US Physical Therapy Inc (USPH) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the U.S. Physical Therapy first-quarter 2005 earnings release conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Chris Reading.

Good morning, everyone. This is Chris Reading, U.S. Physical Therapy's Chief Executive Officer. We're pleased to have you here with us this morning as we discuss our first-quarter 2005 earnings results. With me here in Houston are Larry McAfee, Executive Vice President and Chief Financial Officer; Glenn McDowell, Chief Operating Officer and David Richardson, our Controller. Before we begin, I would ask David to read a brief statement.

This presentation contains forward-looking statements which involve certain risk 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 of the Securities and Exchange Commission for more information.

Hi, folks. This is Larry McAfee. U.S. Physical Therapy today reported net earnings for the first quarter of 2005 of $0.17 per share, a $0.04 improvement over first quarter last year and $0.02 higher than the analysts contest (ph) this estimate of $0.15.

In terms of quarter-over-quarter comparisons, net revenue rose 9% to 30.9 million due to an 8% increase in patient visits combined with the $1.27 increase in average net rate per visit. Clinic operating costs were reduced as a percentage of revenues with a resulting 150 basis point increase in gross margin from 25.7 to 27.2%. This margin improvement is attributable to the rate increase and lower clinic variable and fixed expenses as a percentage of revenue.

Corporate office costs rose from 12.8% to 13.1% of revenues. Most of this increase was for higher accounting fees and other costs attributable to Sarbanes-Oxley compliance. Net income for the quarter increased 33% from 1.5 to 2 million.

Our average visits per day per clinic were 18.4 as compared to 18.7 first quarter of last year. Same-store visits for clinics open for one year or more increased 1.2%. The net rate per visit for those clinics also increased approximately 1.4% resulting in same-store revenue increase of 2.6%.

With regards to the Company's ongoing share repurchase program, we've bought 240,000 USPh shares in Q1 at an average cost of $14.90. Since September, the Company has repurchased over 600,000 shares or approximately 5% of our outstanding shares. Our cash flow remains strong. Over the past 18 months, our average per AR (ph) days outstanding has been reduced from 73 days to 57 days as of March 31. This is an improvement of over 20%. Even after using 3.6 million during the first quarter for stock purchases, our cash balance actually increased from year-end and stood at 20.9 million or approximately $1.76 per share as of March 31, 2005.

As many of you who follow our Company know, 2004 marked a return to our Company's roots where we focused on building robust partner-centered facilities. Last fall we outlined a blueprint for what we believe would be a successful path toward improved operations, profitability, and enhanced shareholder return.

I'd like to take a minute to review those key objectives and to tie those together with the results we were able to produce this first quarter. In the area of development, we discussed our focus on bringing quality new partners into the Company. Through the end of this month, actually tomorrow, we will have opened nine new facilities. Of those, five are new partners and for are satellites from very strong partners. I have been pleased the early performance of these facilities in markets like Omaha, Nebraska; Richmond, Virginia and Davenport, Iowa to name a few.

Since our last call, we have also increased our partner recruiter workforce and we're currently up to five partner recruiters at this point. We will continue to work on developing our new partner pipeline. Last fall -- I want to make a comment on our share repurchase. Larry and I met with many of you and you discussed your desire for the Company to reinvest some of our free cash flow in the Company. To that end, our Board responded with the share repurchase program that has allowed us to accumulate over 600,000 shares since September and approximately 240,000 shares in this first quarter.

We continue to have a solid focus on growing our business both volume and referrals. One of the ways that we have done that is through the addition of sales and marketing individuals in key markets across the country. And I'd like to ask Glenn McDowell, our Chief Operating Officer, to discuss this initiative in more detail.

Thanks, Chris. We finished the quarter with approximately 50 facilities covered by salespeople. These individuals work to automate (ph) and enhance the partners' efforts to grow our referral base by increasing the volume of existing referral sources as well as targeting new potential referral resources, which ultimately become tie back to our clinical partners as a result of the care delivered.

One example of the impact of this has been in the Dallas market where same-store new referral growth has increased 10% as a direct result of this program. To date, most of these covered markets have been in the West and, to a lesser extent, in the Central region. Our goal is to further develop our coverage to additional markets over the course of this year.

Thanks, Glenn. Another focus that we've discussed and I don't think we talked about it on our last call, but our Management Services Contract business. I want to give you an update on that. In recent months, we've added three new contracts, two of which have begun to see patients. While this remains a modest component of our business, we have demonstrated the ability to add to our existing revenue base through these service agreements.

Although we have no first-quarter closure on our initiative to add "tuck-in" acquisitions, we will continue to be active in this area and continue to pursue this as an accelerator to our growth.

As you can see, we continue to work the plan that Larry and I established last fall. While we recognize we have continued progress to make, an opportunity to realize, we're encouraged by the progress thus far and we hope you are as well. And with that we will open it up for questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Chris Perry (ph).

