US Physical Therapy Inc (USPH) 2006 Q1 法說會逐字稿

Good afternoon good morning ladies and gentlemen. My name is Stacey and I will be your conference facilitator today. At this time, I would like to welcome everyone to the US Physical Therapy first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Chris Reading. Sir, you may begin your conference.

Thanks, Stacey. Good morning everyone. Thank you for joining us this morning as we discuss our first quarter 2006 earnings results. With me in Houston are Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, and David Richardson, our Vice President and Controller. Before we begin to discuss our earnings results, I will ask David to read a brief statement.

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.

Thanks, David. Larry, if you would, go ahead and please review our first quarter results.

For the first quarter of 2006, revenue rose 12.2% to 34.7 million due to an 11.9% increase in patient visits, and an increase of $0.31 in net patient revenue per visit. Clinic operating costs were 76.7% of revenues versus 72.8 for the first quarter of 2005. The cost increase is primarily attributable to higher clinic salaries and related costs, which rose from 51.2% to 53.3% of revenue. Contract labor and other clinic costs increased from 20.5% of revenues to 21.7. Most of that increase was a result of higher costs of therapist PRNs.

Our operating margin before closing costs was 8.1 million or 23.3% of revenues versus 8.4 million or 27.3 a year ago. Corporate office costs were 4.5 million or 13% of revenue versus 4 million or 13.1%. The Q1 '06 figure includes 222,000 of stock option expense pursuant to Rule 123R. There is no stock option expense reported in Q1 '05. Excluding equity compensation expense, first-quarter corporate costs ran at 12.4% of revenue.

Operating income was 3.6 million versus 4.3 million in the first quarter of '05. Net income decreased in the first quarter to 1.5 million as compared to 2 million a year ago. EPS was $0.12 versus $0.17. Same-store business rose 0.6% and that rate was basically flat. Our percentage of Medicare patients declined from 22.4% of patient visits for the first quarter of '05 to 20.6% in the first quarter of '06.

Under the Medicare Act, the limit on outpatient rehab services was reinstated January 1st. The cap per recipient for 2006 is $1740. We believe that the decline of Medicare patient visits in the first quarter of '06 is attributable to the cap. We estimate that the impact was over 7000 visits and more than 600,000 in revenue.

To put these figures in perspective, our clinics average about 4.1 Medicare patient visits per clinic per day a year ago, and that declined to 3.7 Medicare patients per day per clinic on average in Q1 '06. That's about two patients less per clinic per week, which sounds like a small number, but when you multiply that by 290-plus clinics times 13 weeks, the impact is more than 7000 visits. The 600,000 lost revenue represents 1.7% of total revenue.

We make no excuses. It was a disappointing quarter. The analyst earnings estimates, after stock option expense, was $0.17 or $0.18 debating on the analyst. That's a $0.05 to $0.06 difference compared to our actual results.

To summarize what caused the shortfall, higher therapist and other clinical salary expense costs cost us about 445,000 after-tax or $0.04 per share. The increased contract therapist cost was 109,000 after-tax or $0.01 and the Medicare impact was 370,000 after-tax or $0.03. Those three items combined total $0.08 per share.

As of March 31st, the Company had more than 15 million in cash or about $1.29 per share. We acquired 48,900 common shares in the first quarter at an average price of $17.53 per share. Since we started the current share repurchase program in the fall of 2004, the Company has acquired now over 900,000 shares or approximately 7% of the total. More than 400,000 shares remain available to be purchased under the current program.

Thanks, Larry. Obviously this was a challenging and difficult quarter, so I want to go ahead and start covering some of the issues the Larry introduced and then more directly into a discussion on what we believe are the solutions to these issues.

During our year-end release and conference call, we discussed the pressure in salary costs as a result of tight labor market for clinicians. Late in 2001, in response to this, we made a reduction in force of over $1.5 million in salary across greater than 50 of our facilities. The majority of these took place in March of this year. Additionally in April, we made a modest FTE reduction in our Houston office. None of these reductions either in Houston or in the field are expected to impact our ability to deliver service either to our patients or to our partners, nor limit our growth going forward.

