US Physical Therapy Inc (USPH) 2005 Q2 法說會逐字稿

Good morning and welcome to the U.S. Physical Therapy second 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's now my pleasure to turn the floor over to your host, Mr. Chris Reading. Sir, the floor is yours.

Thank you. Good morning, everyone. This is Chris Reading, U.S. Physical Therapy's CEO.

I'm pleased to have you with us this morning as we discuss our second quarter 2005 earnings results. With me today are Larry McAfee, Executive Vice President and CFO, David Richardson, Vice President and Controller, Glenn McDowell, our Chief Operating Officer. Before we begin, I'd like to ask David to read a brief statement.

Yes, 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.

This is Larry.

Pleased to report Q2 results, our net earnings for the period were $2.8 million, or $0.23 per share. For the six months, earnings were $4.8 million or $0.40 per share. Both the second quarter and first half, net income and earnings per share levels are Company records.

I'd like to review with you some of the comparative highlights for the quarter and half-year as compared to the same periods in 2004. First, quarter-over-quarter comparisons -- net revenue rose 10% to $33.6 million due to an 11.4% increase in patient visits. Clinic operating costs in the second quarter were 70.7% of net revenue as compared to 66.8% in the second quarter a year ago. As noted in the release, there's been significant improvement in the earnings of our profit sharing and other wholly-owned clinics.

Clinic directors' incentive comp for these facilities is reflected in clinic operating costs rather than in minority interest expense, as they are for the limited partnership clinics. This -- what this does is it slightly reduces our gross margin, but minority interest is less as well, resulting in a net pickup in the bottom line. This is -- it's something to be expected.

If you think about it starting in 2001, when they changed the accounting rules, we primarily opened profit sharing clinics the last few years. Those are still in their ramp-up phase and so you would expect minority interests to go down and operating costs to go up as it relate to comp expense for those clinics. The most important thing, I think, is how much more we brought to the bottom line.

Corporate office costs as a percentage of net revenue were down to 12.4% from 16.1% a year ago. Keep in mind that in Q2 2004, that's when we incurred a pretax charge of about $700,000 related to severance. Net income for the quarter increased 21% to $2.8 million.

EPS was $0.23 in Q2 2005 as compared to $0.19 in the same period a year ago. The stock analyst consensus estimate for the second quarter was $0.20. The analyst estimates range was $0.19 to $0.22. So, the Company's actual results of $0.23 exceeded expectations, bettering both the consensus average and, in fact, being outside the range.

A few notes on the 2005 six-month results as compared to the first half of last year, net revenue rose just under 10% to 64.5 -- $64.5 million. This is primarily due to a 9% -- 9.6% increase in patient visits. Clinic operating costs, again, were higher than last year, but this was more than offset by a percentage of corporate costs.

Net income increased approximately 26% to $4.8 million from $3.8 million, first half EPS at $0.40 -- was $0.40, versus $0.31 a year ago, again, another record. Our cash flow for the quarter and year-to-date has been excellent. We closed June with $18.2 million in cash, or approximately $1.50 per share and this was after using $5 million in May for the acquisition.

Thanks, Larry.

I'd like to start by mentioning that this quarter, we were able to get a lot of important things done, things that we've been focusing and working very hard on. Revenue grew at a steady pace, as Larry mentioned, at 10%. Corporate office costs declined as a percentage of revenue, demonstrating that we still have room to continue to leverage our existing structure. Additionally, we closed on our first acquisition in a number of years with a group of individuals who we feel will do a very good job for us in the future.

In total, this quarter we added ten new facilities and we closed two locations. Our development focus will continue to be on high quality partners and their satellites. I want to talk about two recent examples of these, both of which were satellites.

One, began seeing patients in April -- mid-April, great partner, partner with ten prior locations and this particular satellite, in just four straight -- four short months has ramped up to 40 visits a day. Another example of some of the development that we've been able to do recently, we had a facility open last week of the month of June, that director was in town here just last week, going through our masters training program. She's ramped up already in just five weeks to 23 visits a day.

I think in general, our -- our direct -- or our partner recruiters have begun really to understand the -- the type and the quality of the people that we're looking for to become new partners. They're getting up to speed and I've been very pleased with the results that we've seen on our new partner development day on Friday.

On the revenue side of things, same-store revenues were stronger than they have been in some time. Second quarter tends to be a strong quarter for us, typically absent of those things which can create challenges such as major holidays, hurricanes and -- and as well major travel and vacations. One of the positive contributing factors, though, I think that really helped to -- to contribute to our same-store volume, has been our focus on our sales and marketing initiatives.

And I'd like Glenn McDowell, our Chief Operating Officer to discuss some of the progress that he's made in that area.

Thanks, Chris.

