US Physical Therapy Inc (USPH) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Brianna, and I will by your conference facilitator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy Q2 2006 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A period. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Chris Reading. Sir, you may begin your conference.

Thanks, Brianna. Good morning, everyone. This is Chris Reading, President and CEO of U.S. Physical Therapy. We appreciate you joining us today for Q2 2006 earnings call. With me here in Houston are Glenn McDowell, our COO; and David Richardson, our VP and Controller. David will be handling Larry's normal portion. Larry had an unavoidable conflict this morning and couldn't be with us. But before we begin, I would like to ask David to read a brief statement.

Yes. This presentation contains forward-looking statements which involved 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 at the SEC for more information.

Thanks, David. David, why don't you go ahead and cover the financial part of our earnings release.

Okay. For the second quarter of 2006, compared to the second quarter of 2005, revenue rose 6.5% to $35.8 million, due to a 6% increase in patient visits, an increase of $0.36 in net patient revenue per visit.

Clinic operating costs were 74.6% of revenue, compared to 70.7% for the second quarter of 2005. The increase is primarily attributable to clinic salaries and related costs, increasing from 49.2% of revenue to 52.3% of revenue.

Corporate office costs were $4.5 million, or 12.5% of revenue, versus $4.2 million and 12.4% of revenue. The second quarter of 2006 included corporate costs of $242,000 for expense related to stock options and restricted stock.

Net income for the quarter was $2.2 million, compared to $2.8 million in the prior year quarter. Earning per share was $0.18, compared to $0.23 in the prior year. Same-store visits and the net rate per visit were flat for the quarter. When comparing the first 6 months of 2006 to the first 6 months of 2005, revenue increased 9.2% to $70.4 million, due to an 8.8% increase of patient visits to 713,420. Clinic operating costs were 75.6% of revenue, versus 71.7%. This increase is primarily attributable to clinic salaries and related costs, increasing from 50.2% of revenue to 52.8%. Seller cost and facilities opened or acquired a year or more accounted for most of the increase.

Corporate office costs were $9 million, or 12.8% of revenue, versus $8.2 million, or 12.7%. 2006 costs include $.5 million of equity compensation expense. Excluding this cost, corporate costs would have been 12.1% of revenue.

Net income decreased to $3.6 million from $4.8 million. Earnings per share decreased to $0.30 from $0.40 in the prior year. Same-store visits increased 3.5%, while the net rate per visit decreased $0.17. This yielded a same-store revenue increase of 3.3%, or approximately $2.1 million.

Thanks, David.

This quarter, we've been very focused on making progress on the fundamental issues that have impacted our earnings to date. I can say that I'm pleased that we've seen sequential improvement in each of the months this quarter in the Medicare duration issue. Just remember from last quarter, Medicare came out with a cap that was effective January. Rules were promulgated late in the first quarter. We got our arms around those into the second quarter and began to make changes at the facility level in terms of communication with the physicians, our staff, and our partners, as well as our internal group here in Houston. We've made progress sequentially on that. We can talk more about that in a minute.

Our cost as a percent of revenue, while improving, remains above the same period from prior year and this is going to be a large area of focus for us. Productivity, which has begun to show improvement, along with continued gains in the Medicare duration, should help us to reduce these costs as a percent of revenue over time.

As we look on the development front, we had another very solid quarter of openings. The team is doing a very good job, with 8 new startups this quarter. That brings our total for the year to 20. And if we look over the past 3 quarters, including the fourth quarter, our de novo openings number 30; 21 of those 30 have been with new partnerships. And our total locations climbed to 303, now in 39 states.

We will continue to look at acquisitions, and have been looking at acquisitions, although none closed this quarter. That will continue to be part of our strategy of adding tuck-in acquisitions in the same general flavor of our partnership model.

For the remainder of the year, we will work very hard on further alignment of our growth, our volume, and our cost structure, as we continue to take advantage of what we believe are the best fits in our model.

