US Physical Therapy Inc (USPH) 2008 Q1 法說會逐字稿

Good morning. My name is Rose and I will be your conference operator today. At this time, I would like to welcome everyone to the US Physical Therapy first quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS.)

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

Thank you, and good morning everyone. I want to welcome you this morning. Thank you for joining US Physical Therapy's first quarter 2008 earnings call.

With me in Houston I've got Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, Jon Bates, our Vice President and Controller.

Before we begin, I'd like to ask Jon to review a brief disclosure.

Thanks, Chris. This presentation contains forward-looking statements which involve certain risk and uncertainty. And 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 please review the highlights of our quarter one performance?

Okay. For the first quarter of 2008, net revenue increased approximately 31% to $45.3 million due to a 27% increase in patient visits and a just under 2% increase in net patient revenue per visit. Total clinic operating costs were $34.5 million, or 76.1% of revenue, as compared to 75% of revenue in the year earlier period.

The 1.1% margin difference is solely attributable to the business change with the acquisition of STAR, and is consistent with what we expected. The 300 non-STAR clinics gross margin actually improved from 25% to 26.4% between the two periods. The provision for doubtful accounts percentage was basically flat between the two quarters.

Corporate office costs were $5.1 million in the first quarter of 2008, or 11.2% of that revenue, versus $4.4 million or 12.6% of revenue in the first quarter of 2007. Corporate costs excluding stock option expense was 10.4% in the recent quarter, as compared to 11.6% in the year earlier period.

Operating income from continuing operations rose approximately 34% to $5.7 million. Net income increased more than 30% to just under $2.4 million, or $0.20 per share, which equaled the stock analysts' consensus estimate.

Same store revenues increased 5.2% and same store visits increased by 3.3%, while the average net rate per visit increased by 1.9%.

We made a small acquisition in January with the $2.8 million in funding coming from our bank line. We ended the quarter with $9.2 million in cash and $11.5 million in borrowings, for a net debt position of $2.3 million. This leaves us with plenty of available capital to continue growth, both internally and through additional acquisitions.

Thanks, Larry.

This first quarter of 2008 was one of significant operational focus for us. As you know, over the past number of quarters we have spent a great deal of time and effort on program development designed to differentiate us from our competition, drive new patients, accessing new services potentially from new doctors, with a goal of driving volume and growing our revenue as well as our revenue per visit.

In the fourth quarter of last year, we saw progress in this area in our volumes and our rate. In this first quarter, we gained a lot of traction. And in spite of starting a little slow in January, we posted very strong results.

As Larry mentioned, revenues increased 30.7% due to a 26.6% increase in volume combined with a net revenue per visit improvement from $95.47 in quarter one of 2007 to $97.25 in this recent quarter.

We also saw sequential improvement from our fourth quarter rate. This improvement came even with the addition of the STAR business which, as you all have heard and know, their net rate is a little bit lower on average than our historic rate. That said, STAR's net revenue per visit has shown steady improvement as well.

Same store revenues, which have been on an industry -- have been an industry-wide area of challenge, increased in the fourth quarter by 3.6%, and again in this first quarter by 5.2%, driven by a 3.3% improvement in same store volume as well as a net rate increase of 1.9%.

These volume increases are driven by many of the program enhancements made last year, coupled with our recent concierge program focus. Additionally, we have seen our units per patient visit move forward slowly but steadily, again contributing to our net rate per visit improvement.

On the development front, we added five new facilities for the quarter. However, we had a lot of activity which will become evident as the year progresses.

For this year to date, we have 14 de novo facilities in the pipeline, in other words, on the books, including the four that we opened in the first quarter, and a good deal of activity on the acquisitions side of the business as well. We expect to have a very solid year for development in 2008.

Regarding the STAR transition, volumes started a little slow in January but have picked up steadily since. We are seeing the effects of contracting and pricing improvements in our net rate for the STAR facilities. And in quarter one, a program was initiated very similar to our therapist incentive or TIP program called the Rewards program, which is designed to improve visits seen per clinician, and we've already seen some early progress with that.