We have continued to expand our sales force in key geographic markets. We presently have 15 full-time sales reps covering 90 locations nationally. Our sales reps' major focus is on developing relationships with referral sources who send now, but have the potential to send additional business.

Another key area of focus for them is uncovering new referral sources who we feel will have a positive impact on volume over time as these relationships grow and strengthen. We will look at additional markets where we feel the use of a sales rep makes sense and can strengthen our core business on an ongoing basis. Operationally, we continue to focus on our internal key indicators to help our partners drive efficiencies in the area of clinical productivity, visit capture and net revenue production.

Thanks, Glenn. I guess with that we'll -- Operator, we'll open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Thank you. Our first question is coming from Eric Warasta from Pacific Growth Equity.

Thanks a lot.

I was wondering if you could just talk a little bit about -- on the acquisition front, what you're seeing out there, is that something that's still part of the strategy going forward?

Yes, Eric, it will absolutely be part of our strategy. We continue to be active and selective in those people that -- that we are -- are talking to and looking at. But that's a part of our strategy that I think will -- you will continue to see over the next coming years. So, strategy hasn't changed.

I think the activity out there -- we're on the front end of being able to get the rest of the world to -- to understand and to know that we're back in the acquisition game, although we'll continue to be a de novo--driven company. We will continue to do these tuck-in acquisitions and we're working on that effort.

Thanks.

And then on the same-store sales growth, the volumes seem like a really strong number, 2.8% this quarter. And I know you hinted that internal sales force had a lot to do with that.

I was wondering -- is that kind of a sustainable number to think about, that kind of 2 to 3% range, for same-store going forward?

Well, as you know, we don't give -- that would be like giving you a revenue number.

We don't give those kind of forecasts, but Glenn and Chris can speak to it more, but I think we've been very pleased at the productivity we've seen out of the sales reps, even after only having used them for a short period of time.

I expect from time to time we will see fluctuation in that number and I don't know that we've -- we've been at this long enough to know where we'll settle. Second quarter tends to be a strong quarter for us. So, I think it's too early to tell exactly where we'll be, but we're going to continue to focus on it.

Okay, great, thanks.

Thank you.

[ OPERATOR INSTRUCTIONS ]

Our next question is coming from Mitra Ramgopal of Sidoti.

Yes, hi, good morning, guys. I noticed the revenue per visit was down slightly.

If you could comment in terms of what you're seeing in going forward, if we should sort of expect it to be fairly stable at these levels? And also if you could provide sort of the revenue mix for the quarter in terms of worker's comp, managed care, etc.?

Yes, I think there were a couple of factors. First of all, I think last year, the second quarter was the highest net rate quarter we had. So, you're comparing it to a pretty good rate.

Second thing is, it's a function of mix and I will give you that mix in a minute. And then third, the Hamilton acquisition, though it was only in there for six weeks, their average rate per visit is lower, they're very profitable, but it's a volume-driven profitability, and so that actually brings our rate down a little. If that hadn't been in there, the rate would have been equal to or higher than a year ago.

In terms of the mix, this is based on revenue, private payers were about 28.4%; managed care was 30.7; worker's comp was 15.2; Medicare was 21.8; and other was 4%.

So, as compared to the previous quarter, Medicare was up slightly, about 1%. Worker's comp was down, that has a little bit of a rate impact. But again, part of these numbers are changing now because as you bring in acquisitions, they're going to have slightly different mixes. I think, again, the main thing we focus on is overall profitability.

And on the acquisition front, in terms of the margins of the acquired businesses, is it significantly lower than the existing base? And do you hope to improve that over time?

The -- the gross margin can be different, but again, we're focused on operating profit and we wouldn't -- we're not -- we wouldn't do an acquisition if we thought it was going to be -- hurt our numbers in any way. And certainly we don't think that'll be the case with the recent acquisition.

Okay.

And finally I noticed you closed a couple of locations. In terms of going forward, I don't know if you have any other expectations on that front, in terms of closing other -- ?

We actually closed one and sold one. The -- the effect to the bottom line was negligible, if you look at the gain on sale and closure costs, it was a wash. So, no, I -- we said -- we have told -- told the Street we expected we'd close five or more this year. I think we've closed a couple at this point.

What do we have, David?

Three.

Three closures -- [inaudible] That include the sale of the one location? Okay, two closures and one sale. Is that right?

Okay, thanks.

Thank you. Our next question is coming from Jason Crawshaw of Brait Specialised Funds.

Good morning, guys. Nice job on the quarter.

A couple of quick questions here. Have you disclosed what you paid, as far as on a multiple basis, for Hamilton, would be the first question. And generally, what are the multiples you're seeing out there on an acquisition basis?

No, we didn't disclose the multiple, though the purchase consideration and other information will be in the Q.

