US Physical Therapy Inc (USPH) 2007 Q2 法說會逐字稿

At this time I would like to welcome everyone to the U.S. Physical Therapy Second Quarter 2007 Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Chris Reading. Sir, you may now begin your conference.

Good morning, this is Chris Reading, President and CEO of U.S. Physical Therapy. With me here in Houston, Larry McAfee, our Executive Vice President, CFO, Glenn McDowell, our Chief Operating Officer, John Bates who is our controller who is normally with us traveling on business. Before we begin to discuss some results for the second quarter of 2007. I'll ask Larry to read a brief statement.

This presentation today contains forward-looking statements, which involve certain risks and uncertainties. These forward-looking statements are based on the Company's current views and assumptions. The Company's actual results can differ materially from those anticipated. Please see the Company's filings with the Security and Exchange Commission for more information.

Thanks, Larry. Why don't you go ahead and hit the financial highlights for the quarter?

Okay, thanks. In the second quarter net revenues from continuing operations rose 5% to $35.5 million due to an increase in patient visits from 350,000 368,000, which was partially offset by a decrease in average net patient revenue per visit of 1.6% to $95.63. Critical salaries and related costs were 51% of revenues in both quarters. Rent, clinic supplies, contract labor and other costs increased to 21.5% of revenues from 19.3% a year ago. With the increase of treatable to newly opened or acquired clinics our allowance for doubtful accounts was 1.1% of revenues for the recent quarter versus 1.3% in the comparable period in 2006.

Corporate office costs were reduced to $4.1 million in the second quarter of 2007 or 11.7% of net revenues versus $4.5 million or 13% of revenues in the second quarter last year. Net income after discontinued operations increased by 6.8% to $2.3 million. Earnings per share were $0.20 which was in line with the consensus estimate.

For the six months, net revenue from continuing operations were $70.1 million as patient visits increased from 689,000 to 727,000. Clinical salaries and related costs as a percentage of net revenue were constant between the two periods. Rent, clinic supplies, contract labor and other as a percentage of revenue increased slightly because of the new and acquired clinic.

The provisions for doubtful accounts for the six months was 1.5% of revenues versus 1.4% a year earlier. Corporate office costs were reduced to $8.5 million in the first six months of 2007 versus $9 million the first half 2006. Net income increased by 13.5% to $4.1 million. Earnings-per-share were $0.36 in the first half of this year versus $0.30 last year.

As of June 30th, USPH had $13.9 million in cash and investments and net of acquired clinic seller notes, that equated to about $1.11 per share. During the quarter we opened six new clinics and closed one for a net addition of five ending the period with 298 clinics.

Thanks, Larry. I'd like to begin by reviewing and discussing in detail some of the highlights of the quarter as well as some of our key focus areas. While our EPS numbers came in at consensus, we have been working hard to correct the flat and slightly down same store volume, which have been under some general pressure throughout the entire industry, in part at least due to physician ownership of physical therapy facilities.

Earlier this year, in a focused effort to jump start our volume and expand our referral base, we signed a national agreement with Ford Motor Company to provide out-patient physical therapy for their injured workers though out the country. While this agreement is a national one, it will have particular benefits to our Michigan based facilities, which have been under some pressure from a volume perspective. Glenn McDowell, our Chief Operating Officer and his team, along with one of our long tenured Detroit partners, John Cascardo, have done a great job of bringing home this important relationship. Glenn if you would, please discuss what you can about this agreement and the potential impact for our Company.

Thanks, Chris. The Ford Motor Company contract went into effect yesterday, Wednesday, August 1st, 2007. It affects approximately 100 Ford plants and service centers across the country. We estimate it will generate 10,000 to 15,000 additional annual visits. Over 50% of these visits will be in Michigan with potentially as many as 80 U.S. Physical Therapy facilities seeing Ford workers for care. U.S. Physical Therapy partnered with Agility Health to continue providing on site care at six Ford plants in Kansas City, Louisville and Detroit. We are excited about the opportunity and are committed to helping Ford Motor Company achieve its goals of timely high quality care and reduce lost work days.

Thanks, Glenn. Also in the area of volume and referral development, we are pleased to announce that we have expanded our sales team recently to include a National Director of Sales for U.S. Physical Therapy. This is a new position for us focused solely on improving our sales success and jump starting our same-store volume numbers. This person has 20 years of out-patient rehabilitation sales experience, was in a similar position with one of the large national rehab providers.