We see continued opportunity as we work with our partners in STAR to improve and expand our market position in Tennessee and surrounding areas.

In closing, let me say that our partners and our entire management team continue to work very heard to deliver strong revenue and earnings growth, as we have demonstrated this quarter. I remain confident in our ability to add to our facility base in a meaningful way, and I expect that you will see that become evident as the year unfolds.

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

Yes, sir. (OPERATOR INSTRUCTIONS.) Gentlemen, your first question comes from the line of Larry Solow of CJS Securities.

Morning, Larry.

Good morning. In light of your rather strong same store sales, can you maybe just discuss some of your productivity measurements that you've gone over in the past, units billed per visit and average daily clinic client visits per therapist?

Sure. I'm going to ask Glenn to do that. I just want to point out that we've got some seasonal differences. We've continued to make progress on a quarter-to-quarter basis.

Glenn, you want to hit those highlights?

Sure. If you look at our visits per clinical FT year, visits per full time therapist, at the end of Q1 2007, we were at 10.52. At the end of Q1 2008, we were at 10.81. It was slightly less than we expected just because of some PRN contract labor that rolled over from the Q4 into Q1.

On a unit per visit basis, at the end of Q1 2007, we were at 3.9 units per visit. At the end of Q1 2008, we were at 4.1 units per visit.

Glenn, why don't you also talk about where we've been most recently in terms of productivity the last few pay cycles?

If you look at the last six pay cycles, we've been -- four out of those six pay cycles, we've been at or above 11 visits per clinical FTE. So, we're getting towards the standards of where we expect to get on a consistent basis.

Okay, great.

And then, just to clarify, you said you have 14 de novos on the books and you opened four. So, that means, I guess, 10 are pending? Is that how I can kind of look at it?

Yes, that's how you can look at it.

And that's not necessarily the total for the year, that's what --.

No, that's just what we've got on right now.

That's current on the books, right?

Right.

Okay.

And then, just -- is there any word out of Washington or Congress or anything, because I know they had postponed or pushed out -- kept the rates flat until June. So, shouldn't they be doing something, or is no news kind of good news? Or, how do you look at that?

Yes, I'll tell you a couple of things. One, we have a conference call every week. We've got three different groups that we work with in DC now. We've beefed up our lobby considerably. We've got an industry-wide focus on a couple key areas that are very important to us, one of those being reimbursement and therapy caps, another being physician ownership and the in-office ancillary provisions surrounding STAR.

The word right now is that -- and nobody's really sure. I think that certainly we'll hear something by the end of June. I could venture a guess in an election year that if you look at some of the other areas of healthcare, there hasn't been anything dramatic come down in terms of negative news. So, I'm hopeful at this point, but we just don't know.

Okay. Okay, great. Thanks.

Your next question is from Rob Hawkins of Stifel Nicolaus.

Morning, Rob.

Hey, good morning. And just by the way, on that last question, that House Small Business hearing is meeting on the physician cuts right now as we speak. So, hopefully you're going to see some legislation out of this here, is what our folks are telling us, in the next 30 days as well.

I guess I wanted to kind of understand, is there any seasonality in the productivity numbers on the same store volumes that might be behind it? It sounds to me like this is a nice, sustainable trend, and I want to kind of probe a little bit better on it. How much of it is seasonality, how much of it is STAR catching up, or are we likely to see kind of a 3% volume number and a -- or a 5% net revenue kind of organic number out of here for the rest of the year?

Yes, it's a good question. I think from a seasonal perspective, typically the first quarter is not the best quarter. The second quarter tends to be a little stronger quarter for us in terms of volume and productivity. And that kind of rolls into the latter part of the third and the early part of the fourth quarter as well as school -- when school sports pick back up.

We continue to work on the productivity thing. I think STAR, as you know, is a little bit lower than we are. I think they have opportunity they've recognized, and they've been making some changes, continuing to focus obviously on the care of the patient but with an opportunity there. We've seen early results with them.

And I expect that we'll continue to see some modest unit per visit increase, which should help us in our net rate. Now, whether it's on an annual or a quarter-over-quarter basis, 3% to 5%, I don't know. I mean, I think that there are a lot of questions up in the air in terms of what the government's going to do and other things.

