US Physical Therapy Inc (USPH) 2007 Q3 法說會逐字稿

Good morning. Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy first quarter 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 call over to your host, Chris Reading, President and CEO. Sir, you may begin your conference.

Thanks, Jackie. Good morning, everyone. I want to thank you for joining us for U.S. Physical Therapy's third quarter 2007 earnings call. With me here in Houston are Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, and Jon Bates, our Vice President and Controller. Before we review the quarter's results, I would like to ask Jon to read a brief statement. Jon?

Thanks, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. And these forward-looking statements are based on the 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, Jon. Larry, why don't you go ahead and review the financial results for the quarter.

Okay. I'll now go over the Q3 2007 results. Net revenue from continuing operations increased 13% to $37.5 million due to a 12% increase in patient visits and a slight increase in our average net rate per visit. Clinic operating costs, measured as a percentage of net revenue, were 76% in the third quarter of 2007 as compared to 74.5% in Q3 2006. Most of this difference is attributable to the acquired STAR clinics, as the non-STAR clinics were 75.1% of revenue. The slight 0.6% increase is attributable to the new clinics opened at the end of 2006 and thus far in 2007, as costs at mature clinics were flat. In one of the analyst's reports this morning, there was conjecture that the Company had suffered margin erosion. That is not case. As noted in our press release in September when we announced the deal, STAR's average net rate per visit and gross margin are a little lower than USPH's historical average. Our Q3 results include one month of STAR's numbers which changed the mix.

That said, STAR was a positive contributor to earnings in September. The acquisition is immediately accretive. Please see the Company's 10-Q, to be filed tomorrow, for detailed information. Also, I'd like to note that the Company's 295 non-STAR clinics achieved significant improvement in productivity year over year, as Q3 2007 visits per clinical FTEs were 10.9 versus 10.4 in the third quarter of 2006. In both periods the provisional for doubtful accounts was the same at 1.8%. Corporate office costs were $4.2 million in the third quarter this year or 11.2% of net revenue, versus $4.1million or 12.5% of revenue in the third quarter last year. Net income from continuing operations rose approximately 14% to $2.132 million from $1.874 million. Our earnings per share of $0.18 were on target with the analyst consensus estimate. Same store revenues for de novo and acquired clinics open for a year or more increased slightly. Same store visits increased by 1.4%, while the average net rate per visit decreased by 0.6%.

During the quarter, we acquired 52 clinics, opened two and closed six, for a net addition of 48 clinics, bringing our total at September 30th up to 346 clinics. New clinic openings should pick up in the fourth quarter. The average age of the Company's receivables at the end of the quarter was 57 days. Despite using $19.2 million of cash in the acquisition, we ended the quarter with just $4.3 million in net debt, as free cash flow from operations is good.

Thanks, Larry. Listen, I'm going to go ahead and apologize early. I hope my voice holds out. I've got a bit of a cold. So, hopefully you can hear me. This third quarter was a very busy, very productive quarter for our Company. There was a lot of work and a lot of good competition, and we were able to secure the Ford Motors work comp contract nationally. This contract, which began in early August, helped along with a variety of initiatives to boost our Michigan facilities which had seen volume decline earlier this year. I'm pleased to say that Michigan has posted profit improvements this quarter and our same store volumes, which had been off as much as 8% recently have improved considerably.

Maintaining our focus on same store for a minute, we added a National Director of Sales, also in the quarter. And while he's not been with us very long yet, making some very positive contributions to the team in the form of additional support and training for our growing sales staff, which has been very well received by both partners and sales team alike, additional hiring resources and expertise and enthusiasm and passion for growing our business that we need in order to be successful and take our sales programs to the next level. Also in the quarter, we finalized our deal with STAR physical therapy out of Nashville, Tennessee.

