US Physical Therapy Inc (USPH) 2006 Q3 法說會逐字稿

Good day. My name is Jackie, and I'll be your Conference operator today.

At this time, I would like to welcome everyone to the US Physical Therapy Third Quarter 2006 Earnings Conference Call. [Operator Instructions]

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

Thanks, Jackie.

Thanks, everyone, for joining us today, as we discuss our third quarter 2006 earnings results.

With me here in Houston are Larry McAfee, our Chief Financial Officer; Glenn McDowell, Chief Operating Officer; and David Richardson, our Vice President and Controller.

Before we begin, I'd like to ask David to read a brief statement.

Sure.

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 with the Securities and Exchange Commission for more information.

Thanks, David.

Larry, if you want to go ahead and begin, and review our financial results, [then start].

Okay.

On September 6th, the Company announced that we were closing a significant number of unprofitable clinics. Pursuant to FASB SFAS No. 144, [an imperial that] such assets are disposed of, the results of those closed operations are to be reported as discontinued. In today's news release and the [Company] 10-Q to be filed next week, you'll note that there are several line items in the financials for discontinued ops.

US Physical Therapy's earnings from continuing operations for the third quarter were $0.16, which equals the analyst-revised consensus estimate. Earnings from continuing ops for the nine months were $0.51. After discontinued operations, the Company's EPS [that's] reported was $0.05 for the quarter and $0.35 year-to-date.

I'll now review the results for the comparative quarters in 2006 and 2005.

Net revenue from continuing operations increased to $33.2 million, due to a 1.9% increase in patient visits to 341,000. This was partially offset by a decrease of about $0.36 in net patient revenue per visit.

Clinic operating costs were 75.5% of net revenues, versus 71.3% for the third quarter in the prior year. The increase was primarily due to clinics opened or acquired within the past year. And that was partially offset by a decrease related to clinics owned for more than a year. USPH has opened and acquired 39 clinics in the past four quarters.

Corporate office costs were essentially flat for the two periods, at $4.1 million, or 12.5% of net revenue. The third quarter of 2006 costs include $273,000 of equity comp expense. There was no equity comp expense recorded in the year-earlier period. Net of that noncash equity comp expense, corporate costs were actually reduced 5% in the third quarter this year as compared to last.

Net income from continuing operations decreased to $1.9 million from $2.6 million. As I previously mentioned, that equates to EPS of $0.16 as compared to $0.21.

Same-store visits and revenues from continuing operations declined 3.6% and 3.9% respectively on an adjusted comparable working-days basis. The net rate for those clinics decreased $0.16.

The Company closed 28 clinics during the third quarter, incurring $1.7 million pretax in closure costs and impairment charges. The discontinued operations incurred a $426,000 pretax loss during the period. Net income after discontinued operations was $600,000, or $0.16 -- or, I'm sorry -- $0.05 per share.

I'll now go over the nine-months comparative figures. Net revenue from continuing operations rose 7.7%, to $101.4 million, due to a 7.7% increase in patient visits to just over a million, and an increase of $0.23 in net patient revenue per visit. Clinic operating costs from continuing operations were 74.1% of net revenues, versus 70.6% for the period in the prior year. Increased salary costs related primarily to ramp-up -- clinics opened or acquired within the past year.

Corporate office costs were $13.1 million, or 13% of net revenue, versus $12.3 million, or also 13%. Net income from continuing operations decreased to $6.1 million from $7.4 million. Earnings from continuing operations per diluted share were $0.51 as compared to $0.61.

Same-store visits and revenues from continuing operations for clinics opened or acquired more than a year ago increased 2%. The net rate per visit for those clinics were flat between the two periods.

Net income after discontinued operations decreased to $4.2 million from $7.2 million. Earnings per diluted share were $0.35 as compared to $0.59.

The Company acquired 174,000 shares of its common stock through open-market purchases in the third quarter, at prices ranging from $11.80 to $14.99, for an average price during the quarter of $13.04. We ended the quarter with $15.9 million in cash and investments net of $0.5 million of seller notes. The adjusted net cash balance equals $1.33 per share.

Thanks, Larry.