On the cost and productivity side, we've begun to see some labor cost reductions as a result of our efforts working with our partners to improve clinical efficiencies at all of our facilities. Since the initiation of these focused efforts, we have seen approximately a 14% reduction or a 14% improvement in our general productivity numbers clinically. We have a similar clinical program focus, right now, designed to boast our net rate. While it is a bit more complex in nature than the productivity issue we've been working on and have provided and discussed, we will provide additional tools, enhancements at clinical and service related additions that we feel will help stabilize and improve up our net rate over the coming quarters.

In the area of development, as Larry referenced earlier, we opened six new facilities for the quarter with new partners added in Oklahoma City, Albuquerque, New Mexico, Anchorage, Alaska among others. Additionally, we are working on opening new satellites in relation to our recently acquired Phoenix acquisition in the Phoenix and Scottsdale market. In preparation for what we expect to need in the coming period to fund our growth, I'd like to ask Larry to give you an update.

Yes, it will be in the Q and we recently increased our existing credit facilities from $5 million to $15 million, not so much frankly to fund internal developments, but to fund potential future acquisitions. And we are in the process of discussing with another bank creating a significantly larger credit facility.

Thanks, Larry. In closing and before we open up for questions, let me say that the team here understands the challenge and opportunities in this out-patient rehab marketplace today. We have created and executed on plans that I believe will create new opportunities like the Ford deal to effectively respond to move the Company forward.

With that, operator, I'd like to open it up to questions.

(Operator Instructions) Your first question is coming from [Larry Solo] of CJS Securities.

Good morning. Actually I missed the first, the entry of the call. The six new facilities, were any of the satellite facilities or are they all new partners?

I think we were split four and two, four new partners and then a couple satellites.

Okay, great. And, then do you expect some-- a little acceleration the second half on openings?

Yes, you know we're behind where we'd like to be, Larry, right now. We've had some challenges. We had a couple of our senior recruiters with health related problems that kept them out for awhile. The pipeline is a little thinner than we'd like it to be, although we've seen some recent pick-up in the activity. I don't know that we'll see a dramatic acceleration in the second half right now although we're working on it.

Okay. And then on the call side, I know there has been some anecdotal evidence that this salary rising may have kind of plateaued. Do you expect that to actually begin to show up in the financials?

Well, I think what showed up in the financials a little bit, while our net rate was down a little bit, our percent of labor cost as a percentage of net rate has been flat now for a while where in prior quarters, and particularly last year, we've seen that continue to escalate throughout the year. I think we've seen anecdotally things like signing bonuses and the length of time that has taken to fill key positions decrease. In fact, I don't know that we've had many signing bonuses of late and if we have they have been very small, so the general consensus here and I think among our partners is that it's getting easier. It think the big thing that will help to reduce our cost will be continued progress in the area of, you know, subtle productivity improvements.

Okay. And just last then, on this Ford, DOD agreement with Ford, I'm just kind of new to this business. Is that like a normal type of thing where-- do you have other agreements in place with other large industries, industrial companies?

I think the Ford deal is an exceptional deal. I mean that was a very competitive process with all the major industries players. This is something that doesn't come along often and something the team worked very hard on and it's for us it's very significant.

As far as I know on the provider side this it's the first national contract we've done.

Okay. And then, could you just briefly discuss how you see the acquisition environment going out there today? Are there opportunities out there for additional acquisitions?

There are a lot of deals on the market big and small.

Right.

We're looking at all of them. We said from the beginning that you'd probably see us do more acquisitions this year than we've done in the past. We continue to expect that to be the case, but they are lumpy. We won't close deals every quarter and the deals could range significantly in size.

Okay, great. Well we'll see you at our conference in a couple of weeks. Thanks a lot.

Mitra Ramgopal of Sidoti.

Just a quick question-- I think you might have touched on it regarding the contract, what's the term or length of it?

It's one year.

Okay. And coming back on the same store, I know both the business and revenue were down in light of the initiatives you're implementing, etcetera. What's your best sense of sort of when we see that really stabilizing?