STAR is one of the largest private practices in the country, founded by Regg Swanson, and surrounded by a very committed and capable group of partners. They have grown to be a dominant player in sports medicine and orthopedic physical therapy in Tennessee. In early September, we announced that we had purchased a 70% interest in STAR. That transaction was the result of a relationship that grew over the prior year and will continue bringing U.S. Physical Therapy an extremely talented group of leaders and clinicians -- excuse me. The integration has been very smooth and we look forward to working with Regg on the board as we work together to make significant strides for the Company. As Larry mentioned earlier, we've been making a strong push in our collections activity and although we used a little more than $19 million of cash on this September deal, we were able to pay down some of the newly created debt and ended the quarter with just $4.3 million in net debt and we reduced our accounts receivable days to 57 from 59 at the end of June.

In addition to being productive on the collections side of things, we saw solid improvement in our year-over-year clinical efficiencies. We continue to see improvement in this area and, although we believe that the improvement -- the rate of improvement may slow slightly, we believe we have continued room to continue to gain in this important area. On the program development and training side, we remain very active with our partners, introducing new tools and programs for trying to stimulate and invigorate -- reinvigorate the growth of our facilities. Just this week we had approximately 40 partners and directors representing 150 facilities in to Houston to participate in a multi-day program led by Glenn McDowell and our senior operations team, along with a select group of highly successful partners, who are looking at a variety of ways and strategies to grow and improve our facilities. This format, started earlier this year, includes a strong motivational element, labs to get partners comfortable with new tools, programs, and technologies, networking opportunities, problem solving and instruction encouragements from some of our most successful partners. This interactive motivational program has been well received and has allowed us to reach more facilities more effectively than ever before, while at the same time strengthening relationships along the way which will remain an important element of our success.

In closing, let me say that the efforts that went into making some of the these positive foundation strengthening moves in the most recent quarter, those efforts will continue. We believe we can attract and provide a great home to additional regional companies like STAR and we will remain active in our entire development process, both on the start-up side as well as acquisitions. The operations team has made strides in our clinical efficiencies and as well on our units provision capture, which will help to improve our revenue per therapist as we head into 2008. We feel we can continue to get some efficiencies in Houston as well, as we work to grow our facility base. Thank you for joining us today and with that, I'd like to ask Jackie to open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question is from Larry Solow of CJS Securities.

Good morning. The 1.4% increase in same store visits was pretty good. Was that mostly from the impact of Ford and Michigan or were there other things?

If you look at what had the biggest percentage change, it would be Michigan.

I think Michigan had made some nice progress and we've continued to work with our facilities in some of these program initiatives. I think in combination, we're seeing a little forward progress, which for us is encouraging as well as expected.

I think if I remember right, Michigan visits were almost flat with a year ago as opposed to, as Chris mentioned, at one point they were down 8%. Just flattening out there with the improvement of the rest of the Company put us in a positive same store position.

And how is the sales rep situation? Is that increasing and has that also had an impact?

Sales reps have increased. We're up to 33 sales reps covering 165 locations, not counting the STAR facilities and their sales reps. The sales representatives overall continue to grow and prosper and we're seeing about a 4% same store growth in those markets where we have a sales rep for six months or longer.

Okay so STAR actually had -- also had some of their own sales reps?

That's correct. They do.

Okay. And then just last question. Decision on Medicare rates for 2008 from the CMS -- is that due shortly?

The published numbers are out right now. And those are coming in at about 10.1%. Everything that I've read and heard or that we've read and heard suggests that Congress may act near year end to mitigate some part of that. We can't necessarily guess on what that final number is going to be. But we expect some clarity by year end.

There have been several reports written by different analysts in the last two weeks about the proposed physician fee schedule reduction. Not one report I read has suggested they think what CMS proposed will stick. In fact, one of the analysts on the phone call today wrote in his weekly health care letter that his best guess is that the rate will remain flat. But honestly, it's anyone's guess. We've got to wait on Congress.

Thank you.

Thank you.

Thank you. Your next question is from Mitra Ramgopal Sidoti & Company.

Good morning, guys. I was just wondering if it was possible to give us a sense of how much STAR contributed in the quarter. I know it was just one month.

