US Physical Therapy Inc (USPH) 2008 Q3 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy third-quarter 2008 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 session. (Operator Instructions)

Thank you. Mr. Reading, you may begin your conference.

Thank you, Crystal. Good morning, everyone. Thank you for joining us for this morning's U.S. Physical Therapy third quarter 2008 earnings call. With me this morning in Houston is Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; and John Bates, Vice President and Controller.

Before we begin, I would like to asked Jon to read 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 vary materially from those anticipated. Please see the Company's filings with the Securities and Exchange Commission for more information.

Thanks, Jon. Larry, please go ahead and review the financial highlights of our Q3 performance.

Okay, I will now go over our comparative third-quarter 2008 results versus Q3 2007.

Net revenues increased 26% to $47.2 million due to a 23% increase in patient visits and an increase in our average net patient revenue per visit from $96.75 to $98.11.

Total clinic operating costs were $36.6 million or 77.5% of net revenues. Clinic salaries and related costs as a percentage of revenues were 54.3%. Rent, clinic supplies, contract labor and other costs were 21.6%. Our provision for doubtful accounts was 1.6% of revenue for the quarter.

Corporate office costs were $4.7 million in the third quarter of 2008 or 9.9% of revenues versus $4.2 million or 11.2% of revenues in the third quarter of 2007. Net income rose 19% to $2,531,000. Diluted earnings per share increased to $0.21 from $0.18. As mentioned in the release, Hurricane Ike cost us an estimated $0.01 in EPS.

Same-store revenues for de novo and acquired clinics open for one year or more increased 3.4%. Same-store visits increased slightly, while the average net rate per visit increased by 2.8%. During the recent quarter, the Company opened three relocations, closed two, and sold one.

I will now go over the nine-months comparative figures. Revenues from operations increased 30% to approximately $140 million due to a 26% increase in patient visits and an increase in average net revenue per visit of $1.88 or from $95.96 to $97.84.

Clinic operating costs were 76.1% of revenues. Clinic salaries and related costs, 53.3%; rent, clinic supplies, contract label and other costs, 21.2%. Provision for doubtful accounts for the first nine months was 1.6% of revenues.

Corporate office costs were $15.2 million in the first nine months this year as compared to our 10.8% of revenues versus $12.7 million last year or 11.8% of revenue. Net income year to date has risen 24.3%, $7.8 million. Diluted earnings per share has increased to $0.65 from $0.54.

Same-store revenues for clinics open a year or more increased 5.3%. Same-store visits increased 1.8%, while the net rate increased 3.4%. In the 2008 nine-month period, the Company has opened 14 facilities, acquired 10, closed 8 and sold 1 for a net addition of 15 clinics.

The Company produced strong net cash flow in the third quarter. Our combined credit line borrowings and notes payable will reduce by $6.4 million or 37%. Our cash balance at the end of the quarter was $9.2 million and the average age of our receivables was 55 days.

Thanks, Larry. This is a busy quarter for us here at U.S. Physical Therapy. If you will remember in mid- to late June, we closed out an acquisition of nine locations in the mid-Atlantic region. The integration of that deal us progressed very well. We knew coming into this relationship that we would quickly transition much of their back office operations on a fairly immediate basis. Much of that transition was completed in the third quarter.

We're currently working on a new satellite opportunity with these partners, and expect that they will have -- that we will see more from this group in terms of development and continued growth in the months and years to come.

We also announced recently the completion of an acquisition that ties into our OsteoArthritis Centers of America company. In September, we completed a 65% purchase of Rehab Management Group, or RMG, whose founders are also our partners in our OA Center project. RMG has developed a variety of clinical products and services which have formed much of the foundation of the medical side of our OA Centers model.

Additionally and importantly, we have begun to roll out some of these physician-oriented programs to a number of our existing PT markets, and have seen some early success and synergy created, resulting in stronger relationships with our referral sources, and also an opportunity to capture additional PT business as well.

We believe these physician-oriented programs, all of which are of a musculoskeletal nature, fit well alongside our OA Centers concept, and in conjunction with the many physical therapy partnerships across the country.

We're in the process of educating our partners and our sales team in these existing products and services and the benefits that we expect will come from a cross-sales opportunity, which we will develop over time.