As Larry talked about earlier this quarter, we made the decision to close 28 unprofitable facilities and, in doing so, took a pretax charge of $1.7 million. While the decision to do this was not an easy one, it was the right decision. These facilities have been a drag on us, both from an earnings as well as a resource standpoint. Closing these centers allows us to focus our time, growth and energy in support of our newer as well as our long-tenured and profitable partners.

For the quarter, we continued our solid pace for openings, with seven new facilities added. For the nine months of 2006, we've opened 27 facilities, 18 of which have been with new partners. And in the past four quarters, we have opened or acquired 39 clients. I believe that these new partnerships, both open and acquired, will assist us in restoring our earnings power going forward.

This quarter, we experienced a decline in our same-store growth numbers. A significant part of that decline has occurred in some of our older partnerships, several of these occurring in the Michigan market. Glenn and his team, along with our partners, have been working together to correct the underlying factors surrounding the decline in these facilities.

In addition, we are currently making a very real push for program expansion across our partnerships to assist in driving a broader array of patients to our facilities. In large part, we believe this will help to offset some of the pressure we've seen from the physician ownership issues.

Well, this has certainly been a busy quarter from an earnings perspective. I remain confident we have the room and the ability to improve on our current performance. Our partners are working hard to capture market share. In fact, some of our -- several of our biggest, most successful partnerships have recently opened or are in the process of opening additional satellites. Because they believe, as do we, in their ability to grow, even in a challenging market.

As Larry referenced, our cash flow remains strong. And our partnership model continues to be the right one to see us through these times. We remain committed and focused on the task at hand.

With that, let's open it up for questions.

[Operator Instructions] [Sal Freeman], of [Business Consultants].

Good morning, gentlemen.

Morning.

Mr. Reading, with your background, you're pretty familiar with HealthSouth. A couple months ago, they indicated that the industry trends were away from outpatient. Could you comment on their assessment?

I think HealthSouth made an assessment based upon their business focus. And as you know, and was announced, I think, at their last quarter earnings release, they're divesting of some of their assets. That certainly is their decision; doesn't reflect our focus, nor our decision nor belief, in terms of the market in general.

In a follow-up to that, sir, they do -- they are studying spinning off their outpatient physical therapy clinics.

That's correct.

Is USPH positioning itself to look at acquiring any of these potential spinoffs?

I won't make a comment.

Okay. Thank you, sir.

Thank you.

[Rob Hawkins, of Stifel Nicolaus].

Hey, Rob.

Hi, good morning.

Can you give us a little more color on the drop in the same-store volumes in Michigan; kind of what's going on there?

Yes. I think I can.

Globally, Michigan's struggling a little bit. I think some of that certainly has to do with the economy, although I'm not going to tell you that that's the entire issue. We have a couple older partnerships that carry some pretty big heft. And we've been working with those to restructure some of our positioning in the market. Some of it's been staffing-related. Some of it's been just operations-focused things. Biggest partnerships, we're beginning to see a turn in that. We've been working on that actually for a number of months. We still have some changes to make in a few of those to get where we need to be.

We do see, and we have seen, a few of our partnerships in Michigan, even in this tough market, do okay. And so we do think it's possible to continue to turn those around. But they seem to have struggled more than some of our other partnerships. But that's not the entire problem. But I think part of Michigan has to do with the economy and just state of the market up there.

And I guess, in terms of the productivity changes -- how is that going, how has that been received --

Sure.

-- kind of, where is that heading?

Yes. We've talked about that for a few quarters. It's improved. It's still not where it needs to be; it's not quite to 11 at this point, although we have some regions that are approaching that. It's been received well. In fact, we're paying out now, on an every two-week basis -- I think we talked about that on the last call -- bonuses to a greater number of clinicians than ever before.

Our challenge really right now -- I think the clinicians are pressed and ready in those markets where business is a little bit slower. We've [got] volume in the door, and we'll continue to be focused on that in the coming quarters.

Just for those that aren't familiar with what we're talking about -- we had spoken in the last quarter about how in recent quarters, we'd averaged about 10 visits per day per therapist, and we're trying to get that figure up. We're paying incentives to those therapists who see 12 or more patients a day. And then they even get a little bit higher bonus for seeing 14 or more a day. So what we said we wanted to do was increase the average from 10 a day.

