contains forward-looking statements which involve certain risks and uncertainties. The forward-looking statements are based on the Company's current views and assumptions and the Company's actual results can differ materially from those anticipated. Please see the Company's filings with the Securities and Exchange Commission for more information.

Thank you, David. I'd like to make a few initial comments, perhaps a little different than usual conference calls, but, we've had a lot of activity, and this is certainly a complicated release and it's been a complicated several months. I want to talk a minute or two about, as interim CEO, about the permanent relationship that we have with management and give you a little background. Initially, we began a search with a major national search firm for a CEO. They turned up, apparently, an attractive job for many. They turned up well over 100 prospects and began whittling them down.

At the same time, we were putting the finishing touches on a management, a board retreat to talk about the direction of the Company, as we wanted to make sure to match our CEO to the direction the Company was going. We heard from shareholders, various things, including many shareholders who stated that they felt like we should stay the course in what we were doing in rehab, and some that thought we should diversify. There were, the 100 or so, were reduced to 3, and about a month and a half ago the board interviewed those 3 extensively, and -- but each time we did, we were comparing them with the team that we had of Chris Reading and Larry McAfee, and that was the bar we set.

I, by this time, had had several months of working with them and looking at the Company again, having been away from it for a few years. Frankly, none of the 3 measured up in our eyes to the team we had. And in the immediately subsequent board retreat, finding out what we did and realizing that, if we went back to the basics of what drove this company in it's first 10 years, that we were really at the tip of the iceberg, as far as the potential in our primary business. And, so the board came to the conclusion that we wanted to stay the course in what we were doing, albeit we will probably accelerate the course as the opportunities are provided to us, and they will be, and there's plenty of room for additional growth, and even enhanced growth.

With that in mind, it became an easy decision for us to say, well, we have the best team in Chris and Larry that we possibly could have for the business plan that we have developed. And, so, hence you've all been aware of the announcements of the -- of our new management team. Our CEO and our Executive Vice President, as well as CFO and their addition to the board. So, now, we have the right people, we are confident of, and we have the direction that we're confident of, and we're poised to go forward.

Some of the reasons that we are so confident that we will enhance our growth and our development are some of the philosophical changes we made to get back to basics, as we said. There was many of them that are technical. A few of them are technical. There weren't many, by the way, but a few of them were technical. The major one is going back to the true partnership model where our therapist partner gets actual equity instead of getting a profit participation, and while this to you may not sound material, it is, I can assure you, it is very material to the people we want to achieve as therapist partners. In fact, there are actually some who turned down a partnership that we went back to and reactivated to become partners because they could now get equity.

There were several other structural changes that were made that I won't bother you with, things involved in the table of organization and things of that nature, we are really poised to move in the direction that we're all confident we'll move. The quarter was a complicated quarter, knowing that we were going in the direction we're going, some of the changes we've made, and they've been reported. We closed 8 locations, we are moving away from the Company store model and back to our basics of partnership model, and satellite model and, so, therefore, we closed 8 stores that had been announced, 1/6 of which were Company stores, and we're not, while there will be continued Company stores to fill in particular gaps in areas where we have influence, the indiscriminate setting up of Company stores, while they might work, take much longer, and there's a higher risk of failure than our founding model and our successful model.

And, so, we announce the closing of 8 stores, 6 of which were Company stores. And then we've also tilled approximately 10 Company stores that would have been opened in the 4th quarter to make the numbers that historically have been important to many people, including our former CEO. And, as opposed to where we're direct going, which is the quality of our stores, which, by the way, will be more easily measured by the visits per day, per store that's been opened over a year. And that's the number that I would look for in the next few years as this Company goes forward.

So, we tilled as many as 10 additional stores, Company stores that we would have opened. And in the 4th quarter, the other things, there's other things, there's other what I call underbrush, that comes up in any company along the way when there's a change over. And I felt it was part of my responsibility to turn over to the new management team, a clean of company as possible, and there were some underbrush items that were not material, but were cleaned up.

The one thing, if I were you that I would look at, and probably ask Larry about, is in our revenue per patient per visit. It was down about 1% from before. And from the previous quarter, and I will assure you that there is nothing fundamentally wrong that would cause that to happen. All of the contracts we're signing are as good or better as before, there are no -- the closings, because of the hurricane in Florida, we lost higher priced revenue than our average revenue. And that accounted for some of it.