With that, I'd like to open it up for questions. I know we have a number of people on the call today, and we'll be happy to answer any questions that you have. Operator?

Thank you. [OPERATOR INSTRUCTIONS] [Grayne Raine], Baird Capital Management

Quick question about the store closings. Can you talk about a little bit what were the reasons for the closings and if they were de novo or Company stores?

Yes. We had 3 closings this quarter. Generally, they've been older partnerships where the partner has long since departed, usually in struggling markets, or in other words, facilities that, historically, haven't done well. They've been replaced with a subsequent partner and over some period of time we've made a decision, either pending a lease renewal or some other event in the marketplace, to close the facility. And so I don't believe any of the 3 that we closed this quarter would have been what you would consider, historically, Company stores but were older partnerships, small partnerships that had struggled, and typically in all of our markets.

Can you talk a little bit about same-store business, if you've seen an increase in that, or is that fairly stable?

Well, we report same store every quarter. Same store is flat this quarter. If you look at it for the first 6 months on a visit basis, it's up about 3.5%, which is not particularly where we would like to see it be. Part of the challenge with dealing with, and I think we're making some progress, is on this Medicare durations issue. We dropped at the beginning of the year from around 12, historically, down under 10. And when we talk about Medicare durations, it's the number of durations in general; the number of times, on average, a patient will see us. The Company has, historically, operated around 11; although Medicare, for the past few years at least, has been above that.

With the address to the Medicare cap, and some of the anxiety that created, that dropped to below 10. Month ending June, that was up 10.9, and that certainly created some impact. We're also working with a couple of our older partnerships throughout the country, particularly a couple in Michigan, that have seen some pretty significant drop-off. We're beginning to see some positive things come from them, most recently in the last month or so, and that's created some impact too. But same-store business continues to be a focus.

Rob Hawkins, Stifel Nicolaus

Kind of along the same questioning, is it mainly -- the productivity issues you guys have addressed with your therapists didn't just cover Medicare. Is it that the Medicare is dropping -- the Medicare piece is, I guess, diluting some of the effort that you were making on the productivity on other fronts?

Generally not. It's improved some this quarter. We instituted in the second quarter, I would say in May, we revised our incentive program for our therapists, what we call our TIP program, Therapist Incentive Plan. We've made another revision in that that will be effective August 1st, so effective this month, which will allow us to begin to pay that on essentially an every 2-week basis.

And what we said, I think, in the last conference call is that we felt pretty sure that we could make reasonably steady and significant progress in the Medicare duration thing within the quarter. The productivity part, which has to do with moving some of the cultural elements of the Company that have been in place for awhile, it's going to take a little bit more time, although we're beginning to see some progress in that area as well. Those 2 things combined are what we need to pull together over the next few quarters to get back to where we need to be.

The culture elements, do they have to do with kind of your lead partner therapists taking more of a supervisory role? Do they pull back? Do they try to push more productivity onto the junior therapists and maybe kind of pull back some of the visits that they do?

No. I will tell you, and Glenn is here, and he can speak to this.

Yeah.

But it's been 2.5 years since I arrived, and when I first got here, and a longstanding process, the Company was really built on a productivity model that was kind of capped at 10. And it was kind of a stated objective to be that different company from maybe some of the other big public companies in either what they did or what they supposedly did in terms of productivity. And the reality is, one, I'm not sure what anybody was doing was any different than what the rest of the private practice world, historically, has done. They've been right out there with everybody else.

And we've just got to move our guys, as we have since the time we've been here. We got here, we were less than 8. We got it up to 10 and then it kind of stalled a little bit, particularly in the fourth quarter last year. We've seen that rise to a little bit better than 10.5 now, and we've got to get it the rest of the way, at least to 11, with a goal being somewhere between 11 and 12, considering that we're opening some new facilities, which dilute us a little bit.

Glenn, any other comments?