I would say that these businesses can be bought probably for 3 to 5.5 times EBITDA. But if you're paying 3, it's because you've got a no growth business. So if you're looking at something like the one we just did, it's going to probably be in the 4 to 5.5 range.

Okay. And are you more focused on growth opportunities?

Yes, we're not looking to be the retirement planning vehicle for people. In the recent acquisition, they kept a large stake in the business, all the partners stayed with the business. They're going to continue to grow the business. And in fact, since we bought them, they just entered into a management joint venture agreement with a hospital for another clinic.

So, those are the types of facilities we're looking for. Again, I want to stress -- acquisitions are just a supplement to our growth. We're going to continue to be driven primarily through internal growth.

Okay, great.

Next question -- any sort of change or commentary regarding what you're seeing on a competitive basis? Any of the larger players looking to sort of trim down some of their businesses? What's happening on a competitive basis?

It's interesting. I -- I tell people we have partner recruiters come in on Friday and we talk about different markets and sometimes people tend to shy away from markets where quote-unquote -- there's a lot of competition. I think market share continues to be movable. In terms of the big players, people that you guys would recognize, different people are in different phases of their growth and their opportunity.

I don't think the market's changed or shifted dramatically. Some of the bigger companies continue to be focused on what they're doing, which is different than what -- what our focus is. So, I think there's a lot of opportunity out there still for us to continue to grow.

I mean people look at HealthSouth and Select Medical and some of the others, but honestly, our typical competitor is a local hospital or privately-owned practices in the market. And that hasn't changed.

Okay.

And then lastly, did you buy back any shares in the quarter?

No, we didn't. But our -- our repurchase program remains active. While we were working on the acquisition, there was no assurance we could get the deal done.

We just didn't think we should be in the market. And then after we closed it, the stock price moved faster than our bid, in all honesty. So we didn't get any shares.

Okay. But clearly, still going forward, that's part of the game plan?

Yes, we have shares still available to purchase under our purchase program and it remains an active program.

Great, thanks, guys.

Thank you.

Thank you. Our next question is coming from Mike Petusky of Thompson David and Company.

Hey, Mike.

Hey, good morning, fellows. .Great quarter. A few questions. A great quarter in terms of collections, 55 days --

Just looking forward, Larry, is kind of mid-50s, is that -- is that about as good as can be expected? Or can you do a little bit more there?

Chris just mumbled, we thought it was good at 60. When I got here, that's what we were shooting for was 60. So I don't know how much more it's going to come down. It will probably come down some more just for the reason that more and more payers are going to electronic payment and processing of claims and that expedites payment.

So, I don't know how much -- frankly, this is the best cash flow company I've ever worked with or seen. So, we're pleased at 55. Hopefully it will come down some more, but I think probably it will be driven less by collection effort and more by electronic submittals and payment.

And as far as your management services business, was there any new contracts signed in Q2 or anything new to talk about there?

Yes, hang on, Mike, let me just take a look.

We recently, and I think we were beyond Q2, but we signed a -- we have an -- we signed an agreement that will begin here very soon. I'm trying to look at my list here.

Currently up to nine facilities.

Yes, we're up to nine total locations. Q2 we had a lot of -- a lot of activity. I don't know that we added any that were officially signed in Q2, but --

One or two after the quarter?

Yes.

Something else, I got a call this morning before the conference call from an investor saying well, your management contract revenues were down from a year ago for the comparable quarter. Keep in mind that this time last year we sold a clinic and some management contracts went with that. So, we're actually building it back up now. And, as Chris mentioned, we just signed up some more.

And this one may be for Glenn, I'm not sure.

The 15 full-time sales reps covering 90 locations, is there kind of a year-end target of how many sales reps you want to be at? How many locations you want to have covered by year-end?

We don't really have a target. We're constantly looking at different markets and trying to analyze whether or not we feel it would be beneficial to bring sales on there. But we don't have a number in mind nor a total number for year-end that we're shooting for.

Okay. So is it fair to say that maybe some locations it just won't make sense for a sales rep to cover those locations?

That would probably be true. We tend to look at markets where we have some geographic density and we can take advantage of a sales rep working from multiple locations. So that tends to be focus from that standpoint.

Mike, hey. This is Chris.

We have spent a lot of time on this and Glenn has -- Glenn has a fairly specific list of facilities that we're actively pursuing. A little bit hesitant to give you an absolute number. But we think probably in total that when all is said and done, if we were to take our existing facilities, and I'm not suggesting we will have it done by year-end, but about half the facilities we operate currently could benefit from a marketing director. Whether that be a part-time person in some of the smaller locations where we don't have clusters or full-time people covering multiple locations.