You know, Mitra, I think we're a little bit disappointed that our same store numbers have been flat. That said, we haven't been sitting around wringing our hands. We're trying to do something about it to jump it forward. We brought on somebody that we feel will be a significant addition in terms of national sales leadership to really bring some methodology and some more structure to our program, which I think thus far has worked and been very successful. I think we can do even better. And this Ford deal I think will help certainly to drive volume in Michigan, which quite frankly has been a pretty big challenge for us. This last year I think volume was down somewhere on the order of 8%.

Yes, well just to give you a couple of figures, Mitra, if you exclude Michigan in the second quarter our same store sales were up $1,200, but because of Michigan we reported a net over-all decline and, as Glenn said, half the visits from this $10,000 to $15,000 Ford deal will probably be in Michigan so that will go a long way to turn that around.

Yes and we continue to work on things to make sure we are out there trying to capture volume in this market, which is a challenge but I think we are doing the right things and I think it will come sooner than later, but I don't think the pressure is going to eliminate. We've got to continue to drive it and focus on how to bring additional business in the door.

Okay and I don't know, Larry, if you have the PR mix available?

Yes really no change if you go through the different categories. This is based on charges, but private was 28%, managed care 33%, worker's comp. 15%, Medicare 20% and other was 4%.

Yes and I noticed there was a little up tick at this sequentially with the rev per visit. Is that something we should sort of expect going forward, especially with worker's comp is usually a little more lucrative for you?

No I don't think so. I don't think we are anticipating a rate increase because of the mix change.

Well, you know, we've got to work on some things internally to try to do that from a clinical perspective. I don't think-- I agree with Larry. I don't think it's going to come because of an outside the Company marketplace based situation, but it's something that we've got our eye on right now and we're working to shore up.

Okay, thanks again guys.

[Jason Stankowsky] of Castle Peak.

Just a question on the acquisition front in doing more deals, has the pricing improved?

No, I mean the pricing I think it's I would say most deals there is no empirical data on this. It's just based on the deals we're looking at. Most deals are going in the five to seven EBITDA range. Some really large deals may go for more than that. The deals that we've done historically were smaller so we were able to do them for six or less. But I don't think the range has changed significantly unless you're talking about really large acquisitions.

Okay, and do you have a hurdle rate that you are using? Or are you just looking at the EBITDA and that sort of--?

Well yes, kind of have-- in fact we have a multiple ceiling we're willing to pay.

Okay.

It's really more of that.

Okay

And we're looking, again, for deals where the guys are going to stay. They are going to keep an equity ownership interest and we think there's decent growth opportunity going forward.

Obviously part of their payout is tied to the structure you do, at least in kind of the de novo places. Are you arranging some sort of I guess tie-in where you're doing the acquisition side?

Well they're keeping at 20% to 30% equity interest.

That's a pretty good tie.

Yes and that rolls forward too as we do start-ups so they're heavily incentivized to open satellites if they think they are going to be profitable.

Okay but there is no additional, in terms of the acquisition side there is no additional sort of earn-out above and beyond than just the normal structure?

It depends on the deal. Some deals we've had earn-outs. Some deals we haven't. We don't have a kind of one size all structure other than they keep it a decent equity ownership stake.

Yes. I mean, frankly, if we're paying a lower multiple sometimes they will have an earn-out for some more upside or multiple they may not have an earn-out.

Okay, thanks guys. Appreciate it.

(Operator Instructions) Mike Petusky of Noble Research.

Just a couple questions, one I think I ask almost every call. In terms of your sales reps, what's the number there and how many facilities are they currently covering?

We have about 38 sales reps. at this time covering about a 130 locations. We have plans for a number of other reps, which will add another 20 to 30 locations that's coming on board.

Okay. Any either anecdotal or hard way to quantify the impact of those sales reps on those facilities?

Typically on a same store basis quarter-to-quarter we're up about 4% on referrals where we have sales reps in the market.

And the other think I wanted to ask about, in terms of this Ford agreement, is there efforts under way or are you thinking about using this essentially as a template and then going to other large employers and saying, "Hey this is what we're doing for Ford; we can do this for you as well."

We're hoping to leverage this and use this, if you want to call it a template, but really it's an opportunity for us to look at other employers and talk to other employers about opportunities. And, we're looking at that on both a large local regional basis and also on a national basis.