No, I agree with Chris. I mean it really is a perceptual problem. Again, from a longstanding of what the Company was based upon and it going back and explaining to people why changes needed to be taken place and how to get those changes to take place on a facility level. It's really a perceptual issue.

I will tell you the partners have been very supportive. They've been supportive of the incentive program. They've given us some good feedback and we've listened to that. We've made some subtle modifications, which will go out this month. And we expect that to give us some additional traction.

Okay. And just one quick question, shifting gears a little bit. A couple of other providers, I guess in the sub-acute space, have been succeeding in marketing to managed care, and now there has been a much bigger push towards Medicare Advantage with seniors.

Right.

Have you guys kind of developed any plans to show kind of the Medicare Advantage plans that are looking for alternatives to get better services at a more reasonable cost? Has any of that started kind of working into your programs?

You're talking about basically HMO plans contracted to Medicare recipients, correct?

That's right.

Yeah. I will tell you it hasn't been a huge part of our strategy. I think from a contracting group, again, if you go back and look at how we've built the Company historically, we've not done a lot of national contracts where there are beneficial contracts and markets, whether it be with the Medicare Advantage plan, which you know we participate with some, but not so much with any player, including the Signa's and Aetna's and United's of the world on a national front because we tend to do better on a local, regional, or state basis with a contracting focus. So while I say it's not been a national focus, we continue to work with payers who have beneficial market share in those communities to do contract, and I think we've made some good progress recently and are contract to happen.

[Sean McMihone], Kennedy Capital Management

If you can just maybe walk me through again the average visits per therapist. I think you said it was 10 on the Medicare side, but have you given kind of like a company average?

If you look at, again, we're talking durations now or the average number of visits that all of our patients collectively come to see us, it's historically from the time I got here until the -- reasonably near years prior to that. And since then, it has always been, give or take, around 11. Medicare has always been above that. Medicare has run 12, 12.1, 12.2, 12.3, in and around that 12 range. In fact, I have a graph in front of me right now on it. It's gotten as low as 11.5 in '04, but historically in the last, really in the last 2 years, it's been around 12. It dropped below 10. It's back up at month-ending June at 10.9. I don't have the data yet for any period beyond that.

Okay. And then, again, with the new compensation plans, how are those being received? I think you just talked about you're going to give a bonus out every 2 weeks or monthly? Was that by your employees or -- obviously, you're seeing a rebound in that area, which is great, but can you just kind of give me some more color there?

Yeah. We're seeing some progress. I won't tell you that any of us are satisfied with the progress we're making, although I think from a clinical perspective our folks are trying to do a good job. We've seen -- a couple parts of the country have more people participate in that. When I say participate, all of our full-time people have been eligible. We're making our part-time people eligible at, what, a 40-hour per pay period threshold. And that will be effective this month. And we feel like paying them every 2 weeks. We'll have the opportunity to really, number one, they'll get 2 more -- the potential for a slightly greater annual bonus because we'll have 2 more pay periods than we would have had. When we break it into the 2-week versus the month, the amount obviously halves. But we think that any time somebody gets a bonus and it shows up on the check highlighted as a bonus and they look back and it really wasn't as difficult as they thought it was or might have been that will give us an opportunity to get more people consistently as the number that we need them to be, which is somewhere between 12 and 14 on average for a mature client.

How much pushback have you gotten by your employees? Have you seen some people depart or you've seen people really excited about it or --?

I haven't seen anybody depart. I can't say it hasn't happened, but I haven't heard about it. Glenn is shaking his head no as well.

Glenn, [inaudible].

What I would tell you is, I mean, before such a program was based upon a clinic and how it operated as a whole, whereas now the profit -- the essential program has gone down to an individual therapist and their productivity. From that standpoint, there is obviously a perceptual change. But there hasn't been any negative feedback on it.