Underlying much of this is the need to increase therapist productivity or what we refer to as clinical efficiency measured in visits per clinician per day. How we will achieve this needed productivity is similar in many ways to how we improve the majority of our scorecard indicators over the past few years. Education, motivation, and persistent follow-through. In order to directly and more clearly align our collective interests with that of the therapists, we have replaced a facility-based incentive bonus with a clinician-driven incentive bonus tied directly to our productivity goals.

Additionally, recently with implemented (technical difficulty) we will continue to look for areas are we can make minor adjustments without impacting our ability to generate revenue. These changes, coupled with the continued progress of our sales force, should allow us to absorb at least some of the residual excess capacity that we have within our facilities.

The second primary area of our focus centers around the recent changes in the Medicare payment system, which we refer to as the Medicare cap. Since January when the cap first took effect, we have noticed a definite reduction in are durations associated with our Medicare referrals. Durations which have historically been in the 12 range for Medicare now have recently fallen to below the durations of our other aggregate patient groups.

Current measures of correction involved a very focused effort centered around what we would consider a normal scheduling and visit progression appropriate for the function and diagnosis of our patient coupled with careful trending, monitoring, and feedback both to our therapist and to our partners.

Now, shifting gears a bit, on a positive note, the past two quarters we've -- we have seen much improved focus and delivery on the development side of things. You might recall at the beginning of last year, we were challenged in terms of our pipeline. Our pipeline wasn't as good as we wanted it to be and with focused very hard on that.

In the fourth quarter, we opened 10 new facilities, seven of which were with new partners. In this quarter, our development operations team opened 12 new locations, nine of which were with new partners. So as we focused on this, we've seen considerable improvement. We believe that as we focus on these other challenges that we're currently faced with, we can also drive improvement for the Company.

In closing, let me say that the team down here is very focused in terms of delivering and turning around this disappointing first quarter. We think we've got -- we understand what the problem is. We understand what we need to do to correct it. So with that, operator, let's go ahead and open it up for questions.

(OPERATOR INSTRUCTIONS). [Kirk Streglus], Stifel Nicolaus.

Good morning. This is [Kirk Streglus] on behalf of Rob Hawkins. Just a few questions for you. First, related to the employees that were terminated, were there any severance costs or onetime costs related to the terminations that impacted the quarter that will not be in following quarters?

There were some severance costs, but they were not significant. They represented less than $0.01 a share.

And those occurred in the first quarter primarily.

Yes, we have some in April. We didn't make the cuts here at corporate. We made more cuts in the field in April, but again, I don't think it's going to represent $0.01 a share.

Okay. Second, I was wondering how the productivity increases are going over. Has there been any pushback from therapy partners? What about the newly recruited staff?

Yes, we have not gotten any pushback from therapy partners in terms of pushback. Actually, we've gotten some very positive encouragement from our partners. I can tell you that I think we still have a ways to go.

I think therapists tend, particularly in the clinical level, to function on an intuitive basis. We're trying to ship that to functioning on an objective, information-based, reality basis in terms of exactly how many patients they see per day or per week. That sounds like a very simple thing, but we're having to shift the culture a little bit.

We've seen some early modest improvements. We haven't seen the improvements that we expect nor that we desire yet. But we've -- we have seen some traction. Part of that's been coupled with the reductions. We expect that to continue particularly as we get some early payouts into this new therapist incentive program. So I think we're too early, but we're headed in the right direction.

Okay. What's going on with therapy recruitment? Are there any new ideas or changes to lower dependence on contract therapy?

Well, contract therapists wasn't a big chunk of our costs. We're talking about the differential year-over-year was a little over 100,000 on an after-tax basis. When we looked at these cuts, the first place we looked in the clinics was non-licensed therapist staff.

Support staff.

Support staff. The next thing you look at is contract labor because you don't want to cut your own in-house therapists. And then, so -- Chris and Glenn and our VPs of ops have been all over this. We're not heavily dependent on contract therapists, unlike other medical sectors.

But to answer your question, I think the efforts have been ongoing. I don't think there is anything that has occurred within the last month or so that's dramatically different. But we're doing career fairs and schools, we're going to state meetings, we've got a lot of focused recruiting here. We have an in-house recruiting team. And to a large extent, we filled some pretty big gaps in open positions, but it's really all local market based. And so we continue to fight and scrape for our share of the therapist market.