September proved to be a busy month for us, not just because we saw a nice improvement from the summer in terms of our visits, but also because we dealt with -- first in preparation, later in response to Hurricane Ike. As Larry has mentioned and as we had released earlier, the impact to earnings from Hurricane Ike was approximately 1,800 visits, with an earnings-per-share impact of $0.01. As referenced earlier, revenues improved by the quarter -- compared to prior year, approximately 26%, primarily attributable to a 23% increase in patient volume.

I wanted to take a minute to commend our partners as well as our operations and sales teams for their work this year, particularly as it relates to volume growth and development. While we have more work to do to grow our business, I do believe that our partners for the most part have done an excellent job in what otherwise could be characterized as a very difficult and challenging market.

Our focus forward will be continued volume development activity, which will center around several new programs including fall prevention and cancer-related fatigue. Further, we will work on a cross-sales opportunity surrounding our RMG and OA Center for products and services.

And potentially with some difficulty, particularly in the current market, we must persistently work to address our cost and deliver services. This must come in the form of additional and continued improvements in productivity and clinical efficiency.

As we look forward on the development front, we will continue to be active in both de novo and as well as potential acquisition opportunities. You can expect the same quality, consistency and performance from these new deals as you have seen from us in the past.

In closing, let me say that while the world's financial markets have seen a level of turmoil unlike anything that our generation has witnessed, it is my hope and belief, as well as our team's commitment, that we will work hard on behalf of our shareholders to continue to meaningfully grow our Company. We believe that this difficult market will undoubtedly weed out weaker providers whose resources are limited or who are constrained by access to capital. Some of these will be solid providers who will look for a good home. Others will struggle and ultimately concede market share.

Our message to our partners is an important one for you to understand. This will be a difficult period. If we remain committed and focused on delivering lights out customer service; if we can work harder and smarter than our competition to move and grow market share; if we can use a positive balance sheet, a pristine balance sheet to apply capital and resources to grow our Company while others are looking to entrench, then we will emerge from this period a bigger, better and stronger company.

As we respond to this rapidly changing environment, I am sure we will encounter some challenges. But I am equally sure that we can make progress nonetheless and strengthen the Company over time. Your confidence and support is greatly appreciated.

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

(Operator Instructions) Larry Solow, CJS Securities.

Can you actually see any change in trends at all, maybe even since the quarter end, when kind of things got -- the economy started to -- continued to take a further nosedive, certainly in the press? And were just people aware of what was going on in the economy? Have you seen any downturn in trends at all? And historically, are you guys more of a leading indicator or a lagging indicator -- or any indicator?

I'm not sure that currently where we are in terms of the economy, we have any great, historical point of reference to compare to. I think the Company has been very, very steady thus far.

In talking with our partners in select markets, we have stories of physician groups, particularly specialists, orthopedists and others, beginning to slow. On a macrolevel, we have remained very steady potentially.

I think one of the reasons for that is there are so many -- this business is so fragmented -- there are so many providers that there is still an opportunity out there to move market share. There aren't many markets where we're the sole provider or even potentially the complete dominant provider. So as a market might contract, there is still an opportunity to go out and move business. I'm not saying that it won't happen or can't happen, but thus far, I think we've held up pretty well.

Our patient volumes are consistent with what we budgeted. And so from that standpoint we have not seen any noticeable effect.

And then can you just -- I don't know if you have them or you can get -- usually, you guys give the performance measures -- units billed per visit, visits per therapist --?

Right. Basically, visits per FTE Q3 of '08 was at 10.85. In Q3 of '07, it was 10.86. We have dropped back a little bit from where we hoped to be, and we will be focused on getting that back up above 11 and aiming toward our goal of 11.5.

Okay. And I guess units billed per visit was also one we look at --?

Units per visit in Q3 of '08 was 4.11, and Q3 of '07 it was 3.98. So we have made good progress on the gross revenue charge and unit charging basis of where we are headed to.

Okay, great. And then I guess just one other question, on the drop in corporate office -- is that due to kind of a reverse accrual of the stock compensation? Is that why that occurs --?

Yes, actually, the long-term incentive plan -- because the stock price has fallen below the minimum threshold, some amounts we had accrued earlier in the year were reversed. (multiple speakers) hopefully, they will have to accrue those again in the future.