But, in terms of what we can deliver right now, I think we had a solid quarter based upon fundamentals that were worked on significantly last year, and my hope is that it can continue.

Great.

The -- can you go a little bit further into some of the dynamics on both the TIP program, and then you were doing some -- you guys were experimenting with quite a few services prior to STAR as ways to kind of utilize more capacity at the clinic sites, everything from maybe even like Pilates, massage therapy, some of those ideas. Are any of those things kind of gaining traction, or anything that's going -- being done systematic along those lines that are maybe driving some of this?

Yes, I think that the cash-based programs continue to be -- while they continue to be a focus because we feel like we need to get stronger in that area, it hasn't been a big contributor to these numbers. I think some of the other program development things that we've done in terms of equipment and services, we're working on. We just had a group of about 35 or 40 partners in just last week, spent a lot of time looking at fall prevention, some of the things -- some equipment associated with that, as well as cancer related fatigue and related programs.

We won't have the uniform rollout because not all of our clinicians focus on the same clinical areas. We're seeing these areas, where they're implemented, gain significant traction, and we're trying to push that out on a best-demonstrated practice basis to the rest of our facilities.

And then, in turn -- to just kind of close the loop on that, then in turn are you taking those new programs, is that a lot of what the TIP, the physician piece that's happening, or is it just general awareness of the clinic and differentiation in how you guys do in an individual market? That make sense?

Yes, TIP is really related to the incentives that we pay the clinicians. And so, as we drive more patients, there's more opportunity to see more patients. And I think as more and more people are rewarded for doing what happens during the week for seeing a good load, we have more opportunity to make that be a consistent thing. It's really two different things.

Okay, sorry about that. I got it confused the way you were saying it one --.

Yes, the TIP is based on how many patients per day a therapist sees, whereas our increase in net rate was tied to an increase in units per visit, which is really a function of the concierge program and some of the other stuff. So, they're kind of apples and oranges.

Okay. I thought in your comments, though, this morning you kind of mentioned the physician marketing efforts in the same vein with TIP and both those things. I guess I got them a little bit confused.

Then, I guess what I'm trying to ask about is the physician marketing part of this. I mean, how is that working out related to these new -- are they only for the new programs, or are you guys doing more of a broader based effort?

Well, our physician marketing has always been the key to our referrals and what we do. We have focused more on primary care, family practice, general practitioners because of the physician owned practices that are out there. I think our same store growth is driven off of that.

We've also continued to hone our sales/marketing program. At the end of Q1, we had 41 sales reps covering 223 locations. We have found that sales reps that are in a market for 12 months or greater typically are producing a 4% same store growth impact quarter-over-quarter. So, that continues to be our focus from a sales and marketing standpoint, both through our sales program and with our clinical partners, is to focus on physicians and how we can bring them value.

And anytime we add a clinical program that they can get excited about we can implement at the facility level, gives them another reason to go back in and talk about why or not they should use our services.

Yes, I'm going to make a note of one of the things that Glenn just touched on. We say in our press release that our overall same store growth in visits was 3.3%. That number that Glenn mentioned in clinics that have had salesmen for 12 months or longer, which tend to be our larger, mature clinics, not clinics that are still in ramp up, they had same store growth of 4.3%. So, significantly higher than the company overall.

Excellent. Okay. Well, that helps clarify it for me. I guess I've been kind of mixing up a couple of the initiatives here, and I understand it better. Thanks. I'll jump back in the queue.

Thanks, Rob.

Your next question is from Mike Petusky of Noble Research.

Morning, Mike.

Good morning. Hey, good quarter.

Couple housekeeping, Larry. Could you give the pair mix if you have that handy?

Yes, this is based on charges, but private was 27%, managed care was 34%, workers' comp was 16%, which was up slightly. Medicare was 20% and then other was 3%.

And then, another thing that I typically kind of track, and this may be a Glenn question, but the sale reps and the facility coverage?

Again, we had -- at the end of the quarter, we had 41 sales reps, and they were covering 223 locations.