And then, the rest is what I would call nontrend oriented mix of business. It just happens occasionally. You can't -- It's a -- it's a science, but it has a little bit of art in it, and what your mix of business, but the mix of business would account for probably the rest. But, it is not in any way a trend as Larry will express to you. And this doesn't, frankly concern us at all. It just is a way -- is the way it went in this particular quarter, and he'll go into greater details, but our contracts are just as good. And, therefore, we see it more as an anomaly than we do a continuing event.

We'll get around to questions later on about anything I've commented about, but let me now turn it over to Larry to go through the financial highlights summary.

Thank you, Livingston. US Physical Therapy reported net earnings for the third quarter of 1.1 million or 8 cents per diluted share. If you can access it now, I would refer your attention to the last schedule which is on page 9 of the press release, and that's a reconciliation of nonGAAP financial measures schedule. If you look at that, I think it's a lot easier to understand what Livingston previously described as this complicated quarter.

During the quarter, we took a pretax charge of 966,000, which related to the closure of those 8 clinics. By the way, the closure of those clinics were announced on September 2nd. Additionally, included in corporate office costs was over $200,000 for recruiting fees which related to the CEO search. Which Livingston also described. There are a couple items that aren't included in this schedule, which I think are note worthy, and would suggest that you should consider when you look at the results.

Not included in the reconciliation schedule was the impact of the hurricanes, and related flooding that hit Florida and affected the other Gulf -- affected other Gulf and east coast states during the quarter, and that resulted in lost business for us at 37 clinics in 9 states or, in other words, it affected roughly 15% of our total clinics. We tried to be very conservative and -- in terms of trying to estimate the impact. I know a lot of other companies that is were affected by the storm have thrown out some general numbers, we really try to nail it down to business and what the lost revenue was. We conservatively estimate that we lost at least 22 to 2600 business. That equates to over 200,000 in revenue, probably somewhere between 215 and 255, if you use that (indiscernible) total.

That was not only lost revenue, but lost margin, because we kept -- we we didn't let anybody go during that period, we didn't cut back, people's salaries, et cetera, we didn't think that was right. That cost us at least a penny in lost earnings per share. Chris is going to discuss the impact of the storm further in his comments.

Also, as further described in the news release, accounting and legal costs for the quarter were up over $200,000. Mostly which related to Sarbanes-Oxley compliance, which, again, I don't think that will surprise people. I was just looking at a few releases in the last couple days, I think the Sarbanes-Oxley costs are really pretty staggering. If you add up the numbers, the combination of the clinic closures, the CEO search fees, the hurricane impact and the Sarbox costs totals 8 to 9 cents, at least 8 to 9 cents. Which gives you an adjusted EPS for the quarter of 16 to 17 cents. Versus the analysts estimates which were 17 to 18.

I'd like to spend a minute and just talk about the comparative figures, Q3 of this year to Q3 of last year. Net revenues rose 10.6% to just under 30 million. Due to an 8.6% increase in patient visits, so over 300,000 a quarter now. Combined with a 3% increase from $93.14 to 96.06, and that's patient revenue per visit. The net revenue per visit, although up fairly significantly year over year, was down from the second quarter. This was really a result of a change in mix. Our managed care business increased from Q2 to Q3 from 29.9% to 30.7%. Medicare increased from 21.2 to 21.7%. While workers comp declined from 16.3 to 15.3%. Livingston referenced up -- I wouldn't jump to will conclusion this is a trend.

This is my first summer with the Company, I was trying to see if there were any seasonal patterns associated with the summer, there definitely are. We went back and looked at each of the last five years and every summer workers comp has been, historically, has been lower in 3rd quarter, which is the summer quarter than it is in the spring. So, that decline from 16.3 to 15.3% is a normal pattern. And, as you know, worker's comp is normally a little bit higher reimbursement business for us. If you look at that, plus the average rates of the business we lost at those 35 plus clinics was in the 98 plus range. If you look at those two figures, that explains the dollar difference between the 2nd quarter this year and the 3rd quarter.

Corporate office costs as a percentage of net revenues were 14.2% for both the 3rd quarter of 2003 and 2004. If you take out the CEO recruiting fees, and the larger Sarbox related incremental accounting and legal costs, the Corporate would have been 3.8 million which is 12.7% of revenue. That's more in line with what we said, has really been our target. Same store visits increased 3.1% during the period, while the net rate per visit increased 2.7%, and that resulted in the same store revenue increase of 5.9% as compared to the year earlier quarter.