Yes, we have four in-house recruiters who do nothing but recruit therapists. And the list in terms of how many openings each staff recruiter has is actually less now than it was a year ago. So --

Okay. Thanks a lot. That helps.

Mitra Ramgopal, Sidoti.

Just a couple of questions. I guess we did see the revenue [progress at] -- I think it was the highest for long time, if not the highest. Is that more a function of the payer mix?

Probably to some degree, but you remember last fall we brought in a new person to handle our reimbursement group and I'd say that group has made good progress.

We also did a modest price increases the beginning of the year which we expect it over the course of the year to give us a little bit of a lift, so I think you're looking at a combination of a few factors.

Okay. How far along would you say you are in terms of the staffing reductions you made?

You know, I think with some of the information that we've gotten recently really being able to pull out of our system the information relative to Medicare durations, and the probable impact at least psychologically on our staff in trying to keep people away from the cap, which is my opinion is probably at least some of what's going on, I think we're going to be able to overcome least part of that, at least that's our hope and our focus.

That in combination with the incentive plan and some of the other things, I think will help us to grow revenues and business in a way that we don't have to do another big round. So it's along winded answer to your question, but I think we've made the majority of the cuts we are going to have to make.

Yes, we've made the majority of the staffing changes that we're going to make currently at this point in time, but we're going to continue on an ongoing basis to evaluate each individual center and make changes we feel as appropriate.

And we expect progress from these centers. And you know, movement is very important, and if we're moving forward, we tend to be more patient than if we're moving backward and we don't have a clear path that we think we can influence. In those cases, we'll make reductions if we need to.

We made additional cuts in April and we'll make some in May. Most of it was done in March in February, so I believe you're going to see improvements in efficiency and some of these cost factors in the second quarter.

Okay. And on a different note here, you opened about 12 clinics I believe in the quarter. It's probably the highest you have seen for some time.

Right.

I assume going forward even though you have the issues in terms of getting your expenses under control that you'll still be focusing on expanding the clinic base as planned coming into '06, and acquisitions etc. still remain on the --

Yes. Let me talk about two things. That's absolutely correct. Our development focus continues very intensely. We continue to be happy with the new partners that we brought on both recently as well in the fourth quarter. Our team is very aligned. We've created some incentives for them that I think it really helped to align their focus, and I am pleased with the progress we made there.

And we continue -- Larry and I continue to be very active in looking at acquisitions. We didn't have an announced acquisition this quarter, but we have a number that we looked at. We spent a lot of our travel and a lot of our focus and that will remain a central part in the same perspective that we've outlined in the past, a part of our strategy, so --

Even though we've had to cut costs, and frankly, we blew the quarter pretty good, we're still a growth Company. We didn't let one development personnel incorporate. We didn't let one operations person go at corporate. The cuts we made were in the other support staff functions. So this is a growth Company. We're not going to -- you get banged around a quarter two, we're not going to change our strategy. The strategy is sound. We've got to change our tactics.

Okay. And one more question and I will get back in the queue. Given where you've been repurchasing shares in the past and even in the quarter, I assume in terms of where stock is trading right now, we probably could expect you to be in the market.

We don't comment when we're buying, but we have for 400,000 shares under the program, so --

Mike Petusky, Thompson, Davis & Co.

I was wondering -- actually, a housekeeping item real quick; can you give the payer mix?

Yes, in terms of -- it's actually -- it's by payer class. We actually report it on a visit basis. Private -- this is for first quarter, private was 28.4. Managed care was 32.5. Workers comp was 14.8. Medicare was 20.6 and other was 3.7.

Could you get a little bit more specific as far as carrots and sticks, in terms of increasing productivity for therapists? How do you actually -- (multiple speakers) how do you actually do that? Can you get a little more specific on what's going to drive that?

Yes. Let me let Glenn talk to you about that. We worked real hard on it and we think we've got the right plan, so --

We have got a combination of things in place. The first one is we replaced all of our ongoing bonus programs that we had to focus on to a single clinical productivity bonus based upon visit per day. To do that, we've had conference calls and will continue to have conference calls with our clinical staff discussing what needs to happen from that standpoint.