Okay.

Then, you kind of mentioned there's a little bit of a drag from ramp-ups, the 27 new clinics. Is that kind of going [as] normal? Or how does that look right now, vis-a-vis kind of in the past?

Yes, we did an analysis. Well, it's 27 year-to-date. But if you look at the past four quarters -- and as you know, a lot of these operations take anywhere from six to 12 months to get in the black -- it's 37 over the past four quarters, including the fourth quarter last year. We did an analysis of all the clinics -- we did it at midyear -- of all the clinics we've opened the past few years. And the ramp-ups were equal to -- or in fact, in some cases, better than -- what we've done historically. So there's nothing to indicate that those new clinics aren't doing well.

Okay. That's it. Thank you.

[Mitra Ramgopal of Sidoti].

Hey, Mitra.

Yes, hi, good morning, guys, just a few questions.

Given the slight dip in revenue per visit this past quarter, I don't know if you can comment in terms of your active patients going forward -- and maybe comment on the potential reimbursement environment as you look out to '07.

Yes. This is really the first quarter we've seen a dip. I don't know that -- I can tell you that we're seeing a shift dramatically. We certainly -- in a couple of markets, one of those being New Jersey, there was an announced change in Blue Cross Horizon in New Jersey at the beginning of the year. And actually, we were prepped for it earlier than it actually happened. It took them awhile to phase in some of the changes; a little bit longer than expected.

We're seeing kind of the same mix of some pressure and some lightening, depending. This quarter, it just so happened that we took about a $0.30 haircut. So I think there's still some controllable things on our end that we can do to offset that.

Now in terms of 2007, I think the biggest overhang right now is the unknown surrounding Medicare reimbursement, which likely isn't going to be determined until late November or sometime in December, potentially. So we're actually working collaboratively with some of the biggest companies in the industry on an outpatient basis in Washington, to effectively deal with some of these related TMS issues, the Medicare cap exemption process, which is due to expire later this year; and the fee schedule.

And so our finger's right on the pulse. And we're very active in those areas. But where it shakes out, I'm not sure yet.

Okay, thanks.

And in terms of just the [type labor] market, are you seeing any signs of easing at all?

Yes. I guess I could give you some anecdotal. We have less open positions now than we've had in some time. And our rate of fills has gone up the last few months. Now, I don't know whether that's a long enough period to tell you that we've seen an absolute trend. But I could tell you the last couple months feels a little better. I don't know that the pricing's changed much yet. In fact, I don't have statistical analysis to support it one way or another on the pricing side. But it does seem that we're getting fills done a little bit more efficiently than we had maybe a year ago.

I don't think we're -- and again, this -- we're probably not a big enough database to tell you that it's statistically relevant. But we're not paying sign-on bonuses, for example, at the same clip we were a year ago.

That's true.

And then also, it's kind of interesting; in looking at acquisition candidates, we're seeing a lot of private practices [that are] basically starting to pay for performance. If you're not seeing a high volume of patients a day, they're not given increases like they were a year ago.

And [high] still relative to a practice norm. I mean, we're talking somewhere in the teen range -- 12 to 14 to 15 a day. So --

Okay, thanks.

And Larry, I think you just mentioned about acquisitions -- looking at the cash you were carrying, and how active you were in the market in terms of share repurchases, is it fair to assume you'll probably be looking to do a little of both, given your cash flow and what you're carrying right now?

Well, we have in the release how many shares we bought in the third quarter. And we have, I think, 150,000 shares left under the current program. And it's something we talk about at each board meeting.

On the acquisition side, even though we haven't closed any acquisitions year-to-date, yes, we're actively working on it, and will do acquisitions going forward. And in fact, I think with what's happened in the market, frankly, I think it's a buyer's market now, and there may be more opportunity over the next year and a half to do acquisitions than there has been in the past.

Yes, Mitra, I agree. We're talking to some great people right now. And interestingly, these people have the same view that we do, that they think that even though this is a little bit of a tougher market, there's still opportunity. And I think you'll see us focus a little bit more time and resources on trying to increase the entrepreneurial spirit by bringing some of those people into the Company. So --

I mean, we're not the biggest player in the industry, but there's no other company that has the kind of balance sheet and capital structure that we do, that makes it available to us to be able to do acquisitions.