If you got a bonus before because you were one of those guys seeing a few patients when the facility was doing well, you probably ain't real happy right now and it's probably okay with me that that's the case.

Okay.

If you are one of the people that were working hard and controlling the things that you could control but the facility maybe wasn't hitting on all cylinders because somebody else wasn't doing their part, now you're happy because you're doing your part and you're being rewarded for that. And I think the closer we can align people to what they can control the better we'll do over time.

Okay. And then lastly, on the therapist, kind of the web site that you guys have where you guys are -- therapists can sign up online. How is that? Are you guys seeing a lot of flow there? Or maybe of the facilities that you've opened, how many of the 8 were from the therapist and how many were from your sales staff?

It's a good question. I don't have the answer to that. We look at the amount of traffic coming through. It ebbs and flows. Generally, it's been a good source of additional leads for us. I can't tell you how many of the ones we've opened have come through there. I know that we've just recently done another mailing and the response from that early on has been very, very good and oftentimes we'll drive people to that web site. So in some cases, it comes to the web site, but it's a result of a mailing, or they come through the web site, but it's been a result of a national conference or something else that we've been having. So we've got a mixed bag of ways that we try to communicate with people. Generally, speaking, I'll tell you I think it's been a good thing. Statistically, I'm sorry I don't have those numbers in front of me.

Mike Petusky, Thompson, Davis & Co.

A couple of housekeeping and then I'll get into my questions. Do you guys have the pair mix by any chance handy?

Yeah, I've got it. Again, we're looking at it by visits. On a private basis, it was 28.1%; Managed Care, 32.2%; Workers' Comp, 14.6%; Medicare/Medicaid, most of which is Medicare, 21.3%; Personal Injury, 2.4%; and Self Pay, 1.3%.

And what about sales rep count, how many you added during the quarter?

Basically, during the second quarter, we had 26 sales reps covering about 126 centers. We turned over a couple and brought some new ones back in, so the number has stayed essentially the same from the first quarter to the second quarter. And we expect to follow a few of these. What we've begun to do is sort out at the end of each quarter and rank these folks and to look at how their rankings are changing. And somebody staying on the bottom for reasonably --

We typically expect a sales rep --

Within time, we'll turn them over.

Yeah, we typically expect them to have an impact within 3 to 6 months. And if they are not, then we'll look at what we need to do from our standpoint.

Do you expect that number to be higher over the next, say, couple of quarters? I mean, meaningfully higher or are you guys in a little bit of a cost containment mode from what you're doing there?

I wouldn't say we were in a cost containment mode when it comes to sales reps. We continue to evaluate markets and where we feel sales will have a positive impact where we have geographic density. So I would expect that it will probably -- I think it will probably grow, but I couldn't tell you how much we go based upon the market and where we think the impact will be good.

It will be more modest than it has been maybe in prior quarters. I think what we're looking at now probably are more part-time sales reps in some smaller markets where we don't cluster as many large facilities.

And jumping back to what you guys started the Q&A with, the Medicare duration.

Yeah.

What was -- it's below 10, what was that, 9.7?

9.5.

9.5.

Yeah, it got to 9.5 at the beginning of the year. It's gotten back up to 10.9 at the end of -- in June.

Should 10.9 then be kind of almost a baseline from here or could that slip back a bit? I mean, that's a pretty good improvement in a short period of time.

One of the things was duration, so I'll tell you two things. One, in the last 3 months, it's gone up sequentially from 10.1 to 10.5 to 10.9. And so, yes, it could flip back. It's possible for that to happen. Because we're looking at it on a monthly basis, if you get -- let's say, for instance, we did do some Medicare Advantage plans or something that drove Medicare, or our Florida facilities picked up significantly, and the number of referrals picked up dramatically, temporarily it could pinch your duration because your visits maybe haven't caught up to that yet.