Let's address the balance sheet for a moment. Cash grew 13% during the quarter to almost 25 million or 40% of our total assets. In September, the Company began to initiate repurchasing shares, we purchased 50,000 shares in the month of September, at an average price of $13.09 per share. There were 257,000 shares remaining available for purchase under two previously announced buy back plans as of September 30th. As we stated in the release, management intends to fully utilize both plans.

Now I'll turn it over to Chris for a review of operations.

Thank you, Larry. As Larry discussed, I wanted to go into a little bit more detail in terms of the visits and the volume and, as well, some near term focus on the operation side of things. For the third quarter, although volume was off slightly compared to the second quarter, we do see volumes advance in 2 of our 3 regions. Our central region and our west region advanced in volume, while our east region, which has been relatively strong all year saw an uncharacteristic decline of 460,049 visits, a significant part of which, in my opinion, is attributable to the hurricanes, and the related extreme weather along the east coast.

In addition we realized a visit reduction of approximately 3,000 visits versus where we were in quarter 2, related to centers that we have closed or announcing that were closed or sold between quarter 2 and quarter 3. In addition to that, just looking at some of the costs related issues, we looked at our rate of development beginning late in the 2nd quarter and continuing to the end of the 3rd quarter, we opened 17 new facilities through this most recent quarter end, which created expense increase attributable directly to those facilities that were approximately $500,000 million.

What you'll see us focus on as we go forward are the following key areas. As Livingston discussed obviously, our primary, and our principle focus is filling the pipeline with truly quality -- high quality partner candidates. People that will be interested in the equity model and return to our basics and our fundamentals that built the company. I will mention, we are currently on track to open our previously stated range of facilities between 34 and 38 facilities by year end.

Second point, we will strictly focus on the basics of our business, productivity, staffing, things like our cancellation rate, as well as several areas, which will have, ultimately, some impact on our net revenue rate per visit. We'll continue to work on our sales and volume development. We've had several new sales people in recently for training in key markets, which are new for us. We'll continue that rollout as we go forward, and we anticipate some positive results from that.

We will continue, as has been discussed, our paired contracting strategy, which is centered around volume development, as well as rate development. We have announced previously the expansion of our management services business and that will be a continued focus for us, and we have discussed pursuing some key or tuck-in acquisitions small to medium sized, regional or local acquisitions with solid growth and (indiscernible) potential. And then the last point, as Larry has mentioned, we'll continue to reinvest in our company.

Livingston, now, let me turn it back over to you.

Okay. Thank you. Let me turn it over, Karen, are you there?

Yes, sir.

Let me turn it over to the moderator for questions at this point.

Absolutely.

The floor is now open for questions, if you do have a question, please press star one on your touch-tone telephones at this time. If at any point your question has been answered, you may remove yourself from the cue by pressing the pound sign. With these instructions in mind. Please indicate now if you have a question by pressing star one on your touch tone telephone. Our first question comes from Jackie Waterman of Jesup Lamont.

Good morning, gentlemen. And congratulations to Chris Reading on his promotion, which I think we all believe is a prudent decision on the part of the board.

Thank you, Jackie.

I just want to recap a couple of the comments you made about what impacted revenue during the quarter. It sounds like there was half a million dollars in sort of an impact between about $300,000 coming from a dollar decline from the second quarter to the third quarter in average revenue per visit. Plus about $250,000 in revenue from the lost visits due to the weather conditions. Does that seem like a reasonable -- does that seem reasonable?

Yeah. It's Larry. We lost at least, I would say it's a 250,00 million plus, probably from the hurricane impact, the other thing is too, is the clinics we closed had a decline in their revenues obviously during the period. I looked this up this morning, the closed clinics had done 241,000 in revenues in the second quarter, that declined 186,000 in the third. And, as you'll remember, at the end of the second quarter we sold a clinic and a couple of management contracts and that brought your revenues down a little bit too.

Okay. Great. Thank you. Also, can you just comment on how recruiting is going on the outlook for new clinics in 2005? And if you could talk about your anticipated mix of satellites versus new partner based clinics?

Jackie, you know, we haven't -- we haven't announced a mix or a final number yet on the recruiting side. I know Mike Lang and his team are working very hard. We've had a number of very solid people in here most recently. We are making up a little bit of lost ground, you know, as we try to refill our pipeline and we'll continue to focus on that. And I know Mike and his team have been working very hard. In fact, Mike's on the road right now meeting with some perspective partners as we do this call. We haven't talked formally about a mix, although we would like to see if we could somewhere in the order of 45 or 50% of our facilities opened, be new partners, and that will be our focus for the next year?