We also, Mike, have a number of open positions, so we expect that number to grow. But --.

Yes, because it looks like that -- at least based on my notes, it looks like that number's down about four reps.

It had shrunk a little bit. We had 45 at the end of the fourth quarter. Sales reps for us, you continue to churn and you look for those that have an impact. So, we continue to look at our sales marketing from that standpoint.

Okay, the 10 de novos that are pending. How many of those to you expect you'll actually get opened in Q2?

Mike, I'm sorry. I don't have the sheet right here in front of me. Those are spread right now through -- largely through the end of the third quarter, I think, for the most part. So --.

Yes, that's probably for the next six months, because those are what we've approved internally and we're actively working on a lease. So, we don't really -- I can't tell you an exact number for this quarter.

I guess the last question. A couple of my other questions were already asked and answered. But, how many -- in terms of the TIP program, how many of your therapists, or what percentage of your therapists, are getting bonuses through that program at this point?

Well, all therapists are eligible for it. It varies from payroll to payroll cycle depending upon what's going on. It can run anywhere from 25% to 50% of our therapists hitting it. So, it just varies from pay period to pay period.

And STAR's -- I think STAR's not quite at that threshold yet, but I think an opportunity for them to grow into that direction as well.

Have you guys been -- I guess what I'm curious about, if you guys are tracking that, I'm just wondering is it certain therapists that are doing more and more and getting more and more from that program? Or, are more of the therapists actually really striving to be bonused through that? Do you guys track kind of -- some kind of moving average that I could grab on to as far as percentage of therapists that are bonused there?

I don't have those numbers in front of me. We do look at it from a number standpoint, but I'd have to go back and take a look at that.

We are seeing gradual increases across the board. It is not just certain therapists increasing more and more. As we work on efficiencies with scheduling and mentoring our therapists and working internally, we're seeing more and more of our therapists get to a higher level.

Okay. That's what I was after. Thanks, guys.

Next in queue is David Bachman from Longbow Research.

Good morning. This is Bonnie Cybulko in for David Bachman. First, I just had a quick housekeeping question on the corporate office costs. There was a bit of a drop this quarter from the first quarter of '07. Anything particular there that is noteworthy? Can you give us a little color on that?

Yes, well, it's not down in dollars, it's down as a percentage of revenues. We've said as we continue to grow the business that absolute -- the value of dollars that we spend on corporate overhead will increase, but it'll continue to decline as a percentage of revenue, which will contribute to a larger operating margin.

Okay, great.

And I have a question then, as well, about your same store revenues in terms of increasing your patient visits and how that's impacting your contract labor costs. Have you see any increases in terms of your need for contract labor to try to meet some of those expansion targets that you have?

We have an ongoing need for contract labor. There is a therapist shortage out there. The demand is --.

I think she means PRN.

That has stayed fairly stable for us from that standpoint. We haven't seen a huge significant change in the PRN need. It's usually higher in the fourth quarter because of the holidays, but after that it's a little higher in the summer times because of summer vacations. But, otherwise, it stays pretty stable for us.

When you look at the -- we're happy with -- we're pleased to see that we've got solid same store volume back. Most of the time, we're able to absorb these kind of increases within the existing facilities without having to change staffing. And, again, that's part of the incentive program so that people are willing to work efficiently and effectively to capture those patients.

So, it really doesn't generally result just from a same store basis, at least, on more contract labor.

Okay.

And you did mention the therapist shortage nationwide. Do you see that impacting your growth plans here throughout '08 and into '09 with the expansion de novos?

I think the market continues to be tight. I think physician ownership continues to be prevalent. It's certainly something that I think has impacted us historically over the last couple years. I think we continue to look for creative ways to fight through that, but I don't see a dramatic change in the market in '08 and necessarily in '09 unless there is some legislative initiatives that come to bear. So, I think the market remains kind of the way it has been for the last 24 months or so.

Okay, great.

And one final question, then. You mentioned you've got 223 locations for your sales reps. Have you noticed any regional changes then, in terms of places where your new programs, your new initiatives, are getting more traction? Certain regions of the country where some of these same store sales are stronger than others?