We continue to use really the testimony of our existing partners who -- who have had some time and some traction with this. To move maybe more reluctant partners over. We've had good luck with that. We continue to expect to have good luck with it. And we're spending more time in the -- in the training and the rollout of this program. So we think we'll continue to make progress for -- for the foreseeable future.

That's helpful.

And last -- last one, Chris, on the early part of the call, you talked about a satellite where you -- you had ramped up to 40 visits a day in four months, can you disclose the location of that satellite?

I don't think it matters.

Yes, it's -- it's one of our facilities in Michigan. It's one of our long tenured partners in Michigan -- Bloomfield, Michigan, actually.

To that point, Mike, I get calls a lot of times saying, "Are there any markets you're saturated?" and markets like Houston, Dallas, Detroit area, we already have a lot of clinics. But the clinic he's talking about is in one of those areas, so there's still opportunities, I don't know that any market that we're in that we couldn't continue to grow via satellite.

I agree.

And these particular facilities, actually the two that I mentioned, are in markets where we have other locations, but we didn't cannibalize anything, I don't think, at least in my opinion, to do these. These were relationships which we were able to capitalize on by having the best people available, want to work with us and just got off to a quick grab.

I don't want people thinking every one of our new clinics is going to be doing 40 right away.

No, they won't.

I had already put that in my model, sorry!

But our -- the fact is in the quarter, it will be in the 10-Q data, the average visits per day per clinic was up from a year ago.

Actually on that, and this is really the last one, the second example you guys mentioned, the 23 visits a day in five weeks, was that a satellite or was that a new partner? Or -- ?

That was a satellite.

Okay, okay, great. Okay, thanks a lot, guys.

Thank you.

Thank you.

[ OPERATOR INSTRUCTIONS ]

Our next question is coming from Brooks O'Neil of Doggerty (ph) & Company.

Good morning, that's Dougherty & Company. Congratulations on a great quarter.

I was just curious, you mentioned you opened ten -- or you added ten stores in the quarter. Do you comment on what the outlook is for the back part of the year, where you stand with your pipeline? I know you have a lot under development.

We'd rather -- we haven't given a number and we don't intend to give a number. I will tell you that I'm pleased with where the partner recruiters are.

If you have been on some prior calls, you'll recall us talking that -- there for a while, we -- we turned over some partner recruiters back at the end of last year. We added some new ones, it took those people, obviously a little time to kind of ramp up and get a feel for the marketplace and I think they've done a good job of that. So --

To put it in perspective, we've gone from two partner recruiters that are [inaudible] last year up to five. And the new ones take a while to develop a pipeline of prospects. We had one of the new partner recruiters whose -- she's added two or three in the last few weeks.

Yes.

So we're optimistic about adding to development, but we don't give specific opening projections.

Okay, great.

And then secondly, you talked about mix and other factors that influence your rate.

Are you seeing -- and it sounded to me like if I was listening properly, like there isn't a lot of rate pressure out there, just in a apples to apples kind of a base. But I was just curious if you are seeing anything out there? Either positively or negatively?

I mean the big managed care companies have always put rate pressure on us. I don't know that it's any worse or any less than it's been. We got a significant pickup in our net rate last year. We did not expect to get a big [inaudible] though. And again, but that doesn't say it's an easy market. Certainly isn't. The big guys are out there and when they can, they muscle you. I think we're being more creative in how we go to market in terms of how we contract.

Yes.

And then I guess on a related point, I'm curious if you're hearing either in a big way or anecdotally, are you seeing any impact from consumer-driven plans where consumers are maybe being asked to shoulder a little larger share of the direct cost? Any place that's showing up yet?

Yes, there's a lot of talk about consumer-driven healthcare. I think in our segment of the business it continues to be referral-driven, so driven by the doctor side of things. In terms of the co-pays and the shouldering of the care, this will be anecdotal because they don't have any hard evidence, but my sense is -- is a lot of that has leveled out in terms of the amount and the costs the patients have to pay in order to come for treatment.

So, I think that probably peaked a year or two ago. I think people continue to see value in terms of what we provide, though, which helps them avoid further surgery and other, more involved procedures. So, we continue to monitor the marketplace, but I think it's been pretty steady.

Yes, the consumer in our case pays a higher percentage of the costs than they would for other medical care. If you think about it, each time they come in and see us, and our average patient sees us about 11 times, they're making say a $20, $25 co-pay, plus they may even have a deductible to pay, as well, depending on where they are on that.

So, the higher -- our patient pays a higher percentage of the cost than they do for other -- if they went and got a -- saw the doctor and he had -- because he has typically a higher charge per visit.

Okay, that's great. Thanks a lot.

[OPERATOR INSTRUCTIONS]

Sir, there appear to be no further questions at this time.

Thank you. I just want to thank everybody for joining us today. If -- if-- if you have any further questions, we're available in the office 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.