May I add to this, Mike Lang is a name that may not mean anything to many of you. He was in charge of recruiting and development up until about 2 1/2 years ago, the chemistry between he and Royce Bradlin wasn't good and he left. We were fortunate enough that Chris and Larry were able to recruit Mike back to that position. And he is a very instrumental participant in the business plan of the board. And, we've seen his performance before, and I think everybody on the call, and everybody on the board is confident that, we ran for a period of time without anybody in charge of that department, and several recruiters and development people, all of whom reported to the CEO individually. And, so, now we have that stabilized. That was what I referred to a little bit as structural changes, but more importantly, we have a proven right person in there, and he's attacking it with vigor.

Okay. Can you also comment on your outlook for the fourth quarter on -- I know, historically, you've been -- fourth quarter isn't your strongest due to the holidays, but is it safe to assume that we should see a normalization in the southeastern United States and Gulf state-based clinics?

Certainly hope we don't see any more hurricanes. I don't think there are any forecasted. Fourth quarter traditionally for the the Company, although you recognized Larry and I have been -- this will be our second fourth quarter cycle, and we've made some changes, not traditionally, the biggest quarter for the Company, traditionally a little softer with the holidays, we're a little soft on the initial start, but, it's early, and the team's focused and so right now, I think it's too early to say where we end up.

Okay. Thank you.

Thank you. Our next question is coming from Ross [De Mont] of [Mid Wood Capital].

Hi, guys, congratulations on the recent managerial changes. Quick question, Larry, I know that you recently put together I think a five-year plan or multiyear plan and reviewed the business model. Having done that, can we talk a little bit about long-term margins, and I guess not necessarily operating margins, because it's a function of how many company owned versus partnership deals you do since the minority interest line comes i below that. But if we just want to look at pretax margins, you go back three years for this company. You have much better pretax margins than you have today. You've had a lot of growth in between with really no operating leverage flowing through. Can you just kind of talk about that, talk about the sustainable long-term pretax margin, what the model looks like?

Yeah, I mean, in terms of that five-year plan, that was what was presented at the board retreat Mr. Livingston was talking about. If you look, historically, the Company's, what I'm going to call operating margin, which is the contribution from the clinics before corporate ran in the low to mid-30s --

does that include the minority interest piece.

This is before minority interest.

Okay.

So it ran in the low to mid-30s. Now, as you had more profit sharing, that figure has come down, that actually comes out of that number as opposed to minority interest lines.

Right.

That said, after the changes we instituted this spring, in the second quarter of that margin, got back up to over 30%. I think it was like 32 or --

32.4.

We got back up to 32. This most recent quarter, it dropped below that figure. Some of that is linked to these costs and some of these items what we did. I would think long term, certainly, a goal for us is to have margins back up over 30%, maybe not every quarter, but certainly on an angled basis, that will be an objective of ours.

But that, I guess I mean I'm trying to take it further down then that. That's really -- you can, you can decide how you want to allocate costs. You know, from the corporate level down to the clinical level. We just go all the way down.

We actually don't allocate costs. We charge them a 10% management fee that gets eliminated intercompany.

Okay.

Anything that affects that line is the mix between profit share and partnership. And so, that said, you will see the minority interest line probably grow some, but not necessarily grow as a percent of revenues as we spend more time focusing on --

May I add to this, a minute, Larry?

Let me take a step back. I'm probably not getting my thoughts out very well. As we sit here as an investor, we're trying to figure out, what's the long term profitability of the company, in this business model? There's always nonrecurring stuff, be it hurricanes or searches for management, whatever it is. Take it all the way down to the pretax line, and tell me, what can you earn? Because you used to earn close to 10% there? Now, and now we haven't had any operating leverage over the top line's grown from 80 to whatever the run rate is now, closer to 115 or something.

Let me try this, Larry, even though I'm not going to give numbers, particularly. We are convinced, the Company and the board. First of all, we're not going to have any more operating changes, we're sure of that. But at least not of our intent. And the Company foresees, as it continues to grow, getting back to the significant operating leverage that it had before. And hence, that was some of the conflict between the previous CEO and the board was things like that. But there is plenty of operating leverage left in this company as the number of partnerships and satellites continue to grow and perhaps grow on an appreciated level.

But there's not a number we can talk about that's a reasonable pretax margin. I mean, is it 5%, is it 10%? What can the business model run at?