Congratulations on the quarter. A question on the collection that you talked about. What do you attribute that to? Is it a change in reimbursement?

No, it's not a change in reimbursement. The Company, frankly, when we got here had pretty good collection effort; but we stepped it up. I think it's a combination of really a bigger focus on collections and as more and more payers go to electronic reimbursement. And for an outpatient business we, frankly, we were pleased at 65 days and now we're down to 57. I think there is still some room for improvement. But it's one of the reasons, that over the years, the cash flow of this Company has been really superb.

Our next question comes from Tom Jacob (ph).

I was calling to see if there were any plans for future cash model revenues in your plans?

Tom, I'm not sure I know what you mean by cash model.

Maybe items that are not necessarily billed underinsurance; but possibly bringing in a different revenue stream by offering cash model, physical therapy, or physical therapy type services to a customer base that you may not tap in all the markets that you're in.

Let me go ahead and take that, Larry. We do some of that now in varying amounts across our facilities. Now we don't break it out and we don't tend to track it as a separate product line. We have a variety of things that we do in some markets whether it's orthotics and prosthetic business, or sports outreach and some components where we contract directly with schools or with other agencies. Some of it is product related. Some of it is service related and it really varies considerably by market. But it isn't something that we have ever reported as a separate item and it really rolls into our net revenue rate provision that we report on a consolidated basis. So, something that we currently do.

Our next question comes from Michael Petusky. Please go ahead.

Nice quarter. I had to step away for about a minute. Did you guys give pair (ph) mix?

No, but I've got it here. Let's see, private was 28.4%, managed care 31.2, workers comp. 16.1, Medicare 20.4, and other 3.9. So if you compare it to what we averaged for last year, private and managed care are up a little bit. Workers comp is flat. Medicare is down a little.

How were those -- that break out -- how is that going to look say 12 to 18 months down the road? Are there trends that we should be looking for?

As you know, we don't give projections. But if you look at it historically, the movements we have in these bear (ph) classes are very very small, even from quarter-to-quarter, much less year-to-year.

I was wondering if you guys could dig in and drill down a little bit into the sales and marketing folks. I thought I heard that you guys said that 50 of the clinics are now covered by the sales folks.

Right.

At what point will you have full coverage of all your facilities or with all of your partners?

Based on our model, we probably won't ever get to the point where we have 100% coverage because we'll be in small markets where we have one partner, one facility and we won't have an economy of scale that allows us to bring on a sales and marketing person. In which case we will do what the Company has always done, which has been also very successful, which is to rely on that partner and their relationships. Where we will look to roll these out are in markets where we have clusters of facilities, either within a partnership or across partnerships, which we have also done effectively.

If you guys could guess, even in fairly broad terms, what do you think the penetration would be say over the next say by year-end and then by year-end '06.

Mike, again, we don't give projections. If we give you a projection then we're going to have to report every quarter. We will report historically. We started our with nine a year ago. So to coverage at 50 clinics is pretty dramatic improvement. It took awhile for us to get up to speed on these, but as Glenn noted, back in the Dallas market and some other markets where we already had frankly good marketing people and good market coverage, we have seen nice pickups.

We will continue to provide updates. I just don't want to be in a position where we have got to detail the markets and the number of facilities just yet. We do have a plan. We are looking at a number of markets and we will continue to work the plan as we have on these other things.

So it is fair to say that there is still significant markets or clusters of facilities that don't have these sales folks helping them.

Fair statement.

Our next question comes from Mitra Ramgopal.

Just a few questions. First, with regards to the share repurchase, I think you mentioned there are about 200,000 shares available. Any sense that you will renew the authorization or do something beyond once that is used up?

This is something we discuss at every board meeting. The board has been very amenable to increasing the repurchase amount. They did that as recently as December. We have a board meeting in May. I'm sure we will address at that point. I can't tell you how it will turn out but if we increase the amount, of course, we will announce it.

In terms of the clinics openings, the goal I think for the year is probably 35 or more. Is that fair?

I think that's in your model. We haven't given a number.

We did open 35 last year.

You were just kind of using historical averages. Trying to get the opening six in the first quarter, if it's going to be a little more back-ended this year.

If you look over the last few years, it has been back-ended. That's not intentional. It's just the way it turns out sometimes.

Our focus really is to do as many very high-quality partner facilities as we can, but to not diminish the quality of the facility in order to get a certain number open. So we're going to continue to try to hit on those target partners that are going to give us long-term sustainable business.

In terms of the management contracts, I know you -- it's still a small part of the business; but you added a few. On average, what would be sort of the revenue from a typical contract?