But, generally speaking, I will tell you that it's my perspective that 10.9 should not be the ceiling because it wasn't before. We're dealing with the same anatomy and the same group of people that we were dealing with before. I think there is a better understanding now in the Company, in the industry, than we had back in April or February certainly. But it could bounce around a little bit, although, generally speaking, I expect it to go up a little bit more before it stabilizes.

As you continue to educate your therapists and they educate your patients, I mean, really is there any reason this number can't go back to 12?

Well, I think -- certainly there is no law that's broken if it gets to 12 or even a little above 12. I think there wasn't a cap before, so the small percentage of people that are going to run into the cap or will continue to be modestly anxious, even though we've given them reassurance that we'll continue to see them at the end of their [count] and it won't create a financial hardship, whatever the case may be, individual circumstances applying here. We're dealing with a Medicare population that for many of these people have fixed incomes. So if I were to guess, I would say that I would love for it to get back to 12. I would expect maybe it won't quite get back the whole way, but I would expect it got back a substantial part of the way.

One more quick one. On the therapy productivity, you are talking about approximately 10.5 visits per day per therapist.

Yeah.

And you're talking about 11 to 12 is the goal. I know this takes longer than knocking out the expenses and --

Yeah. It took us, just to create some perspective, really 2 years to get it from 8 to the 10, and that was based upon all 3 of us, Glenn, Larry, and I, arriving about the same time and Glenn and I and the operations folks working hard on it from that point. We certainly have, I think, more credibility now and a better relationship with our partners after 3 years than we did when we first got here. So I would expect that we could make some dent in that. But the higher it goes, the harder it's going to be too. So, some of that early movement was more low-hanging fruit than we'll get when we get to the 11 range.

What kind of 11 to 12? Would that be more like, say, a 3 to 4 quarter type of goal? Would that be a reasonable guess?

Yeah. I'm not going to tell you on the outside. I think it's going to take us a good year, particularly to get to the upper number. Whether we get 12 or not is somewhat dependent upon function of how many new clinics we open too, which drag us down a bit. And those are in those numbers too as well. So, as we have a great opening quarters, we average down a little bit because we have a lot of people who are just seeing a few patients a day. So it depends. But it's going to take us a little bit more time.

Do you have any data on what the kind of mature clinic therapist is seeing relative to the new therapists that drag that number down?

I don't have a complete segregation. I know that for a while that we were running separately, and from my perspective, although it may be useful, I think it was allowing people to make excuses. So I haven't run those numbers recently. I don't have it on the tip of my tongue.

Okay, last one, and then I'll get off. You guys expect maybe to do another deal, acquisition, before the end of the year or we are probably looking at '07 before you do anything more there?

No, we continue to be active, and you can expect to have something probably before year-end, I would certainly think.

Mitra Ramgopal, Sidoti

Just a couple of questions. In terms of the staff reductions that you had permitted in first quarter, is that pretty much over or is that going to be an ongoing issue?

We continue to evaluate. We're certainly not moving or doing staff reductions at the pace that we were previously. We've gotten the changes that we feel were appropriate to make and now we're continuing to make changes as we evaluate volume and staffing on a month-to-month basis center by center.

So really, Mitra, when I look at it from afar, Glenn is closer to his data there than I am, but when I look at it, we're down really to looking at support staff in most cases. Not so much on a licensed basis. Certainly if something dramatic happens in a marketplace, up or down, we'll try to staff to that change appropriately. But I think we're really more in the fine-tune perspective now, as opposed to any major moves.

Okay. And regarding revenue-per-visit, do you see that ticking upwards steadily or is that pretty much the top where we are now?

No. If you look back, it's come heck or high water; it's always ticked up a little bit year-over-year. I don't want to say -- what I won't say is that it's hit the top. I also won't say that it has a tremendous amount of room to move. I think right now we're focused on two things, and I think the team is doing a good job in getting new partnerships contracted sooner, which helps us to drive volume in those new partnerships earlier and build to a net rate that's a better net rate, instead of taking people out of network for longer periods of time.