We have an ongoing process where we continue to look at scheduling, maximizing scheduling efficiencies and hours of operation and what we need to do to impact from the standpoint. And we continue to look at durations especially from a payer standpoint on the Medicare side to make sure that, again, we're not losing (indiscernible).

Yes, Mike, we've put some dollars behind it. We've got -- as -- you heard us talk about this before. As a Company, we've been lower in my experience at least, which is over 20 years, than a lot of other groups, private practices, companies, and institutions out there in terms of productivity.

Some of that, at least when I got here, was purposeful. They believed that they could operate lower [in that] with a differentiator. We've corrected some of that over the period and then we saw a plateau, as Larry mentioned earlier, really occurring late in the year last year.

In an effort to get off that plateau, we've created some incentives which are dollar focused that really are thresholds are going to be 12 and 14 visit a day, which is still very doable, very achievable, allow us to give great care, a lot of one-on-one attention, but give the therapists $300 to $500 a month pop if they can hit those levels. And they're not rounded levels. They're absolute [four-month], [a certain] visit target, and we believe that whether everybody achieves that or not, there will be a movement toward that which will help us grow visits and grow our revenues.

We looked at a lot of private practices in the last few months in terms of acquisition candidates, and invariably, they require their therapists to see 13, 14, 15 patients a day. So setting up (indiscernible) rates of 12 and 14, and again, it's a carrot, not a stick. It's how they can earn a bonus, but it gives a therapist who is willing to do the work the opportunity to earn an extra $5000 or $6000 a year.

And in a market which is competitive financially, we think that it's a way for people to control their own destiny and potentially over time, for us not to be -- not to succumb to salary pressure, but really to change it into a performance-driven aspect which is more beneficial for us over a long period of time.

Several [of our other] bonus programs would have factors that the therapist didn't have control over and this is one that they have direct control over.

And you guys -- I am sorry if you mentioned, I didn't catch it. You guys are basically around 10 visits a day? Is that right?

That's correct.

Yes.

Mike, we measure based on a licensed clinical basis and then we measure it based on total clinical FTEs, which includes support staff. And so one affects cost and one affects true productivity.

But we are going to measure on an individual licensed therapist basis, so if you're an individual staff clinician and you see 12 a day, you're going to be getting a bonus.

Right. And you guys mentioned nothing changes in terms of your acquisition.

No, not in terms of our strategy nor our focus. I think the one thing -- well, I will tell you we looked at more practices. We talked to more people this quarter probably than ever before, so you might say it intensified, but it didn't diminish.

And you know, US Physical Therapy historically has not been known as an acquisition Company, not that we will ever be acquisition driven, but it's taken us about a year. Kind of like building up your pipeline on the development side for people (indiscernible) if they're buyers, they will go out and look at stuff and propose real prices.

So we looked at a lot of things in the first quarter. We did two acquisitions last year. I still believe we will do at least that this year. What we are going to do on the way, we described to people, we're going to structure them just like our partnerships where the therapist-owners continue to have a big interest going forward.

As far as -- can you give an update just on sales reps, where you stand on that and does that get affected by these cost reductions, etc.?

Let me just give you a global overview. I will let Glenn going handle the details. That hasn't been an area where we have targeted nor do we believe we'll target in terms of cost reduction. It has been effective so far. It continues to appear to be very effective. I'll let Glenn share the information.

We -- as with everything, we'll have high performers, medium performers and low performers. And over some period of time will call low performers and replace them hopefully with high performers. But Glenn you want to talk about the detail?

Yes, for the first quarter, we had 20 sales reps covering 130 locations. 18 of those reps have been in place for longer than three months. Same-store growth in those 18 markets where we have a rep for three months or longer, we saw a 9% increase in new patients in Q1 '06 compared to Q1 of '05. 14 of those markets where we have a sales rep showed approximately a 13% increase if you take out the low end people. And we feel moving forward the sales continues to be effective.

We've run on a few more sales reps covering a few -- another few clinics. Presently we have about 29 reps covering about 170 locations as it of yesterday. We'll continue to evaluate sales reps on a month to month, quarter to quarter basis, and we've made changes in a couple of markets where sales reps were not as effective as we thought they ought to be.