You'll see -- rather than do that and get into a lot of detail, Mitra, we're going file our Q tomorrow and there's a lot of information in there. And what I would suggest is that the listeners look at the Q and if they have any follow-up questions, absolutely give us a call. But there's pro formas and other information in the Q.

Okay. That sounds good. And I saw that there was a nice uptick in the management contract revenue.

Some of that again is from STAR. STAR had, I don't remember how many contracts.

I think eight total locations. But STAR has a significant position in management contract revenue and so you'll see that number, particularly in this next quarter, pick up with -- largely from their efforts.

Okay. And if you had to look at just the integration so far, are you on track in terms of what you expected to get from the transaction?

The nice thing about this acquisition, this merger, this relationship is that these guys run a really good show and we are absolutely, very thrilled about the transition so so far. It's gone without any hiccups. It's been very, very smooth. And we're very excited to have them on board. No bumps, no lumps, no bruises.

Their earnings contribution in September, in fact, was slightly higher than what we had had in our acquisition log.

And finally, I know you mentioned you have like 33 sales reps covering about 165 locations. Any sense as to when you think pretty much all of your locations will be getting a sales rep, given that you're seeing really nice same store growth, once you have someone in place.

I don't know that we'll ever have a sales rep covering every location, just because we're in many rural areas and it's difficult sometimes to find part-time salespeople for a single location. We're going to continue to look at trying to put sales where we think we can have the biggest impact and where we feel it's appropriate that we can handle and manage from Houston and from the management staff that we have in place.

Mitra, in some of these facilities, particularly our new facilities that are ramping up, we rely appropriately I think on our new partners to get out. Particularly when they're less than full capacity and that's been effective in the past. We'll continue to do that, but as Glenn mentioned, we continue to look for opportunities whenever we can to add the right person to the mix to grow volume.

Okay. And just finally I guess with STAR, does the mix change going forward or I don't know Larry if you have the numbers for you quarter.

I have the numbers for this quarter. STAR's are a little different but not materially from our mix. What our combined mix was for the quarter was private insurance 28% managed care was 32.2%, worker's comp 15.4%, Medicare 20.9% And other 3.5%. So it's not really materially different than in prior quarters.

Thanks a lot.

Thanks, Mitra.

Thank you. Your next question is from Rob Hawkins with Stifel Nicolaus.

Good morning. A few questions. The big one I have is just trying to understand, and I know the Q will be out tomorrow, but there's a margin impact from STAR in the quarter on some of the expense items. How fast do you guys think you can bring STAR kind of in line with kind of your typical run rate on these various expense margins?

You know, I don't know how to answer that question. I think these guys run a very good business. They're in a different section of the country. We didn't have much in Tennessee. The payor element's a little bit different. They run a fairly efficient process, but I know, like us, continue to look for improvements. I think their business, like ours, continues to evolve and they continue to look for ways to hone that in and we're working together on all elements of that. I think the business is in good shape. I don't think there's a major retool to be done right now. So --

I think important to look at, when we do acquisitions we pay a multiple of the bottom, not the gross margin. So the fact that their net rate and gross margin may be a little bit lower than ours doesn't mean that we overpaid for the deal. The deal was, in fact, accretive and I think when people look at the detail tomorrow and I would go through it but there's a lot of information in there. I think when you look at that, you'll get a better handle around that.

Okay. I guess one question then related or following on that is you kept overhead in line with the last quarter on a whole dollar amount, do you guys anticipate you're going to need any additional overhead to support this pick-up in business or it pretty well self-contained where you've got enough?

I think the increase in costs here in Houston in terms of corporate costs will be a minimum.

Okay. Pricing was just a little bit soft this quarter. Is any of that related to Michigan and worker's comp differential or is it just kind of a normal quarterly fluctuation?

Actually, our net rate was better than we budgeted. If you factor in the 5% Medicare cut this year, for our net rate to be up from a year ago is somewhat surprising.

I think we've actually made some operational improvements that maybe haven't fully shown themselves this quarter that, hopefully, will support our net rate and this is of course in the absence of whatever happens to us with CMS at year end. But STAR's net rate, of course, is a little bit lower with their payor mix and I think that has some impact as well.