Absolutely. Thanks a lot.

We are working on that.

Rob Hawkins, Stifel Nicolaus.

Good morning. I wonder if you guys could do a couple of things on the acquisition development outlook. You guys gave some good color earlier. It sounds to me like there is a heck of a lot more opportunities for you guys on that in these troubled times.

And then I would also like to kind of get a sense to -- it sounds pretty exciting what you're doing with the OsteoArthritis Centers. I was kind of thinking that that was more of specialized centers, but it sounds to me like it's an add-on service for everything. Can you guys spend a little bit of time flushing both of those points out?

Sure. On the development side, I think you will see us continue to be very deliberate in terms of what we do. We don't expect necessarily to go run out there and save a lot of troubled providers. That is really not our focus. We are talking to some very good people right now, and we expect that we will continue bring good deals to the table.

And I do think that as the economy continues to struggle, as I think it will over the next year or so, I think that there will be some good providers who are going to look for a good home. So we will just have to see how that plays out.

On the OA Centers side, the OA Centers concept is really center-focused, where we have physician and physical therapy in the same site. And the products and services that we deliver, particularly the medical services that make up the bulk of what we do and expect to do in these OA Centers -- we have the ability through RMG to rollout in select markets of our choosing to physicians on really a service basis.

Some markets where either by population or reimbursement or other things, we don't expect to have an OA Centers expansion into those markets. But we can rollout these products and services and cross-sell them, and in many cases, take advantage of the physical therapy business that spins off.

Now, I will tell you that we are just at the front end of this. We have 30 partners in today for what has been our six or seventh major partner meeting where we rollout new programs, new services. We had a great day yesterday and meetings last night and the RMG folks are in. And we are getting people oriented to that. So it's going to take a little time, but we think there's some opportunity there to strengthen referral relationships and to drive some additional business over time.

Just some more on the M&A side -- as noted, we have very good cash flow, and in the third quarter, paid down the credit line significantly. Even after the RMG acquisition, we have over $35 million in unused availability under the facility. So we certainly have a very clean balance sheet, and the ability to do additional acquisitions.

We are talking to a number of people. We haven't changed our philosophy. We will only do deals that are accretive. We're not looking to buy turnarounds. One thing that's interesting is most definitely multiples have come down on the acquisition.

Oh, you've already started to see that?

Yes, well, we have seen it going back probably five or six months.

I think expectations across the board have come down. And I think a lot of people -- there was a fair amount of venture -- private equity money in the market a year or so ago. And you know, that had heated up.

That's pretty much gone by the wayside. And at least right now for the people we are talking to, they are not talking to anybody else. So it's not like -- we continue to stay away from big wars and other things. We have been able to be very selective.

Great. And then can you guys refresh me on the net revenue per visit increases? Is this kind of more a phenomenon of the newer clinics, the bunch of clinics that you bought last year, and kind of bringing them up -- I think that's kind of -- earlier? Or is there maybe something more going on here? Because it looks like you are getting nice pickup there, even though the productivity was relatively flat.

Yes, you're right. The productivity was flat. We were a little soft, particularly in the beginning of the quarter with the volume. The summer for us was a little slower. September picked up nicely. So in aggregate for the quarter, our productivity didn't look that good.

On the net rate side, you remember that the STAR Group, who is, by the way, now very focused on improving their rate going forward, following a number of very successful regional partner meetings that have had with their team. But if you remember, they came in considerably less in net rate -- somewhere in the $88- or $89-a-visit range than we were.

So when you aggregate them and their size with us, we have made some pretty good progress this year with net rate, much of what has been attributable in combination to our units per visit pickup, and then conversely, to some progress we have made in some of our markets with some fairly good-sized payers. So I think the combination of those two things has given us a pretty good pickup this year.

I would agree with Chris. From an operations standpoint, we have put some major focus on impacting units and the kinds of units that we charge. And we've seen good response from the field with that. That has impacted net. We've done well on the reimbursement side with renegotiating some contracts.

And we have done a very good job in working with AR, bringing some days down, and in focusing on cash collections. And those three things in total have impacted net. And we continue to look for improvement in that area.

