US Physical Therapy Inc (USPH) 2007 Q4 法說會逐字稿

Good morning. My name is Sandra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy fourth quarter 2007 year end 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) Thank you. It is now my pleasure to turn the floor over to your host, Mr. Chris Reading, President and CEO. Sir, you may begin your conference.

Thank you, Sandra. Good morning, everyone. I want to thank you for joining us this morning for U.S. Physical Therapy's fourth quarter and year end 2007 earnings call. With me here in Houston, I have Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, Physical Therapist and Chief Operating Officer, Jon Bates, our Vice President and Controller. Before we begin to discuss our results, I would like to ask Jon to please review a brief disclosure. Jon?

Thanks, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. These 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, Jon. Larry, why don't you go ahead and review our fourth quarter and year end results.

All right. I'll start with the fourth quarter. Q4 results were strong in what is traditionally a weaker season of the year for us. Net revenue from continuing operations increased 30% to $44.2 million, due to a 27% increase in patient visits and an increase in average net patient revenue per visit of approximately 1%. Operating margin for the recent quarter was 23.4%. Corporate office costs were $4.6 million in the fourth quarter of 2007, or 10.5% of net revenue versus 12.1% in the year earlier period. We continue to make progress spreading our corporate and public company costs over a bigger base.

Net income from continuing operations rose 19% to approximately $2.5 million. Net income after discontinued operations increased 18% to $2.5 million. Earnings per share increased to $0.21 from $0.18. The $0.21 of EPS beat the consensus estimate of $0.18 by a considerable margin, and in fact, exceeded the high end of the range of all of the analysts individual estimates. Thanks to our revenues for de novo and acquired credits open for one year or more increased 3.6%, same store visits increased by 2%, while the average net rate per visit increased by 1.5%. I'll now hit the highlights for the full year. Net revenue from continuing operations increased 12% to just under $152 million, clinic salaries and related costs as a percentage of net revenue were 52% in 2007, compared to 51% in 2006. Rent, clinic supplies, contract labor, other costs and the allowance for doubtful accounts were fairly comparable year over year. Corporate office costs were 11.4% of net revenue in 2007 versus 12.8% in 2006. Net income from continuing operations rose just under 8% to $8.8 million. Net income after discontinued operations increased approximately 39% to $8.7 million. Earnings per share rose to $0.75 from $0.54. Actual EPS of $0.75 for the year, again, beat the analyst consensus estimate, which was $0.73. Same-store revenues for de novo and acquired clinics opened for one year or more increased 2.6%. Same-store visits increased by 3.1% while the average net rate per visit decreased slightly.

Our free cash flow from operations remained strong. The $12 million in bank debt we incurred in September in conjunction with the STAR acquisition was reduced by $5 million, or more than 40% during the fourth quarter. As of year end, the company's net debt, which is calculated as cash minus bank debt and seller notes, have been reduced to less than $1 million. The company's adjusted EBITDA for the year 2007 was $20.5 million in the fourth quarter, which was the first full reporting period, including STAR, adjusted EBITDA was just under $6 million. That's a 26% increase as compared to $4.7 million for the fourth quarter of 2006. For additional cash flow information, investors are referred to the 8-K we filed today and should see our investor presentation on the company's website, which we updated this morning.

Thanks, Larry. This was a very busy and productive quarter for us. As we discussed, we completed the STAR acquisition in September. We've worked very hard with our partners there to ensure a very smooth transition. I'm pleased to say that relative to that acquisition, things are going very well and we expect continued good things from them in the coming period.

As Larry discussed earlier, this quarter we grew revenues by over 30% as compared to prior year. We saw an increase in net revenue per visit overall. This is attributed to the improvements in our utilization management, strong focus we've had in clinical program development. We've improved units per visit over the last six months through these focused efforts and I am pleased to say that our STAR addition has also improved the net rate in each of the past several months since we've acquired them.