We haven't given a forecast. I'm not prepared to give you one today. If you look at -- if we run an operating margin of 30 plus and can keep our corporate below 13 we can produce those 10% numbers you're talking about. But we're not going to give you a forecast.

Okay. Yeah, and I certainly wasn't asking for a specific forecast. I'm just looking for sort of -- okay well, I'll follow up with this line of questioning another time. Thank you, both.

Our next question is coming from Mike [Pitowski] from Thompson Davis & Company.

Mike, you there?

Are you live?

Yes.

Go ahead with your question, sir.

Can you hear me, fellows?

Yes.

A couple questions, the 2200 to 2600 visits that were lost in Q3, I would assume that some of that would come back, I'm just wondering if you could make a guess as to how much of that might be made up in Q4? And then is there any lasting impact in terms of damaged buildings that you guys are going to have to work through in Q4 related to the hurricanes?

Well, as it relates to damage, we had a few facilities that had some physical damage, most of that has been the repaired, the bigger problem, we think, is power outages and people's accessibility to the clinics, the flooding and all the that. Or damages to their home. The problem with it, when we talk about lost visits it doesn't necessarily translate into backlog. Because, for example, if somebody's late in their duration in terms of their treatment schedule, let's say they're number 8 or 9 and they're going to come in 10 times, they may not come back, you may lose them. I don't want you to think this is like backlog in a computer business or something else, where all the sales get made up.

Mike, it's really different than that, it depends. Some of these folks are still pulling things back together. Our facilities now are open and fully functional. And, we expect to get, certainly, those people that were early of their treatment, allow them back, but, as Larry mentioned, some of the people late in their treatment will disconnect or will have other personal problems that outweigh their physical concerns for the moment. So, it's really difficult to predict at this point.

Any time you interrupt somebody's treatment schedule for whatever reason, you reduce their odds they're going to return for treatment.

And, based on what you know now, is it likely that when the Q4 release is put out. Is it likely you're going to have to say, write a sentence or two, essentially saying, well, at the beginning of the fourth quarter we still had some lasting impact from hurricanes and that cost us X amount, or is it likely that everything that was --

I don't think it will be a number, significant enough be a penny per share.

Okay.

I know for a fact that two clinics still were impacted the first week in October.

The first two weeks.

First two weeks of October. So, again, it's nothing like it was in August and September when you had all these clinics up and down, the Gulf and east coast being impacted.

What about -- will there be any CEO search expenses in 2004?

Well -- I hope not, that means they'd be changing us.

I mean, did any of that leak over into October is what I'm really asking.

No. That's the last of it.

What about the last question, the Sarbanes-Oxley Q4 expense, and then if you talk about what you see as the Sarbanes-Oxley expense in '05.

Well, there's no question that in the first year, companies are going to spent a lot more than they are on a recurring basis. We've not only had -- let me just give you an example of some of these costs, and this is my personal estimate, I can't tell you exactly. I'm estimating this year that we'll spend 600 grand on Sarbanes-Oxley alone. We had to hire a full-time manager to work on this. We have used Mann Frankfort as a consulting firm to do a bunch of work. We used KPMG, and we're using Grant Thornton. It's just amazing what Sarbanes entails. I don't think our annual cost will be 600,000. Unless they -- part of the problem the costs are so high is because Sarbanes, itself, is not well laid out. Everyone is kind of guessing at this point, including the accounting firms. I think as it becomes more structured, more of a normal financial audit, people will be able to build it in their routine and the costs will go down. In the fourth quarter , we'll spend money on this. This is, you know, we're going to do it, we're going to do it right. And, that's going to cause us to incur some outside costs.

So, maybe like a couple hundred thousand in Q4.

I can't say exactly. But it wouldn't surprise me.

And, then, next year, what would you anticipate, if it was 600 this year, 300 next --

David, what do you estimate?

Probably 300 to 400,000 next year. We are going to maintain a full-time manager, obviously, the accounting fees, external fees won't go away. We'll probably have consultants still, not necessarily at the same level we did this year.

It's an expensive proposition. It's been an eye opener for me.

Okay. Great. Thanks.

Our next question is coming from Eric [Warasta] of Pacific Growth.

Good morning.

Good morning.

Just had a quick couple of questions, first of all on the Florida market. I know you guys had mentioned that revenue per visit was a little higher there. Maybe, your excess(ph) was $98 per visit I was wondering if you could address, there's something specific about the Florida market that higher revenue per visit.