You continue to look for improvement -- should we see it tailing off? You have had these guys now almost for a year. Is most of the bank done, or do you think there is still pretty good room?

Actually, I would honestly tell you that the banks -- just starting on the STAR Group -- the integration has gone well. We have kept the entire team intact. Clinically, we have opportunities in the marketplace.

They have just recently rolled out some initiatives which I think will create the bang in that rate. And that was something that we knew going in would take a little time to get some traction with. And that has begun, and we expect to see that really -- effect of that into next year.

Mike Petusky, Noble Research.

A couple of quick housekeeping -- I know I always ask about the -- can you guys give the payer mix real quick, if you have it handy there?

Yes. Private payers were 26%; managed care, 34%; workers comp, 16%; Medicare at 20%; and other, 4%.

What about the current sales reps and how many facilities are attached to them?

Right now, we have 41 sales reps. And that includes STAR and [Life Fitness]. They're covering 224 locations. We have a number of sale reps openings, which when we fill those, will take us back up to about 233 locations being covered by sales.

In terms of the election of a couple of days ago, does any of this matter in terms of PT reimbursement or I guess the physician fee schedule as we get out beyond 2009? Are you guys hearing anything in terms of Democratic proposals or leanings on any of these issues?

I guess the short answer is no. I mean we all got up and came into work, and it was business as usual. I think that there's certainly a lot to tackle for the new administration. I expect them to work on health-care, although I think that will focus more on looking at the insured or the uninsured population.

I don't necessarily -- and I really can't even begin to speculate what it might mean in 2010 for the physician fee schedule, particularly where the country is right now. I can tell you that I can't imagine that the current adjustment that is statutorily on the books will happen, because I think it will take family practice doctors clearly underwater. And I certainly don't think that will be good for the country, nor the health-care system.

So in terms of what happens in the near term, I think we are steady, I would guess. In the long term, I can't even begin to guess.

I mean, the rates are set through the end of 2009. So (multiple speakers) when you are talking about 2010 and after issue.

Right, right. Larry, two, three, four years ago, it would seem like you would occasionally have a little bit of seasonality show up in Q4. I think last year, Q4 looked an awful lot like Q3. And I may be recalling that incorrectly.

Well, that's probably because of the STAR acquisition, which closed in September. (inaudible) better, because we were bigger. You're right; fourth quarter is seasonally very slow. The week of Thanksgiving and from Christmas to New Year's, it's hard to get patients to show up.

And guys, I will tell you this year, if you look at November as being on a workday basis and understanding that the Friday after Thanksgiving, which is counted as a workday, is often a bit of a slow day, we have 19 work days in November.

So October is the big month for the quarter. And then we have the shortest month of the year in November in terms of work days. And then we have December, which is generally a roll of the dice.

So we are working hard right now to get some things done. But the fourth quarter, is as Larry mentioned, a little less predictable than some of the other quarters traditionally.

In light of that, can you refresh me where your current guidance is?

Well, we don't give quarterly guidance.

Right -- for the year.

$0.83 to $0.89.

Okay. And last one, and I will let somebody else get a shot at you guys. A few years ago, you guys bought back an awful lot of stock -- 14, 15, 16 area. And I think it is probably almost objectively true that you guys are a considerably better Company today than you were two, three, four years ago. And the stock obviously is at the low end of that range where you guys were buying back stock.

Is there any temptation, given your cash flows and all of the -- even the borrowing capacity that you guys have, is there any temptation to reinitiate the stock repurchase program?

No, not at this time. If you look at our -- what are the highest returns on our investment dollars, the highest return is to open a de novo clinic. The second-highest return is to do an accretive acquisition. It's not that stock buybacks can't be accretive, but right now, we think there's enough opportunities on the de novo and acquisition side that that's where we ought to put our capital.

And quite frankly, I'd rather strengthen our market position than just reduce the number of shares outstanding.

(Operator Instructions) David Bachman, Longbow Research.

Could you provide a little more color on the same-store visit growth, maybe any variation that you are seeing there geographically? And then perhaps related, can you talk a little bit about the worker's comp book of business -- perhaps what you're seeing there or what you saw in the quarter?

Well, I think comps stayed pretty consistent. Actually, (multiple speakers) it was up a percent.