This is attributed on the STAR side to renegotiation of a number of key contracts, which we were able to effect soon after the deal closed, coupled with the recent reevaluation and adjustment of our pricing there, combination of which should continue to produce strong improvements. We have maintained a solid effort and focus on cash collections, which resulted in us paying down our bank debt incurred in the September transaction, reducing this by $5 million or more than 40% for the fourth quarter. We have remained active in pursuing high quality acquisitions and continue to believe that U.S. Physical Therapy can provide an outstanding home for many of the groups who remain committed to growth and clinical excellence, but who are also seeking a strategic partner who can provide capital, as well as additional resources to help them achieve their goals and objectives.

Relating to our partner relations and our clinical program development, we recently had over 20 of our leading partners, directors and clinicians in for an initiative that we began working on in the fourth quarter. We call this initiative our concierge effect. During the this multi day event, these outstanding clinicians produced over 100 advanced clinical progressions, protocols and flow sheets for large variety of clinical diagnosis, the purpose of which is to support and challenge our clinicians across the company to raise the bar across all of our various subspecialties to improve the care and service of our patients. This focus, which we refer to, again, as concierge effect is meant to ensure that we continuously elevate the care and intensity, as well as the service for our patients, but especially toward the end of their program and as they progress from a pain-free condition to a more active program.

All too often, patients receiving physical therapy move in an independent fashion, particularly at the end of the program and often are found to be in a position where occasionally they can question the value, particularly at a time of rising copayments for a program that they are largely independent in performing. What we've attempted to do with this is to provide our clinicians with the framework and tools to allow them to progress in what we would consider to be an advanced fashion, our patients in a very high intensity and high service model and what we would otherwise refer to as a very customized, high intensity personal training-like physical therapy visit so that we send these patients out on their last visit in better shape and better condition, better able to handle the stresses that their job or their life is going to bring to them, with a much better service element than potentially they are going to receive elsewhere or that we have traditionally provided.

We believe that this will help differentiate us in the marketplace, reduce late and program cancellations, improve our durations, and improve our effectiveness, as well as our efficiencies, particularly for our younger therapists. In closing, let me say that we remain committed to growing our facility base with de novo, as well as acquired facilities, and working effectively with all of our partners in improving our company for the benefit of our patients, our shareholders, and our stakeholders. We look forward to answering any questions you might have today so at this time, I would like to ask the operator to open up the lines for questions and or comments.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Rob Hawkins of Stifel Nicolaus

Good morning, Rob.

Hey, good morning. Great quarter. Got a few questions. First one is, about a year ago you guys started providing productivity numbers, I guess on a per day basis, kind of visits per day going from 10, moving towards 12, and I know you're layering in these acquisitions, so it's not easy, but is there a way to kind of look at legacy, how you're doing or separating STAR and USPH to try to understand that a little bit better and see where the productivity numbers are going?

Sure. Let me get Glenn to give you an update on where that is. I will tell you there's a little quarter-to-quarter seasonal variation, but I think Glenn's got the numbers.

Sure. The holiday's tough, I know.

This is for the productivity number we've been looking at, Rob. Fourth quarter of 2006, is it correct to you was at 10.62. Fourth quarter of 2007 our productivity, is it correct to you was at 10.86.

Okay, and I mean do you still feel pretty good about where they are trending?

I believe so, yes. And it continues to be a focus for us. It varies a little bit quarter- to-quarter, month-to-month, based upon seasonality and the use of contract labor staff, but it continues to remain a focus for us and we're driving to get to 11 and above this year. And I'll just tell you that STAR, whose measure was a little bit less than what ours has been recently, has recently put in place a clinical excellence and rewards program to incentivize their clinicians both on the service side and on the efficiency side and they are beginning to see some improvements on that, although it's very early. It just went into effect really in the last month or so.

Okay, and that's kind of - - that segues into my next question. Where, I guess, do you guys view STAR and then the other recent transaction in terms of maturity, you got a nice pricing improvement over the quarter and looks like labor margin kind of went up and my guess is - - with productivity and other stuff it will start working down, but how do you see that progressing sales for the next year so.