It's not the Florida market. It's all 37 of us. We figured out the average revenue for those 37 clinics, I think it was 98 and a quarter. If you look at the average revenues of those 37 clinics, we keep calling them the Florida clinics, because that's where the hurricane hits, it was really all those clinics.

Well, is there something that in the Gulf coast or --

well, it's actually in -- I think, how many states was it in? 7 states? 7 states for the clinic, so it's not Florida. I mean, it's just that mix happened to be a little different. Not dramatically different, our rate last quarter was 97 something. so maybe they average on -- a buck or two higher than other areas.

Okay. And then just on the expenses associated with closing the 8 clinics were just a little higher than you had mentioned in the September release?

Actually, they were the same, if you go to that reconciliation schedule on page 9. Closure costs themselves, which are things like, you know, leases, write off, that kind of thing were 815,000, we'd announced they would be 800,000, and then you have losses from the clinics of 151,000. Which, again, was commensurate with what we told people the historical had been -- the losses had been year to date for those clinics. The nine number is actually includes the losses of closure costs were right on target.

Okay. Great.

Thank you, our next question is coming from [Michia] [Remkapal] of [Saddaty]

Good morning, guys. Just a couple of questions. I don't know if you could review pair mix for us. I know you mentioned worker's comp was about 15.3% in the quarter?

Yeah, this is for Q3 2004. This is based on charges, private pay was 28.3%. Managed care was 30.7%. Workers comp, 15.3. Medicare, 21.7. And then the rest is self-pay and personal injury. Just other, really.

Okay. And, I know you mentioned in your release with -- you have Chris on board. You are going to focus a little more in terms of getting the hospital PTOT business up again, and potentially, some acquisitions, I don't know if you could provide some more color on that?

We've talked about that. We brought Lester Kaiser in about 5 weeks ago, and Lester's been criss-crossing across the country following up often both -- on both hospital related PTOT outpatient business primarily. And also physician-owned practice business. And we have a pipeline, I think we've discussed, you know in our travels in New York and Boston, probably around 18 or 20 prospects right now we continue to work on. And then the tuck-in acquisitions, something that the Company hasn't done in a while, we actually have looked at a few. And, you know, that's going to be a focus for us to do a couple of those a year, we think.

They won't be -- the Company is never going to be an acquisition driven company. Our growth, internal deNovo growth. There are several markets we've looked at where we could pick up anywhere from 3 to 6 clinics, say, with a -- structuring a partnership with the seller much like we have with our traditional partners ,and then where they're growing and there's opportunity to do additional deNovo clinics off of those, that's the type of acquisitions we're talking about.

What would be the average size of one of the management contracts?

The ones we're looking at right now, to be honest, really mirror our mature facilities, so somewhere in the mid-20s, mid to upper 20 visit per day to start out. They ramp up, they tend to ramp up a little quicker because of the captured audience. But, I can tell that you we have a diverse enough portfolio right now to really give you a real clear picture of where that will end up. But, we expect it to be relatively equivalent to our more mature centers.

That would be like for a physician on practice. I guess the outpatient facility for a hospital might be a little bigger, it depends on market size.

Okay. Thanks.

Thank you. Our next question is coming from Robert [Raddis] of David J. Green and Company.

Yes. With respect to Medicare, could you discuss the rate outlook and whether -- what are your concerns about the fact that Medicare seems to be trying to squeeze dollars out of the whole rehabilitation field?

Robert. This is Chris Reading, you know, there are two issues, one is, we expected a slight Medicare decrease in reimbursement this year. And we actually got a slight increase on an aggregate basis. More than a few years ago they announced Medicare -- CMS announced that they were going to put a cap, an annual cap on their outpatient reimbursement for their outpatient physical therapy services. I think next year's cap at the end of 2005 is estimated to be somewhere in the neighborhood of 1590, 1594, something like that. But that cap has received a moratorium prior to its implementation over the last several years. And we don't know when and if that will come back. It's slated to come back, I think, at the beginning of 2006 right now. But understanding our business. Average patient in our system is seen approximately 11 times. And Medicare, I would say reimburses us on average, somewhere in the mid-80 range. You're looking at a net revenue reimbursement, typically, from a Medicare patient beginning to end somewhere around $1,000. So while we would certainly have some patients with more extensive problems, it would hit the cap if the cap is ever enacted. It's not a huge proportion of our overall business. I don't believe that Medicare has any published information as to what the rates will do. Specifically yet for next year.