Yes, we've been running around 15 normally, and it was up to 16. So that apparently was effective.

Right. On a same-store basis, as I mentioned, we were a little slower in the summer. We picked up September, and ended up being a pretty good month from a volume perspective.

One of the analysts noted -- if you take -- the 1,800 visits we lost to the hurricane were in mature centers. So that affected -- our same store numbers would have been better than they were, and they weren't bad.

Typically, as Larry mentioned, in Houston, we have some very, very good centers, all of which are very profitable. And we had in Houston for the month of September, which was a good, strong working days month, I don't think we had a single center that was profitable. (multiple speakers)

And so that volume is back. Those centers are back and working. And the city for the most part I think has largely returned to normal.

So I don't know. Same-store for us for the year has been pretty solid. We obviously were a little thinner this quarter, I think due to some easy-to-explain things. We will have to see going forward.

And I will tell you on the work comp side, anecdotally, we have not heard anything from our partners in the field yet that there's been any major impact on work comp business referrals, at least at this point.

And keep in mind, guys -- our business gets people back to work in typically 10 or 11 visits, and in many cases, helps to avoid surgery or return from surgery or, particularly from injuries, very, very quickly, and fairly efficiently from an economic perspective. I don't expect companies to -- they really don't have any ability to dissuade people from attending from a work comp basis.

And you know, it will depend certainly on the workforce and the labor market. But people have to be able to work. And they have to be able to function. So I expect we may see some downturn, but I expect us to be able to work through it.

You know, you look back in years past, we have never seen a dramatic decrease in our worker's comp business. We have seen it move between 14 and 17% of our charges or revenues. But it is normally fairly steady.

Even if you look at the [four] contract, there hasn't been any slowdown. While this has not run at the visits we predicted when we additionally signed the contract over a year ago, we haven't seen any slowdown in our [four] business out of as of yet.

Okay, great. That's very helpful color.

And then just on the fourth quarter. You said you know it was somewhat unpredictable. But is there any truth to there maybe being a little bit of an incremental benefit from people meeting deductibles towards the end of the year? I mean, just the end of the year -- perhaps there being some things that would encourage people to be using utilization to pick up a little bit because of deductibles being met and that kind of thing?

I don't know that it will vary this year because of the economy and any of those things. I think typically, back to when I was a provider in the clinic all the way through to current, most people don't want to go into surgery past the first week of December. Things for the orthopedic guys will slow down dramatically, because people don't want to be recovering over the holiday. It's just a period of time when people like to spend with families and other things.

So I think predating December, certainly -- people are looking to get things done now potentially, maybe rather than in January. Once we get into December though, I think that changes.

Yes, the other thing too -- health plans are not always on calendar years either. For example, ours at our company isn't.

So the most -- or a lot are on calendar years. We really see the deductible impact in the first quarter. After that, most people have met their deductibles. If you have been to the orthopedist before you come to see us, you probably already met your deductible.

Okay. And just one last question, and then I'll jump back in. On the OA business, in terms of the credit market that we are seeing now, you guys are in pretty good shape. But any color on the impact on your partners in that business, and how that might have an impact in the next year or so?

I guess as I look at it, I don't look at that business from I guess a lending or a credit basis any different than I look at the rest of our business. And when you say our partners -- I mean, we are the majority partner in that deal. We (multiple speakers) put up the capital. So it's all the same as far as I am concerned.

Okay, so the OA deals are structured the same way as the existing clinics?

Very similar. We have a physician with some incentives. We have got PT with incentives. And then we have got the guys out of the RMG deal and the partnership. But we are the managing partner, and we are the capital partner. And so it really -- you shouldn't look at it any differently, I don't think.

I mean, it costs us $175,000 to start up a new PT clinic. Probably for an OA Center, it is $250,000. But the capital requirements are not dramatically different. We've only opened one OA Center to date. So we are talking about something that's (technical difficulty).

Okay, great. I appreciate all of the color. Thanks a lot, and nice job navigating through a very busy third quarter for you guys.

(Operator Instructions). At this time, we have no further questions.

Okay, everybody, listen, thank you for joining us. I know this is a busy release day. We appreciate your attention and support. And have a great day.

This concludes the U.S. Physical Therapy conference call. You may now disconnect.