Yes. I think in terms of productivity, I think we still have some room and it will continue to be a focus. I think it continues to be a tight labor market and so I think to some extent. We've made some productivity improvements and some of the labor cost have kind of kept pace. I'm hoping that we can get a GAAP in that -- official GAAP and we continue to work on the program development side so we can get an increase in our pricing, assuming that we don't have any major government changes that come down the pike. So I feel pretty positive about this year, and then beyond that, we'll have to see how the marketplace shapes up.

Okay. Alright and then there's one other thing I always wanted to talk about is development pipeline. You mentioned -- it sounds like you're talking more and more about acquisitions and maybe downplaying the de novo side of things a little more.

Actually not. I mean we continue to have a very active de novo program. We continue in this market to be very selective and so we're not going to add facilities that we don't think are going to give us the returns that we've historically enjoyed. But we've -- our focus on de novo who hasn't wavered at all and we've been more active than we have been historically, I guess beginning really last year on the acquisitions and we continue to talk to some very good groups and we expect to get some things done this year, but not to the detriment of our de novo program.

Any guidance that you guys can give us on where you see facility numbers going or is that still bouncing around too much?

Larry, you go ahead.

We traditionally haven't said how many de novos or how many clinics we were going to add through acquisition. We kind of did that in years past and got ourselves in a bind. We're just not going to do it, but I'm confident that we'll have a good de novo year and I'm certain we'll do acquisitions.

Okay. Thank you. I'll jump back in queue.

Thanks, Rob.

Thank you. Your next question comes from Larry Solow of CJS Security.

Hi, Larry.

Hi. Good morning, guys. How is it going. Could you just -- your revenue per patient I see was actually pretty good, it was flat with last quarter and that's with the addition of STAR for the three months because I think they were only contributing about a month in last quarter's numbers, is that correct?

That's correct.

If I'm not mistaken, they are more, like in the high 80s, with these recent contract negotiations, they are maybe around 90, so still seems like you must have some pretty good improvement across the board, outside STAR to kind of keep those numbers flat quarter-over-quarter.

That's correct.

Okay, and then could you just elaborate a little bit more on your unit, your unit increase. Could you discuss your unit per patient increases?

We've done a number of things on the clinical program side. We have worked hard all year. We've been very active with our partners, across the company to make sure that program development things take hold. We've looked at a number of service improvements. We talked a little bit about the concierge effect, which is more recent, but all those things have translated to what has been a pretty steady, modest, but steady improvement in our unit per visit rate, and that has translated to a modest improvement in our net rate, which we think we haven't capped yet.

Right.

We continue to work on those things. The STAR guys are working on theirs. I think together we have still got some room.

I mean we disclosed some of this in the past. Our most recent quarter, Glenn, I think we averaged four units per visit?

Yes, for the fourth quarter we were at 4.05, third quarter we were a little bit over 3.9, so we've made some improvements even in the last quarter.

Do you have Q4 2006's number?

That was Q3.

Right. The 3.9 But the 4.05 was 4Q. Do you happen to have 4Q 2006?

Right now I - - we don't (inaudible), but I didn't have it. But vis a vis the third quarter, that's about a 3% improvement?

Right.

That would contribute obviously to that, to the rating of it.

Right, exactly, exactly. Okay. Then just the -- one other question. I see depreciation was actually like -- if I back my way into it, seemed to be about $2.2 million. Is that -- it seems a little bit high. Obviously it's mostly related to STAR. Is that kind of a good run rate quarterly number, or was there something in there that may be a little bit unusual?

Depreciation and amortization, only thing that would be significant effect upon it in the fourth quarter as compared to the earlier periods would have been the addition of STAR. And normally doesn't move around much quarter-to-quarter.

Right, okay. So then the little over $2 million, could I expect like an $8 million annualized number versus like $4 million last year, I think it was?

That does seem high.

That seems high. We need to take a look.

Right.

Normally, historically our CapEx, which is pretty much a clinic and our depreciation and amortization are pretty comparable.

Right.

I dont know why we were running, I'm trying to think -- there's nothing related to amortization that would have been. Larry, I would have to look at it and call you back.

Sure, yes, we could talk about that later.

I'm sure it was right at $5 million, which is what you would have expected.

Just under 5.

Right. Okay. Then just last question, could you just talk about -- are you seeing any, the impacts of the contract with Ford, how that's going and do you see any opportunities for similar type national contracts?