And we're very owner- and therapist owner-friendly. And that's attractive right now, certainly, in this market. So you'll continue to see that be a focus.

Okay.

And finally, we saw a dip in the revenue from management contracts. Any color on that?

Yes. I would tell you we're not really actively pursuing that. Occasionally one will pop up, and we'll do it on a defensive basis.

What we've found is that the doctors have a tendency to be very short term in these management contracts, where after a year or two -- and the risk is no longer there -- they have a tendency to pull these back in-house. To be honest, I think our time's better spent focused on acquisitions and startups than dealing with these doc deals.

Thanks. I'll get back into queue.

[Operator Instructions] Mike Petusky, of Thompson Davis & Company.

Good morning, fellows.

Hey, Mike.

If you mentioned it, I didn't catch it, [though]. Was there a reason behind the contract management revenues being soft this quarter?

Yes. Mitra just asked it. We've had a couple contracts this year roll out that were with physicians, where they've been with us a year or two; whatever the initial contract term was. And Mike, what we're seeing is after the risk is essentially removed, and they're more comfortable, they're taking these back in-house. And that certainly is the case across the board. We still have some -- fact, we have one that I think we've had for five, six years, that continues to be strong. We have a couple hospital contracts that continue to be very strong.

Okay.

And I'm going to apologize again; I missed more than half of this call. Did you guys give payer mix?

No, we did not.

No, I can give that. And this is based on percentage of visits. Private was 27.9%; managed care, 32.6%; worker's comp, 14.4%; Medicare, 21.7%, and other, 3.5%.

What percentage of your clinicians do you think have actually gotten bonuses so far with the new incentive plan?

I don't know that we have it on a percentage basis. It has gone up over the last several months since we've instituted the new program. But I couldn't tell you statistically where we're at.

I mean, would it be one in four, would it be -- I mean, could you give kind of a ballpark on something like that?

Yes. Mike, I'm not sure we have a good guess. Because sometimes they'll hit it for a month, they'll miss it for the next month. I'm not sure we have an all-in number. It would truly be a guess at this point. I will tell you, it's not the majority yet, or anywhere close to it. So we still have room.

Yes --

We're not seeing [static] about the number. So I think the opportunity is there for it to continue to increase.

Yes. We [kind of --] it's about full- and part-time people, Mike. So it's kind of hard to measure it percentage-wise. But we look at the number of bonuses being paid each two-week period, and that has increased. And that was the whole idea behind the plan.

Did I hear that it was a little less than 11 visits per day, at this point?

Per therapist --

Yes, per therapist.

Per therapist visit. And, I mean, what is that number, the 10.8? Is it -- what specifically is that number? Do you have that?

[We] were at 10.6 at the end of September.

Okay. And what was the number at the end of June? Do you have that?

It was around 10.5. I don't know whether it was 10.4 or 10.5.

Okay. All right. So you're still making headway there.

Okay. Great. Thanks.

Thanks, Mike.

[Mitra Ramgopal of Sidoti].

Yes, hi, guys.

Can we assume that pretty much the clinics you wanted to close, in terms of underperforming, et cetera, are now kind of behind you? And going forward, you'll just have the occasional clinic here or there that you might [still check]?

Yes. Mitra, I think the right answer to that is, we've closed everything that we wanted to close. A year ago or two years ago, [if you'd] asked me if we closed this many, I would have said no. But yes, I think we've got the bad stuff behind us. I do think we'll continue, on an every-so-often basis, to have facilities that surprise us or something changes. And we'll continue to have some closures from time to time.

So I think that's the right answer on the right sentiment right now.

[Okay], thanks again, guys.

[Operator Instructions]

I am currently showing no further questions and would like to turn the floor back to management for any closing comments.

Okay. Listen, thank you, everybody. I appreciate your time this morning. You had good questions.

Larry and I and the rest of the team will be available later today if you have things you want to follow up on.

Have a good day.

Thank you.

This concludes today's US Physical Therapy Conference Call. You may now disconnect.