Mike, I think it's an opportunity to kind of underscore the fact with a lot of these companies that even though we're not the largest provider in the industry we can certainly be competitive. We were able to cover 91% of Ford's locations throughout the nation with our facilities and we had excellent reputations regionally that extended based upon our clinical care. So I think that's something that's transportable. Now we don't have anything that's scaleable on the Ford size that's imminent but it's certainly a focus.

And just one quick one for Larry and forgive me I was a few minutes late getting on the call and I didn't catch this if you mentioned it. What are the terms of the expanded credit facility? What are you paying?

Well, actually, it's got great grid pricing based on our leverage. I mean, it will be-- you'll see most of the information in the Q I mean but thing the pricing is very reasonable. Currently we're paying LIBOR of plus .75%.

Okay. Fair enough. Thanks guys.

Alex Washburn of Columbia Pacific.

Hey, I wanted to see if you could provide a quick update on your cash pay initiative?

Sure. I don't know that I have any firm numbers to share with you. We're actually retooling the statement to track these by individual programs. I will tell you that for the cold laser and some of the other things we have done, particularly where we've gotten TV coverage, that's picked-up quarter-to-quarter. Again I don't have the numbers at my disposal. I think it's going to continue to take some time. This is a pretty new thing for not only for our people but for physical therapists in general. But, based upon the volume of the contracts that are coming through, for everything from personal training to massage therapy we've seen that pick up quite a bit. I think it's going to take us some time before that becomes a really meaningful number. Right now what we're hoping is over time we can grow that to be something that's meaningful and in the interim we can bring in a number of people who aren't currently patients and may not have been otherwise exposed to our services previously, expose them to our people at our facilities and use that to continue to grow our additional treatment base.

I mean it's less than 1% of revenues and we expect it to continue to be less than 1% of revenues near term. So I don't want to make too much of these cash based programs.

Good enough. Thanks a lot.

(Operator Instructions) Rob Polkin of Stifel Nicolaus.

This is actually Tony Parker for Rob.

I guess a little further detail regarding the Ford contract, I know you broke out several specifics. You said you cover 91% of Ford's locations. In those markets that you do have facilities, will you also provide the on-site rehab and if you will would you be looking to, I guess, bring in additional therapists to cover those actual I guess-- what is it-- the factory locations?

Yes, the deal we did with Ford, well, they are actually decreasing the number of on-site therapy locations that they have from 13 down to six. Those six on-site locations will be covered by Agility Health who we partnered with to do the on-site care. Otherwise, we will be doing all the off-site out-patient rehab.

Great, great and then as far as your productivity increases, could you break out some of the, I guess, tools and enhancements that you are going to provide? Is that standard across all of your therapy markets or are you specializing it different programs, different tools for different off-clinics.

Well, I mean again today one of the big things that we did other than really helping our people and our partners and making sure that we are all on the same page with where we needed to go we created some objective guidelines. That wasn't really last year, Tony. We changed out the clinical incentive program. I think that had a major impact. Operation's team continues to work it and then in terms of some additional clinical tools and other things that we think we can use both to improve our care and our productivity. Those are things that we continue to roll out and evaluate. But the main thing I think that has driven this productivity up tick has been the focus of the team as well as the realignment of incentives directly related to average daily visit volume.

Let me give you a couple of stats, Tony. When we started this program beginning of last year, in the spring of last year, we were averaging 9.61 visits per FTE. In the most recent quarter, the second quarter this year, that was up to 10.98 so that's an increase of almost 1.4 visits per therapist.

And in Q1 that was 10.5. We get a little motion between quarters but 10.98 or right at 11 is the best quarter that we've had as a Company ever. So, it's moving in the right direction. The higher it gets, I think the more difficult it will be to move. I don't know if quickly is the right word.

It will probably come is smaller increments, but we're still working on it.

And I guess your pie in the sky best case scenario is still the 14% target? (inaudible) visit?

No we said we-- not 14%. 14% is what our improvement has been thus far but we said our target was to hopefully get to 12 as an average. Now again, with all these de novo clinics we did it's kind of hard to-- that might be difficult with that. You know the industry average is higher than 12.

Okay thanks for going back through that with me, guys.

Thank you. We have no more questions. Thank you.

All right. Well, with that we'll thank everybody for attending. If you have any additional questions, Larry or I are available throughout the day to answer those and, again, we thank you for your support. Have a great day.

Thank you. This concludes today's teleconference. You may now disconnect.