With the Ford, we've obviously had the contract with Ford since September of 2007. The volume that we have seen from Ford have been about 40% of what we normally expected, based upon some closures they have had, slowdowns, temporary shutdowns. We look forward to continuing our relationship with Ford and are having regular meetings with them. We have talked to other large entitities out there, but as of yet have not been successful in creating a comparable contract, but we continue to look at that area as an opportunity for growth.

Okay, great. If I could squeeze one more question in, I know you guys normally don't give guidance, but you have put out an 2008 number a couple last quarter when you acquired STAR. Are you kind of still comfortable with that number?

Yes and -- it sounds a little canned because it's a prepared statement, but I want to read something to you and kind of rehash what we did when we issued guidance. We're not revising guidance at this time. As we stated in the company's September press release, when we issued the guidance for 2008, which was for $0.83 to $0.89 per share, the company doesn't plan to provide quarterly guidance or update.

Annual guidance stands unless there's a material development which causes management to believe that earnings will be significantly outside the range, and I note significantly. Obviously we were slightly ahead of guidance in the fourth quarter and for the year. I suspect that next time we do an acquisition of some size, we'll have to update it. I had several calls this morning from people. Obviously the original guidance of $0.83 to $0.89 is fairly wide. I think you could take our fourth quarter number and kind of triple it and I expect the most of the estimates now will be to the middle of the high end of that range.

Okay, great. All right. Thanks a lot, guys. Appreciate it.

Thanks, Larry.

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

Hi, Mike.

Good morning. Great quarter and great progress this year. A few things, one housekeeping, Larry. Do you -- you normally have the payer mix, do you have that handy?

Yes. Private, this is for fourth quarter, private was 26%. Managed care, 35%. Workers' comp, 15%. Medicare, 20%, and the balance is 4%. It moves slightly from the third quarter. Again, most of it's attributable to the mix with STAR in there for the full period.

And one other, I guess semi housekeeping item, sales reps in their facility coverage?

If we include STAR, the company right now has 222, or -- I'm sorry 45 sales reps full-time and part-time covering 222 locations across the country. We just had a big sales rep meeting, we had our First National meeting where we aggregated all the sales reps. You might recall we added a sales manager nationally for this group. We just had the group in a week ago and a very excited group, getting together for the first time, providing more resources and them understanding how important they are to our success, so we'll continue to look at markets where we can add full and part-time as appropriate.

Terrific, and in terms of the same-store percentage, is it safe to assume maybe, maybe you can even be more specific, but just generally speaking, is it safe to assume that the same-store sales performance with facilities where there's a sales rep attached is higher than corporate averages?

On a general basis, yes, it is. If you look at sales reps that have been in place for nine months or longer, we typically see about a 3% to 4% increase in same-store rep referrals over the same prior quarter. So from that standpoint, that's how we do from a sales rep standpoint.

Okay. How are you thinking about that now going forward? I mean if we're having this call a year from now, I mean what kind of coverage relative to the facilities do you think you're likely to have? Is it increased percentage, is that fair to say?

I think it will go up. I think, Mike, where we have typically multiple facilities and a busy clinic that has the opportunity to accept continued growth, we're looking at part-time solutions and other things. I was just in a market a week or so ago with two facilities where historically they hadn't considered a sales rep and after about a 30-minute discussion, they are committed to it, they are excited, and that will be an addition for the coming period. So sometimes it's a timing issue relative to the amount of time the partner or partners have to get out, and sometimes it's a facility density issue. So as we add de novos and we add satellites and we get some facility growth, it's safe to say that we'll continue to add sales reps in a number of these markets.

And just one last item. In terms of acquisitions, as I think about your position in the industry and essentially the third biggest group out there and the other two groups, I guess absorbing, sizable acquisitions or sizable merger, I mean, is it fair to say you guys see basically every deal that matters out there, or are shown every deal that matters and I guess I would like to you characterize, I mean, how full is the pipeline out there in terms of potential deals?