Those contracts -- the visits tend, just on the ones that we've done more recently, tend to pick up a little quicker. I think we have looked at somewhere in the 25 to 30 visits a day range. Although, we have facilities that are certainly bigger than that. Now understand that we don't keep 100% of the revenue until we have a management fee that we contract under and then pay salaries pretty much under that.

Margins can be a little less on a management contract but you've got not investment. From a return standpoint, it's very good.

Returns are great. The margins aren't bad. They're not quite as healthy as our clinic margins; but they are not too far off.

Could you -- just a follow-up question. If you could give us an update in terms of the competitive environment?

I don't think it's changed a lot quarter-over-quarter. You know, we continue to work hard in all the markets, even where we have dominant market share, because we believe that marketshare is movable. And that can go both ways. We have got to fight to keep it and we are going to fight to get more. I don't see anything in the landscape that has changed dramatically really over the past year that changed the competitive environment. We've talked a little bit about therapist availability and those kinds of things. Really, I don't think it's changed dramatically.

When I get investor calls, people always ask me about companies like HealthSouth and others. But really in most of our markets our primary competitors are small mom-and-pop operators and hospitals. Certainly, in some markets we'll be up against a HealthSouth, or a Benchmark, or Physio (ph), or somebody. But that's not normally our primary competition.

Our next question comes from Eric Worth (ph).

Just had a couple of quick questions for you. On the same-store visits growth of 1.2%, just kind of thinking about that. And then some of the experiences you have had in markets like Dallas where the marketing program really seems to have taken hold. I was wondering is that 1.2% something where you might see accelerate? I don't know if you can give an exact number. But just something that's going to trend upward over the next 6 to 12 months.

Obviously, we'd like to do it. That's the reason that you do these marketing programs; but we can't project that. What typically happens with a clinic is after three or four years, it reaches maturity, not unlike a lot of other retail businesses. The other thing that affects us too is we open satellites. And almost invariably when you open a satellite clinic, you pirate it, or cannibalize a small percentage of the business, maybe 5 or 10% may move to the other clinic. But the combined clinics are more profitable. So, frankly, and we said this repeatedly, visits are important to us. We're more concerned about things like total visits and visits per therapist rather than necessarily visits per facility. Because you can have a very high visit count in a facility and if you're not staffed appropriately you're making less money than you would in a small clinic. So it's not an unimportant measure; but it's not the driver we look to.

And then on the same-store revenue per visit. Do you have that number available?

Same-store revenues increased 2.6%. So that was a combination of the 1.2% increase in visits and 1.4% increase in net rate.

And then just last question I had was on rent expense. It looks like there was a little down-take this quarter. I was wondering if that is something that we could think about run rating or what was responsible for the drop in rent expense?

Part of it is in the fourth quarter. David, now correct me because I'm probably going to misspeak on this. But in the fourth quarter -- well, what happened in February is the SEC came out with their accounting pronouncement about how you account for rent and lease hold improvement. And so we booked a cumulative charge in the fourth quarter related to that. It wasn't a big number but that's probably -- you're not looking year-over-year, Eric.

Sequentially, right.

That's because you had more of that charge in the fourth quarter.

I would say it's fair to say we haven't seen a trend where rents suddenly go down.

And our rents are actually higher in the first quarter than in most of the analysts' models. I don't remember specifically about your alls; but that's because of that change in accounting treatment. I've actually had a couple of calls about that in recent months.

And just to piggy-back on that question about rents and leases. Are those renegotiated annually?

No. Typically, we have five-year leases.

Three to five with renewal provisions in there that give us the ability to renew on an extended basis.

With 260 plus facilities now we literally have --.

We'll have probably -- I looked at it the other day. We will have 20 or 25 that renew this year, maybe 30. I don't know the exact number.

Every other week we're working on a renewal; but they are longer-term leases typically.

You're next question comes from Ryan Kilstein.

I think you might have partially just answered my question. I know that the mature clinics had an uptick of 1.2% for visits in the quarter. And then just before that in the press release, talked about the average clinic visits going from 18.7 to 18 4. Is that a function of the satellites as well or was there fewer clinic visits from your newly opened locations in this quarter versus a year ago?

No, the ramp ups are similar. We haven't seen that. We look at that fairly regularly. It's just more a function of -- you've got a combination of things. You've got older clinics that are actually going to see modest declines after they reach maturity. You've got the satellite effect where you get a little cannibalization. And when you get the effect of new clinics, which obviously always bring your average down.

And the drop-off in the mature clinics, that's captured in that 1.2% then.

We had an increase even despite the fact that clinics normally reach a maturity point.

We are trying to do some things to overcome that cyclical drop-off when they become mature. One of those things obviously is a sales and marketing program. Others have to do with program development. So it's not something that we take for granted to the point where we don't work on it. We continue to work on it. We continue to look to see what we can do to improve it.

Our next question comes from John Abbey (ph).