Right, and if you look at our first quarter numbers, our patient visit increase was 12% despite the Medicare impact. And personally, I have no doubt that we would not have been able to achieve that if we had not had sales reps out there.

Okay. Great. Thanks.

[Shawn McMahon], Kennedy Capital Management.

I just had a question how the own-your-own-clinic is going, the website that you guys offer for therapists who want to own their own clinic.

Yes, in terms of the website, I don't know that I could give you a real objective answer. We get some of our leads through the website. We get some of our leads through our normal website. And then a lot of our leads come through cold calling and through the efforts of our recruiters. It's always been a combination.

The other things that we supplement with that, which is kind of a rounded own your own theme, but not directly related specifically to the Web medium is that we do a lot of direct mailings and a lot of other things to create an awareness and a consistent message. And I think the combination of those has been part of what's helped us drive the new facility openings and the new partner additions that we've made these past few quarters.

Yes, and that's only (indiscernible). And I know -- I can think of several partners that have joined us in the last six months that contacted us, whether they contacted us through own-your-own-clinic or just knew of us, whatever source and contacted us. Still we're getting a decent percentage. Most of them still call from recruiters working hard and making cold calls, but I would say that the site looks good and I think it -- I always ask -- I've asked a number of the partner candidates if they looked at the site and what they thought of it and the feedback was very positive.

I will tell you that I think what happens over time is that an individual sees a message; they may see a mailing, may not be the right time, they may see the own-your-own-clinic stuff. They may sees us at a national conference, and then something changes in their life or their work situation where they get to a point where they feel they have the confidence to be able to do something. And the repeat messages across a variety of different mediums take hold and they give us a call.

Or we call them and they tell us, hey I've been seeing this stuff and now I am ready. I am glad you called. So I think we're going to continue to have to try a variety of different things, but I think what we're doing right now is working. But we continue to evaluate it each month and each quarter.

Okay. And then I guess what is your average amount of visits per patient? Do you guys give that ever or --

No, you are talking about durations?

Yes, durations -- not how many visits that a physician -- or that a therapist sees.

Historically it's averaged around 11 if you look over the last few years.

Somewhere between 10.9 and 11.2. We've recently separated that out so that we can track the impact of this Medicare cap separately. And really for the first time, we've seen Medicare durations drop below the durations for all other patient types, which from a care perspective, a medical perspective, a physiologic perspective, makes no sense.

Other than I think either in combination between patients' fear and therapist desire to keep patients out of the cap, they modified scheduling and other things, and I think they've -- we've over shot because we didn't have a great percentage of people looking at a historical perspective that would have hit the cap. But I think unfortunately, clinically, we've applied to a greater percentage of the population a behavior change in terms of scheduling that we need to overcome now.

I guess that's what I am trying to get at. If you take your $600,000 revenue number, divide it over 7000 visits you supposedly lost for Medicare, you roughly about $85 per visit.

Yes, our Medicare rate varies between -- we've always said between 85 and 88, in that range depending upon --

In the first quarter it averaged 87. But -- what you -- how we can quantify this in several different ways. The main thing is you can look at the change in the mix. You can tell there were lost visits. Our durations, which historically ran over 13 for Medicare patients, is now closer to 10 --

It's just under 10.

Under 10, which means not that they hit the cap, though I'm sure a few did but not that many, but something happened where we changed our treatment regimen or the patient does not want to see us as many times. It's probably some combination thereof, but we'd be better off seeing them for however many ever visits we can. And then if we haven't finished treatment, which normally we would, only about 2 or 3% of our patients exceed 18 visits or 17 where you hit the cap. See them a couple times for free rather than limit them to 10, 11, 12 visits, thinking you're doing them a favor, and it doesn't necessarily make sense from a care standpoint.

It doesn't make any sense. What Larry said is exactly right. What you'll see us do and how you will see us mitigate maybe some of this fear, if that's the right word, is we have aftercare programs in the vast majority of our facilities which give any patient the ability to kind of hang around and come in on a prescheduled basis and be in a supervised setting, but not necessarily get everything they would have gotten had they come in for care.