Well, you know, I don't want to get too far ahead of ourselves in talking about a pipeline. Remember, we're very selective and it is safe to say that if there are any meaningful deals out there, we get a call. It's also safe to say that we mine our own deals and deals that aren't on the market that we'll do very much like STAR, on a relationship basis. They may take sometimes, and so it's not unusual to find us with a pretty involved over time discussion with the group that may not be talking to anybody else. So, we have been active, though, and I think we'll continue to be active. But, I don't want to get into a trap of characterizing exactly what the pipeline looks like.

It's not a -- when we say pipeline, people normally think of a backlog, and that's really not how it works. And as we said in the past, we did a deal January 1 this year, a small one. We're not a company that's probably going to close an acquisition every quarter. But, t's kind of the portfolio effect. We're looking at so many opportunities now, you know you're going to get some of them. So we're confident we'll close some acquisitions this year and just as with STAR, that they will be accretive.

Okay. Terrific. Great progress this year, guys.

Thanks.

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

Hi, Mitra.

Hi, good morning, guys. Just a few questions, starting with the acquisition. Could you give us how much you have available on your credit facility to fund acquisitions, and also if you're seeing any difference in pricing, say, since the STAR acquisition.

Yes, the credit line, and this is all -- but it's $30 million with the right to take it up to 50 million, and after the acquisition we did January 1st, right around $10 million outstanding, so we got 20 under the existing commitments and the ability to add another 20 on top of that. So we're not capital strapped in any way. I don't think pricing's -- pricing hasn't gone up or down -- in the industry is in a pretty broad range

And understand also that the STAR deal was a much bigger deal than is average out there.

Right.

And we paid more on a multiple basis than we've historically paid on others for good reason, I think that will prove to have been a good decision over time, but there's -- as Larry said, a pretty good range, depending upon the size, the maturity and the infrastructure associated with the -- with these deals, which range from single sites to mid to high teens and as I said, there aren't many 50 to 60 location deals out there. So I think you'll see the range continue to be similar to what we've seen in the past. Yes, if you look historically what we paid, it's been right under, what, five was the last analysis we did. So I think that's, you know, that's where the market is. I don't think it's -- on on average, I don't think it's changed.

Thanks. And also, are you seeing any softness in the workers' comp for private pay business as the result of the economic slowdown?

I think it's -- I mean, were you see the numbers, we're working hard. We're working really hard and the same-store numbers are positive. They are not huge, but they are positive, and I don't know what to tell you about the economic slowdown. We haven't seen yet, I don't think, any evidence to suggest that patients are not coming in for the therapy once it's prescribed, whether we're just too early or it's just not what's going to happen, I'm not sure. But so far, so good.

Okay, and then finally again, the same-store numbers are really good, both on a -- we saw a nice increase in the revenue per visit. If had you to use the fourth quarter going forward, I guess this is numbers you can build off of.

Yes, I think the rate was not -- there was nothing -- no aberration in the rate for the period.

I think in the third quarter, it's a decline of 0.7% -- this quarter was up about 2%.

Yes, I think the bigger thing to look at is look at how -- look at -- it's tough when you compare one quarter to the next because sometimes this quarter we had STAR for three months, the prior quarter we didn't. It's going to move around a little bit. Looking at it over time we feel like we can move the needle a little bit right now and we're focused on that. So, I would look at it in over a period of time and I think you'll see some progress.

Okay. Thanks again, guys.

Thanks, Mitra.

Thank you. (OPERATOR INSTRUCTIONS) Your next question from David Beckman of Longbow.

Hi, good morning. Thanks for taking my call and congratulations on a good quarter. Also thanks for the update on guidance, that's helpful just to see you reaffirming September. I guess my question relates to going back to your kind of new emphasis on service. Can you give us a little bit more color on what the opportunity is there? I'm sure you have some idea on what the inherent opportunity there is, you were seeing fuller durations and less cancellations. Just can you give us a little bit more insight into how you think about that opportunity?