But I think the street needs to be aware, for example, in the fourth quarter when you have STAR in there for a full three months. Their net rate runs in the high 80s versus ours in the high 90s. So their mix is going to bring the average net rate down. That said, it doesn't necessarily bring -- it's not, the bottom line should be better.

Okay. And then a finally, you guys have been making nice tries at productivity, ex-STAR are you guys still making -- pushing forward on the visit per hour -- or, excuse me, per day, per therapy day.

We've got a seasonal element with our visit fluctuation and the summer tends to be just a little bit softer. Second quarter tends to be the strongest quarter. And we don't flex that much staff throughout that period, but on a year over year basis, we're making some nice progress. We've looked at recent numbers and we believe that we can continue to move ahead slowly but move ahead. So we think we'll see that continue for at least a time.

All right. Thank you. I'll jump back in the queue.

Thank you. Your next question is from Mike Petusky Noble Research.

Good morning. A few questions on STAR. I didn't hear, did you -- I heard you say that they have their own sales force. But how many sales guys do they actually have?

Right now they have four sales reps.

Okay. Will they then be attached not only to STAR facilities but also some U.S. Physical Therapy facilities?

No, those sales reps are -- again, Mike, we really don't have much in the way of overlapping facilities or any in the way of overlapping facilities. So those sales reps will continue to be solely for STAR. I will point out that they have a very big, very effective sports medicine program where they cover some 40 plus high schools. And in effect, those athletic trainers that are out in the community are quasi sales reps as well, because they're on the sidelines standing with the doctors. They're in the schools and they're in the community, moving the initiatives forward and providing great care. So while we don't consider them true sales reps, they do have a strong sales element to their business.

And how many facilities do the four STAR sales guys that you segmented out -- how many facilities do they cover?

They cover all the STAR Facilities. They have it broken out differently than we do, but that's what their coverage is. [Technical Difficulties] Sorry about that, Mike.

In terms of the contract management revenues, to me looks like if you only are including one month of STAR revenues to this, to me it seems like these guys -- STAR has a pretty sizable business in this space. If you look at you first two quarters, you average essentially $300,000 a quarter in that business. Now you report 488 with one month of STAR. Should I be thinking that this is a business that is at least a few hundred thousand dollar dollars a quarter on their end.

We're looking here to see if it's in the pro forma information so that you can get it in detail tomorrow.

I will tell you that they manage a number of physician practices that are pretty robust practices. They've done a great job at that. And you know, I expect that will continue. I don't know that the number necessarily will grow dramatically. I think it has opportunity to, but Jon is shaking his head. It's not in the Q.

We may need to break out and have a footnote on that additional disclosure. It's a good question. So Mike, we'll follow up with you and we'll probably put something in the Q tomorrow related to that.

Sorry for creating extra work.

Oh, no.

That's all right. It's a good question.

And actually just on that real quickly, how many contracts between both entities do you guys now have in that business, roughly? Is it 20, 15, 20, something like that?

No, no, no. In terms of number of contracts --

You're looking at 10 to 12 total.

Well, I don't know. Mike, I think we need to go back and look and I should know that answer but between contracts and locations, I need to -- it's somewhere around 10 to 12, something like that. It's not a big number. But STAR has some ones that have some heft to it.

And last question on STAR. In terms of how they've traditionally incented their therapists and productivity goals and all the rest of it, was it fairly consistent with how you guys incent therapists and compensate therapists or were there any differences? Was there anything, I guess, you were going to take from them or will there be any integration issues on that front?

They're running a great business and their approach historically has been to have key operators, as well as regional operators, be tied to the bottom line profitability of the business. So from a philosophical standpoint, Mike, it's been very similar. Their statistical numbers differ a little bit. And as I said earlier, I don't know that there will be any material change, although I know they're working and we're working both together and independently to move the ball in areas that we feel like we can make some continued improvement. I don't expect any big philosophical, cultural, or other changes in the business though.

Will their therapists be on your incentive program?