Much of what we do, can, in fact, eliminate the possibility of subsequent surgery, and so we should be and are perceived as a cost-effective activity which, in fact, will save Medicare money in the overall global view. And that's the position that we like, and we believe and I think we'll continue to enjoy.

You know, see -- you don't see any relationship in thinking at CMS between what -- the 75% rule that they want to impose on inpatient rehab, and that kind of thinking translating to outpatient rehab?

I don't know. I don't think there's been a link why yet. I'm familiar with 75% rule, and it really has to do with diagnostic mix. You know, which is -- I think it's still yet to be determined even on that end. I haven't seen the two things linked yet.

Yeah, obviously, in patient treatment is much, much, much more expensive than outpatient. So if you're trying to save dollars, there's going to be a lot more dollar potential savings in in patient than out.

Thank you.

Thank you.

Thank you. Our next question is coming from Will Lyons of Westminster.

Good morning. You obviously would review your clinics on an ongoing basis what to keep up and what to close. Over the next couple of quarters, should we expect any more closings?

It's something we look at at ever quarter. We even said at the beginning of this year, we anticipated we'd close a clinic, at least a clinic a quarter. I don't know of any closings that will happen in the 4th quarter, but that's a possibility.

Nothing planned?

We don't plan them. I mean, if we think we need to close them, we close them. Right now I don't know one we're going to close. We could. It wouldn't be unusual to close a clinic or two a quarter.

Our general philosophy is, that it's -- if every one of our clinics are good, and we don't have any closures during the course of a year, whenever they fall, then our screen is probably too tight. And so I would think that closing clinics, although not of the magnitude that we did in the 3rd quarter ,will be an ongoing part of our business?

Sure. Okay. A little more of a housekeeping question, or detailed question, over the last 6 quarters, you were reserve for bad debt has dropped significantly. What's behind that?

Well, it actually dropped. If you look in the 3rd quarter last year, when I came in as CFO, we did a review of everything on the ballot sheet. And it looked like, frankly, our reserves for bad debt were too high based on our experience. Historically, our actual bad debt experience runs about 1% of revenues, I think if you look at the most recent quarter, we expensed a little over 1% of bad debt. The drop you're talking about, most of that came in the 3rd quarter of last year.

Just an adjustment to more matching the historical results?

Yes, and this year, so -- and if you look at our experience. I think probably a better measure is our average days outstanding for the receivables. We started. I don't know what it would -- I know it was -- when I came on board, it had been around 70. It got down to around 68 at the end of last year, and as of the end of the 3rd quarter the average days outstanding were 60.

Right.

We continue to see improvement in our collections.

Great. Thanks a lot.

Thank you, our next question is coming from Jason [Crawshaw] of (indiscernible).

Good morning guys, just a couple questions here. The first would be, as you move away from the company-owned model toward the partnering model. What does that do for CapEx requirements, is that a material change or what's the situation regarding that?

It's really not a material change. If you look at our Company owned stores, I guess, it's a partner owned stores, what it takes to get those facilities open in terms of lease whole(ph) improvements or in terms of equipment expense, really isn't much different. There's some very basic things that we would need to have across both those facilities, the only variation would be potentially downstream as the facility generated more visits over time, potential expansion, but, you know, we've seen that with some of our more mature facilities, and quite frankly, we're not in a real capital intensive business, so, I don't expect the impact, I don't expect it to be significant or dramatic.

Well, along those lines, obviously, you guys continue to generate significant free cash flow. I know in my discussions, I think in the past, it seems as if I go back maybe 6 months, you know, shared buy back wasn't a priority. I see you bought back shares in the quarter now, and you've sort of indicated you're going to continue to do so. Has there been a shift in sort of thinking in that regard?

Let me try this one, Larry. I think Larry mentioned that we still have over 200,000 shares that we have approved -- been approved by the board to buy back and that we're going to move in that direction. The board believes in the Company and believes in the management team of the Company. And obviously, if we do a few -- couple of selective, maybe small group acquisitions a year of that will take up some of the cash. But if you believe in your company, then -- and -- know where you think you'll be in 3 or 4 or 5 years, then you must look at the possibility of buying additional shares.

Okay. That's helpful. It certainly seems as if it is something that -- I mean, conceivably, after you've utilized this buy back, I mean, we could see an expansion of an additional buy back? I mean, not that you're saying that, but that would not be --

We haven't announced anything, so we'd be -- they'd hang me if I --

Okay, sure, fair enough. Last question would be, you discussed just operationally getting back to basics, and you mentioned a couple areas as (indiscernible) cancellation rates, maybe working on the staffing, can you sort of -- if you look at the opportunities there is, can you sort of highlight one or two areas where you think specifically you'd have the best opportunity to improve in that area?