No, I mean, we have seen -- these niche programs that we do tend to be fairly much market driven, so they're on a much smaller local community scale. So, it's not that we've seen a significant increase in the east region with certain programs versus other programs in the west. We just haven't seen that.

Yes, I would tell you our VPs -- we have a VP for each of the three regions. They and their teams have done a good job in rolling these initiatives out. They tend to be somewhat of a competitive group internally, and they're all pulling pretty hard.

But, no, we haven't seen one area lag behind dramatically, nor one area jump out in front for any particular service. They all have some strengths, but they're all doing well right now.

Okay, great. Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS.) Gentlemen, your next question comes from the line of Mitra Ramgopal from Sidoti.

Hey, Mitra.

Good morning, guys. My questions have pretty much been answered. But, just a couple of follow-ups. I know you'd mentioned the de novo pipeline is pretty good. I don't know if you could comment a little on the acquisition front.

Let me just say that we -- what we said last year and I think there were some people that were starting to doubt if we were going to have a meaningful contribution from acquisitions last year. They take time. We've been very active. We were active last year in building the pipeline for this year. We've remained active. I'm confident we'll get a number of deals done this year that will add to our facility base.

Yes, I don't -- when we say pipeline, we don't mean that we have businesses under letter of intent, but we know, because we're talking to enough groups, that we'll close some.

Okay. And are you seeing any change in pricing? Is it being more favorable or no -- or just the same?

I'd say it's probably softer than a year ago.

I would agree.

Okay.

And then also, just to follow up on the sale force, given the success you are having with that, any plans to be more aggressive adding, or you pretty much have the people in place that you need?

We continue to look at areas where we can add sales reps, but it becomes a geographic matter as far as having enough locations depending upon the area that -- to really afford a sales rep. So, we continue to look for areas where we have enough locations in a geographic density to add. But, I would say for the most part, we're covered in most areas that we want to be. We'll continue to look for opportunities where we can add people.

Typically, now we're down to the level, other than replacing some people that may have been lower performers, we're down to where we've pretty much got all the full time rep coverage I think until we add more facilities, and then of course there's that opportunity. We're really probably more on a part time basis now where we can plug somebody in halftime or three-quarter time and make it be cost effective and efficient at the same time.

Okay. Thanks again, guys.

Gentlemen, you have a follow up question from Larry Solow.

Hi, guys. Could you just give an update maybe on Michigan? Although I know that had kind of been a drag a little bit on the business, and that kind of -- was showing some improvement, earning update there?

Michigan has rebounded very well for us this year, and has over the last six months. We are doing very well with the visit volume that we have in those areas. And we continue to think that we'll continue to grow in Michigan as we have.

Now, interestingly, I think early on -- let me take a step back. About a year ago, we made a considerable focus -- Michigan a considerable focus operationally at our existing facilities, and then concurrent with that, we signed the Ford agreement. And what we've seen is that the operational focus and getting some of these facilities back on track has really taken hold.

The Ford contract has been a nice benefit as well, although I will tell you I don't think we've seen quite as much volume out of the Ford contract as we've predicted. And so, the majority of the traction we've gotten with Michigan so far really has been through the efforts of our partners and our management team to shore that business up locally. Glenn, would you agree?

That's correct. We put a lot of operational focus there and our partners have responded very well. And we've rebuilt the business and are going quite well.

If you took out the Ford contract, the business would still be up significantly year-over-year.

Okay. And is that -- do you plan -- do you think you'll -- I mean, but Ford, but there I think that contract was for a year, do you expect that to be renewed or --?

We have had a meeting with Ford. They have chosen to continue with us for an additional year and we're in the process of renegotiating rates. But, otherwise, we will be the provider for another year.

Okay, great. Thanks.

There appear to be no further questions. Mr. Reading, do you have closing remarks?

Yes. Thank you, operator.

Listen, I want to thank everybody for the time this morning. Larry and I and the rest of the team will be around today if you have any follow up questions. Thanks and have a great day.

This concludes today's US Physical Therapy conference call. You may now disconnect.