Just had a question. Do higher gas prices or other kind of general economic pressures affect your business? Have you seen that historically or maybe have you seen any effect here in the first two months of the second quarter?

Obviously, any business is kind of tied to general economic conditions. But gas prices, specifically, no they don't have any effect on us per se. There's no way you could quantify it in any way. I mean, it's not like a manufacturing business that uses petroleum products as a feedstock. It's just not an issue for us.

Most of our patients are coming from fairly nearby, and they are next to work, or they are next to home. So it's not a burden for somebody to get into therapy typically from a drive standpoint.

The second question I had was do you see working capital improvements continuing throughout the year and does that imply improvements in cash flow as long as your business continues to do well?

The Company has always had good cash flow for years and years. We continue to work our receivables obviously. They have gone down in terms of average age for at least the six consecutive quarters I have been here. There's a limit. You know, you can't get them down to zero but we continue to work on it. You know it's really our cash balance is a function of really three things.

Obviously, it's driven by cash flow. But in terms of use of proceeds, it's what's your rate of development in new clinics? How many shares we buyback? And should we use any cash for acquisitions? But as we talked about with a lot of our investors in the fall, it doesn't make a lot of sense to have $1.75 in cash per share on your balance sheet. We need to reinvest it in the business one way or the other.

I next question comes from Michael Petusky.

Just a few more. Can you talk about -- when you talked about the sales and marketing people, how many sales and marketing people are actually covering those 50 facilities?

Right now we have seven sales reps out there. Most of those are in the West. We have a few in the Central region and then we're looking to expand from there.

How many folks are working in your management services business right now?

Actually, I mean, we have one person whose sole responsibility is that area from a prospecting component. And then the VPs and the rest of the operations team work on things like deal closure and implementation. So there are multiple people --

And the local partners will actually handle the staffing in most cases.

Exactly. So, I mean it's multifaceted and it's integrated within the rest of our operation structure but one person on the prospecting side.

How many contracts -- is it like somewhere from 5 to 10 total that you have in that business?

Six or seven I think at this point.

You have to remember that we sold how many last year?

Two. Two went away.

Again, our Vice President of Development for Management Contracts didn't come on board until the fall. So we had told people this was something that would take several years to develop where it would be a significant business; but it's a nice add-on to what we do.

At the top, you guys talked about the new therapist partners that you guys added. And I think you mentioned Omaha and Richmond. Where are the five new ones that you added? Where did these folks come from? Did they come from HealthSouth? Did they come from hospitals? Can you kind of talk about where some of these folks came from?

In the past, I think the Company's kind of given a laundry list of where everybody has come from. And just out of -- I think from a couple of perspectives. One, out of respect for the other companies that are out there, I don't know that we want to go down that path. I don't think it's that important. These are quality folks that were established in their marketplace, either in a private practice, or a nationally held practice, or a hospital. And we picked them not because of where they came from but because of the qualities that they possess.

And I think because of Chris and Glenn's backgrounds, everybody presumed we're just going to pick off HealthSouth left and right. But that's not the case if you look at it. We get a broad mix of people. And typically most of our partners come out of hospitals or private practice.

That gets me part of the way there on that. And the last question that I had was what your sales rep is doing in Dallas to drive new referral growth there. Was there something specific in Dallas that made that a little bit easier? Or are the initiatives and strategies that person is bringing to bear in Dallas, is that doable in a lot of places?

Typically what we look for and where we put sales reps is, as Chris said, one, we have geographic density by a number of facilities. They also tend to be fairly heavily populated bases with a large number of physicians. And the sales rep is able to take existing referral sources, grow them, and also go out and find new referral sources just because that's what they do from a full-time standpoint.

The markets that we have chosen really are based upon geographic density and where we think we have the ability to grow with new existing referral sources that are out there that we haven't touched.

Logically, if you just think about it. A good partner of ours might be able to get out what, twice a week? Or a half a day a week. Which means it's hard for them to call on a lot of GPs and others who can't be individually high referral sources. Somebody working the market all the time can touch doctors that probably the partner couldn't get to.

Mike, I want to add one point. Where we have really seen this takeoff as an example in this Dallas market; why it has done so well. We have very strong partners, very strong directors in the Dallas market. They give great care; they are very connected to the community. When it would seem maybe that when you add a marketing person to that type of a mix, you wouldn't get as much pick up. But what we have found is when you have people who know how to create relationships already because they've been doing it for awhile, the added benefit of the sales and marketing person really propels them because they know how to tie in the care. They know how to tighten the communication down with the doc. You can get a very quick conversion to a pretty steady referral source. So those of the kind of markets that we will continue to look to rule out new salespeople.

Our next question comes from Eric Worth.

(technical difficulty)

His line has disconnected. There appear to be no further questions at this time.

Thank you, everybody. We appreciate the time you have taken today. We appreciate your continued support and have a great day.

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