I don't know. I think ultimately, we're too early in the process. I think that will be up to the STAR partners. I know they're coming in here in just a couple weeks right before the board meeting. We were just down there. We had a couple days worth of good meetings. We're still in the process of trying to plan for '08 and get our budget set. So I think at this point it's too early to tell.

And last one, totally separate item, in terms to have Ford contract and I think asked a question somewhat similar to this on the last conference call. But do you guys have much hope in terms of using that as a template going forward and landing a few other deals along those lines?

We're obviously looking for other opportunities that we can use the Ford contract to help leverage us into items. Most of our opportunity typically comes from relationships that our partners had out the in field. So we're looking to them to help bring us potential opportunities. And we'll continue to look from a corporate standpoint here in Houston at areas around the country that we can talk to. We're in some conversations with some people, but nothing that's significant at this point that we're ready to discuss.

Great. Thanks.

Thanks, Mike.

Thank you. Your next question is from Larry Solo with CJS Securities.

Just a quick follow-up. I know you guys mentioned the new store -- new store openings are a little slow. And I imagine that was probably in relation to the fact that you're busy with the STAR acquisition, but I know last quarter you had mentioned that there was some health related problems with some of your recruiters. Has that been resolved?

We've beefed up the recruiting staff here. We've got some good folks that are hitting hard. I don't know that I would say that the quarter was slow as a fault or because of the STAR deal. It's been a little slower this year all year. We've down some things internally and externally to change that as we look forward. We've created some external consulting agreements. We've beefed up our staff here. We've made a few changes, quite honestly, to improve the focus and delivery of that process. But I really think it's unrelated to STAR.

Okay and a follow-up to that, I also see you had six store closings, was there anything in particular?

No, we had told the street at the beginning of the year that we would -- in fact, we had budgeted 10 closings this year and what do we have now, Jon?

I think we're 12 or 13.

So we'll end up -- actually it's on the last page of the press release. We're at 11 year to date. I wouldn't be surprised if we closed one or two more in the fourth quarter, so maybe we end up at 13. And one of the clinics we closed in the quarter was a STAR clinic. So, acquisition. That said even if we closed say 13 for the year. The cost of those closures are going to be less than we expected. I think we only had, what, $18,000 in losses.

Most of these came at the end of lease terms in facilities that had been underperforming for a considerable period of time. And it was either relocate it or re-up a multi-year lease. And we took the opportunity to refocus resources. So they weren't big impacts.

Okay. And then just one other question. I see you acquired about $400,000 minority interest this quarter. Was that related to STAR or existing partnerships?

That was a different -- that was another partnership.

Okay. I was just wondering. That was an existing partnership. Okay, great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is from Mitra Ramgopal with Sidoti.

Hi, guys, just a quick follow up. I guess if we look back to '05, '06, you had opened close to 30 clinics a year and I think after the first three months, you were at 11 and I know you had the acquisition in there. Looking forward, in terms of just de novo, should we assume it's going to be significantly scaled down versus what we saw a few years back.

I wouldn't make that assumption. Mitra, I'm not happy with where we are this year. The focus hasn't really changed, though. We've changed out some of our recruiters. We did have a couple people with health problems that kind of threw us a curve, that had been here for a while and highly productive. We've beefed up the staff and the focus remains very much the same. The market's changed from '05 a little bit. And we're trying to respond and react to that. But quite honestly, the focus is going to continue.

In fact, MItra, the acquisitions we're looking at and the ones we've just done, including STAR, have their own de novo plans. So for example, when we were at STAR last week working on their budgets, part of they reviewed was what they viewed as their pipeline for de novo opportunities.

Okay. Thanks a lot.

Thank you. There are currently no further questions. I would like to hand the floor back to management for further or closing remarks.

Thanks, Jackie. We appreciate everyone's time this morning. Larry and I will be around today to answer any questions, follow-ups that you might have. And as he mentioned, there will be additional information coming out tomorrow. We hope you have a great day and we thank you for you time this morning.

Thank you. This does conclude today's U.S. Physical Therapy conference call. You may now disconnect.