Yes, you know, I think it's a little bit early, but just to make sure there's clarity, we've always had a real strong emphasis on service at this company. Our partners traditionally have done a great job. What we're trying to do is to take those last few visits and really ensure that we've got an even greater focus on service and particularly on intensity and progression so that -- I don't know if you have ever been through physical therapy, but often times the last few visits become more independent and they can sometimes become stale and in an effort to really differentiate ourselves from our competitors, we've rolled out this program. So I think it's a little bit early.

I think we look at durations, cancellation rate. We look at some modest pricing in terms of unit capture improvements, but we're just on the front of really rolling this out with the advent of our meeting just a little over now, a little over a month ago where we brought our partners in. We rolled this out just really in the last four to five weeks, but we expect it to have a positive effect. Whether that neutralizes some economic pressure or some other things or we build on where we are right now, I think it's too early to tell.

Okay, okay. Fair enough. That's helpful. And then just a last question about the labor markets, can you just kind of update us on what you're seeing there? I know it's continuing to be tight, but are there parts of the country that you're struggling a little bit more with on that front?

I don't know. I don't know by region that we see a major difference. There's certainly some pricing differences by region. I think overall, it continues to be a tight market. We're not seeing crazy or large sign-on bonuses and related incentives that were there, two years ago. But in the last six months, I don't know that I've appreciated a major change. Glenn, what do you think?

No, I would say the market as a whole is generally where it has been, as Chris said, we're seeing people not throwing out huge sign-on bonuses the way they were previously. But otherwise the market continues to be relatively tight and therapists are making smart choices on where they choose to go.

Sure, sure. Okay. Well, congratulations, again, and thanks for the information.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Your next question comes from Walter Ramsley of Walrus Partners.

Good morning. Thanks for taking my call. Congratulations. I have a couple questions. Most of them have been answered. In the past, the company's had a little volatility in the winter due to the weather. Anything like that this year?

January we didn't really have much of an impact. We had a little bit in February, but, I mean that's -- I don't think we're on track with what we budgeted for the year. Let me put it that way.

Okay. All right. I haven't been following the company for a while. Do you have locations in Massachusetts? They just implemented a universal care law up here and some of the guys that I know in the business have seen a little increase in traffic as a result of that.

We don't have much in Massachusetts. One facility. A hand facility in Cape Cod, but -- so not a lot of impact one way or another there.

So if the Democrats take over and they implement a universal care program, do you think that would have any effect on the company?

I don't know. You tell me. I think -- all bets are off right now. I really don't know. I haven't seen enough transparency, clarity or detail on everybody's universal care concept to be able to give you an intelligent answer.

Okay. And just one other thing, the reimbursement rates that are being paid, have they changed materially, or are they likely to change?

They have not changed materially, either from a government perspective nor from a private sector perspective. Last year the government was down. Medicare paid us about 5% less in 2007 as compared to 2006, and right now we're in a reasonably steady period. How long that maintains is anybody's guess, but it's been pretty steady for a while.

Yes, it looks that way. Okay. And one last thing, I should know this, but the discontinued operations, is that just the locations that you shut down, or is it include other stuff?

If you remember back in September 2006 we closed approximately 30 clinics because of the size of that closure, which at the time represented about 10% of the base, we had to treat it as discontinued operations for financial reporting purposes.

Oh, I see. Okay. All right.

We still do some closures. I mean we close like -- the clinic last year that was because of a one-time, big group closure.

Right, but at this point if you were that close one, that would just be in the regular operating results?

It is.

Okay.

The last quarter, we closed three clinics during the quarter. We closed 12 for the year.

The big difference is now most of these are at the end of their lease and if they have been chronically underperforming and we spent what we consider to be adequate time in trying to turn these around, we may decide to shut a facility down. The closure costs have been fairly insignificant and it just allows management to focus on more opportunities other places.

Got it. Okay, thanks again. Appreciate it.

Thank you.

Thank you. At this time, there appear to be no further questions. I would like to turn the floor back to Chris Reading for any closing comments.

Sandra, thank you. Listen everybody, we appreciate you dialing in. Larry and I are available throughout today to answer, or the rest of the week to answer any questions you might have. We appreciate your support and we'll catch up with you soon. Thank you.

This does conclude today's U.S. Physical Therapy conference call. You may now disconnect your lines, and have a wonderful day.