The second thing is we've been able to go back on some bigger contracts and some more dense markets and get some beneficial increases. I'm sure you guys have seen some of these managed care plans are boasting some pretty nice earnings and that hasn't -- we've paid attention to that and we expect that some of that will flow through and that's how we approach our negotiation with these companies.

Okay. And finally, in terms of just a use of cash, I guess, obviously, you're still looking for potential acquisition opportunities. Absent that, given where the stock is trading and where you've purchased before, I guess it's fair to assume you would be active in the market until the share repurchases?

The plan that we announced really now more than a year ago in terms of our acquisition strategy, share repurchase, reinvestment, and acceleration of new openings continues in force.

[OPERATOR INSTRUCTIONS] Bill [McKeever], Merrill Lynch

A couple of questions strategically. One is that the Workers' Comp area, obviously that's a fairly good part of your mix. Do you seeing growing that as a percentage of your total revenues?

Yeah. It's something that we're focused on. Obviously, with our partnership structure, we tend to lean on the initial strength of the partner and the relationships and the type of facilities that they have, and then beyond that look to grow a program. It's an area that I think that we need to spend more time on. We're focused on it currently. It is an area that I think has a potential to grow. I don't think it's 15%. We fully tapped the Work Comp market to the extent that we need to.

And then a big picture question. I think there was a study done by one of the orthopedic groups and they talked about orthopedists bringing therapy in-house, and I think we're now up to about 30% of orthopedists do therapy themselves and they have the therapists working for them.

Right.

Have you seen that in effect to your business? And if you think it is a trend, do you see it leveling off here or do you think that orthopedists, the natural tendency is to try to improve their income that they'll continue to bring therapy in-house?

I didn't see the article. I guess my first comment would be I'm surprised it's only 30%. It feels like more than that. I know it varies a little bit across the country based upon the community standard. Some places, it's less acceptable. Most places, it's being done. Yes, it has impact on our business. It does create additional struggle. There is typically not a week go by where we don't hear about somebody bringing some business in-house, typically on the orthopedic side of the world. But it's a reality that we've got to deal with right now, until the legislation catches up. I think there are only 3 states in the country that make it essentially not legal through the Practice Act for physical therapists to work and be employed by physicians. But most places, it's okay, just to start work around, and we've got to deal with it. I don't necessarily think it's leveled out though either. I think it continues to be an avenue for those guys to replace income. But I don't have any current statistics on it.

Okay. So it's a bit of a headwind for you. And the same-store growth that you saw, which was essentially flat, do you think with these other initiatives that that can begin to pick up or does the orthopedist situation kind of keep until that levels off, until you get legislative relief, keep the same-store growth in the flattish area?

Let me answer it two ways. One, I think if there was a legislative intervention, I will tell you that we're working cooperatively, I'm sure with probably some people who are on this call, as well as some of the other big companies out there, to create some understanding in Washington about what this does and about the impact that it makes, not only for the patients but for the federal payers as well. If we didn't have that, I think we'd have a lot of headwind -- or a lot of wind behind us, rather. We've got to deal with the headwind right now. I think we've still seen on a year-to-date basis same-store growth about 3.5%. We were flat for the quarter, really dealing with a lot of this Medicare stuff. I expect that we won't continue to have perfectly flat same-store growth. I can't tell you I know what it's going to be though.

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

Okay. Listen, everybody, I know we had good attendance on the call. I want you to know that the team is working very hard to continue to make progress. We made some progress this quarter. We've got more to do. I’m encouraged by the progress that we made, but nobody is sitting around slapping backs and kicking back. We've got a lot more work to do. But we do have a good team, we've got great partners, we've got great facilities, we've got a lot of good development activity going on right now. So appreciate your interest and your time and attention and we thank you. Have a great day.

Thank you. This does conclude today's conference call. You may now disconnect and have a wonderful day.