So we have a variety of different options, including seeing them a little bit longer, but one of the things we've got to change is we've got to change this early bleed out because the vast majority of these people wouldn't reach the cap. We'll do that with information. We got conference calls, we got audio CDs going to people. We've got many different mediums meant to create good saturation, good penetration so that we can begin to turn this around.

Thanks guys. That was a lot of help.

(OPERATOR INSTRUCTIONS). [Bob Stanford], Stanford Capital.

Good morning. I wanted to ask about the capability you have to increase prices from any of your [peer] groups.

We really have two issues and two methods to go at it. One is to do a sticker price increase, which is just to increase our per unit prices for the things that we deliver. Unfortunately, probably, and this is a rounded guess, I would say probably 85 or 90% of what we do is on a contracted basis, so the sticker price changes probably don't affect the vast majority of the people that we do business with.

They affect a small percentage and in places that don't have, let's say, a [real comp] fee schedule, and there are less states that don't have those in place, but there are some, we see a pickup. And we expected to see a very modest increase with the pricing increases that we rolled out at the beginning of the year and that haven't been done in a number of years.

Where we really probably over time get more traction is with recontracting and focused managed care, negotiation efforts with larger payers in markets where we have significant penetration. And that, it depends on the payer. It depends on our ability to create a compelling reason why we should make more. We had I think pretty good success, but it's not 100%, so --

Different from the pricing issue, the other thing that affects your net rate per visit is how many units you bill. And one of the other problems we saw with Medicare in the first quarter is that each month, our net rate went down, which meant that our unit mix went down, which probably meant that at least in a few cases, our therapists were not charging for all the work they were doing. So again, we need to do what's right by the patient. We shouldn't charge them for anything we don't do, but we should absolutely charge the patient for what we do.

What does your therapist make in relation to what they used to make before they joined you are what other outside people make?

Sure. There is two different categories. I will let Larry address this. We've looked at it pretty carefully. There is staff therapists and there is partner directors. What do our partners make now compared to where they might have made someplace else before they got to us?

Oh my gosh, the partners make a lot more. The partners make two to six or seven times what they made when they were a staff therapist or a director. In terms of our staff clinicians today in terms of what average salaries have done, what was the mean we saw --?

Yes, I looked at it recently. I believe the mean -- it was either 60 or 65. I believe it was 62, 63, in that range. The 70th percentile I think was 65. 25th the percentile was high 50s.

And how much is that up from five years ago? Just guessing.

I would say 8 or 10,000.

Yes, I would say 8 or 10,000 probably over --

If you look at therapists away from you, how does that look?

We pay our staff therapists market price. This is a tight labor market. Everybody's going to be paying.

No, I don't think we're overpaying nor do I think were getting a steal on people right now. I don't think that's possible to do. What we're trying to do is align their ability to make maybe an above market rate in aggregate by having an improved productivity, which really from a productivity standpoint gets us more into line with the rest of the market.

And I can tell you this, from looking at acquisitions and talking to partner candidates every week, 90%-plus of therapists never get any incentive pay. And so we now give them an opportunity to increase their take home by anywhere from 6 to 10% if they hit the bonus productivity build.

Thank you.

Mitra Ramgopal, Sidoti.

I just wanted to circle back again in terms of the tight labor market. I assume your competitors are also seeing some of the same issues you guys are, and I was wondering is you stand to benefit from that in any way.

Well, I don't know. I really don't know how to answer that. Everybody's focused on finding the best people as quickly as possible when there's a need. I think what we have to offer maybe is a little bit different, because we have a path really that mirrors more of a private practice where a staff therapist could work their way in ultimately to a director position with a much bigger base of incentive comp. And I think we have owners that are locally attached and driven to work with their people. I'm not sure we have a competitive advantage. I certainly don't think we have a disadvantage.

(OPERATOR INSTRUCTIONS). Sir, there appears to be no further questions.

Okay. Well listen everybody, we appreciate your time. Larry and I and the rest of the folks are here. We're available to take any questions that you might have or you might think of later. We continue to appreciate your support and will continue to work hard on your behalf. Thank you.

This concludes today's US Physical Therapy conference call. You may now disconnect your lines at this time and have a wonderful day.