Sure. You know, I think we have -- we've made some fairly significant changes through the year. I think right now, our focus is on productivity, which is directly related to our staffing. I think we have some opportunity there. Our cancellation rate actually up until this most recent month has been pretty good. We got hit pretty hard in September. But I think that's been pretty solid. I think it will continue to be solid. We hope for some small improvement there.

Sorry, just on the cancellation rate in September, was that just a function in the Southeast region on the hurricane, or was that sort of throughout the organization?

No, that was more primarily focused on the east coast as it related to some of the weather. We've actually been pretty steady otherwise, with the cancellation rate. We normally pick up a little bit in the summer, because people, depending upon the day, are more likely to shift an appointment, you know, if the golf course looks good. But, you know, outside of that, it's been pretty steady.

As far as the potential, we look for partners who are the most capable, who have a following, and a couple of things have happened in the past few months, the outpatient business that HealthSouth, I think they let the head of their outpatient group go. And I think Benchmark, which was a competitor, doesn't have the same CEO, and I don't want to be ghoulish, although it's near Halloween, but those offer opportunities for us to perhaps enhance our number of very good partners that might be coming from those organizations.

Okay. Great, thanks.

Thank you. Our final question for today is coming from Jeffrey Nixon of MCM.

Chris, congratulations.

Thank you, Jeff.

My question is, you know, I guess if we're going to try to improve our productivity as you mentioned, there are two things. One is, is it -- can we improve productivity, is there a big spread in the performance in your mind between the various centers, and just by bringing up the laggards(ph) as an opportunity or are they pretty consistent?

Well, there's a bit of a spread. Part of our spread, we built in inherently by virtue of the fact that we bring these facilities up from scratch. Although, we open typically with a couple visits, it takes a little time and in aggregate it affects our overall productivity. When you look at our facilities that have been open. Our real opportunity is as we get the transition point from one staffing level to meeting the second staff person, and how quickly we can then transition the volume in those centers to match that additional staff which we have to get at some point in order to continue as well. So, we're working with our partners, we continue to refine our sales model and our training in that regard. And it's going to take a little time, but we think there's a continued upside in that area.

And then I think it's also true that partners, obviously, are a big issue for you, but probably -- am I right in saying that a tougher issue was actually finding the kind of more genuine person to come into the clinic. That that's a tighter market. I wonder what your read is on that was right now?

Staffing, overall, the more junior person, particularly to do with satellite, usually comes from within the center. So that person usually is the most senior person after the partner, and they go out and open the second center, in terms of line staffing, markets tighten up a little bit. But, you know, it's not something that's been disruptive to the business. Something we're focused on, and as I said, we still have some productivity upside. We may have an impact in an individual center. You know, if somebody leaves, it's really related to the time it takes to fill that person -- we're still making those fills. So it will be a continued area of focus for us, but we don't see anything dramatic right now.

So that -- in terms of your progress, because it sounds like a critical part is actually filling those positions and the clinics and kind of -- to build critical mass, so what you're saying is, it's not an overwhelming problem for you right now? Even though you have a little more competition from the physician-owned practices.

We've got some competition, I'm not really sure how much on the hiring side comes from physician-owned practices, but certainly competition for the visits on the physician side which can have an impact on the productivity. Physician staffing a variety of different ways. Some of which include profession staff, licensed staff, and others, which include a lot of ancillary people, so it really is dependent. These markets go through cyclical periods and they've done that as long as I've been in the profession the last 20 years, and we have provisions, and other contracts that we've engaged with temporary staffing agencies and other people to fill gaps as they appear to be critical.

Okay. Great. Thanks, Chris.

Thanks, Jeff.

thank you. There appear to be no further questions at this time. Gentlemen. I'll turn the floor back over to you for any closing remarks you may have.

Thank you. Thank you for participating. This will be my last -- my second on my reccurant(ph) and my last investor call. I was thinking here, reminded of Richard Nixon after he lost to John Kennedy saying, you won't have me to kick around any more. Sure enough, he became president again in '68, and sure enough, he was kicked around further. But I am extremely confident that with our current management team you will not see or hear from me again or -- and I will go back to being on your side of the street, a significant shareholder, and one that is looking forward with the Company and with this -- what we think is a great management team. But thank you for your support of the Company and thank you. Some of you have called me, and thank you for your comments. That's it.

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