US Physical Therapy Inc (USPH) 2009 Q3 法說會逐字稿

Good morning. My name is Laurie, and I will be your conference operator. At this time, I would like to welcome everyone to the U.S. Physical Therapy third quarter 2009 earnings conference call. (Operator instructions.) Thank you.

I will now turn the call over to Chris Reading, Chief Executive Officer. Please go ahead, sir.

Thank you. Thanks, and good morning, everyone. I want to welcome you to U.S. Physical Therapy's third quarter 2009 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 begin discussing our results for the third quarter and year-to-date periods, we have a brief disclosure statement that we need to cover. Jon, if you would?

Thanks, Chris.

This presentation contains forward-looking statements which involve certain risks and uncertainties, and 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, you want to go ahead and cover the year of financials in detail?

Yes. First of all, I'll review the third quarter results. Net revenue increased 8.1% to $51 million due to a 2% increase in patient visits and an increase in our average net revenue per visit of $5.31.

Our gross margin increased 290 basis points to 25.4%. Clinical salaries as a percentage of net revenue declined to 52.6% from 54.3%. Rent, clinic supplies, contract labor, and other costs also declined.

The provision for doubtful accounts for the period was 2% of net revenue as compared to 1.6% in the third quarter 2008.

Our Corporate Office costs were higher during the quarter. The increase is the result of higher incentive compensation accruals, including both the current year and the cumulative earnings growth provisions under the three-year long-term incentive plan.

Our operating income increased by a $1,264,000 or 21%, to $7.2 million. The operating income margin of 14.1% was a 150 basis point improvement.

Net income attributable to common shareholders rose 22.5% to $3.1 million. Our diluted earnings per share increased to $0.26 from $0.21.

Same store revenues for de novo and acquired clinics opened for a year or more increased 1.4%.

In terms of the year-to-date results for the nine months ended September net revenue increased 8% to $150,993,000. Our gross margin increased to 26% from 23.9%.

Corporate Office costs year-to-date are 11.3% of net revenue versus 10.8% for the same period last year.

Our operating income increased by $3.9 million or 21.5% to $22.1 million. Net income attributable to common shareholders rose 20% to just under $9.5 million. And our diluted earnings per share has increased to $0.80 from $0.65.

During the first nine months of the year the Company has opened 14 new de novo clinics and closed seven clinics, for a net addition of seven, bringing the total to 367 clinics at the end of September.

The Company's net cash flow continues to be very strong. In the past nine months our debt has been reduced by more than $9 million despite 14 new clinic openings and 5.6 million in share repurchases.

As stated in the earnings release today, we are increasing our earning guidance for 2009 to net earnings of $11,550,000 to $11,800,000 or $0.99 to $1.00 in diluted earnings per share. This is the second time this year we have raised guidance. You'll remember that our initial guidance for 2009 was for EPS of $0.84 to $0.90. In July we raised it to $0.93 to $0.98, and we are now raising it again to $0.99 to $1.00. If we make that figure that would represent a roughly 20% increase from actual EPS of $0.83 in 2008.

Thanks, Larry. I want to take a few minutes to talk a little bit about the quarter and the year and, as well, where we think we're headed on a go-forward basis.

For us, typically the third quarter is often a bit of a challenge because with summer comes a heavy increase of vacations, including our physicians, our staff, and our patients, as well. Elective surgeries typically drop as the weather improves.

This year as a result of a very focused effort on the part of our partners, our sales team, our contracting group, and our corporate operations staff, we were able to pull together the best third quarter in the history of our Company.

Our revenues of over $51 million were within 1.5% of the record setting, and normally seasonally stronger record second quarter this year. On a year-over-year basis our gross margin improved about 300 basis points to 25.4%, on a modest visit per day per clinic increase, coupled with a very solid improvement of over 5% in our net rate, along with continued productivity and other cost reducing improvements.

In spite of what has been a very difficult, challenging economy this year, our talented team of partners and directors have embraced our enhancing value focus which has helped propel us through these challenges, and has put us in a very good position for continued growth, especially once the employment picture improves, along with the broad economy.

Embedded within our third quarter numbers are Corporate Office costs which have increased year-over-year. This is a result of a couple of different influences, one of which has been the strengthening of our Corporate staff in several key areas over the past year. This should bode well for development and the operations portion of the Company. Over the past year we have strengthened our financial and due diligence resources.

We have enhanced our Development Team, and just this month we have added a fourth Operations VP, who comes with more than 15 years of high level outpatient operations experience, and whose addition will allow each of our very capable VPs more time and focus to work with a slightly smaller partner group so we can further improve our operations metrics and build on the strength of our existing partnerships through a more focused effort on our organic expansion to satellites and other opportunities.

The net result of these areas of focus this year produced better than a 21% operating increase for the year comparable quarter, a 22.5% improvement in net income attributable to common shareholders, and a 24% improvement in reported EPS.

Let me say for the records just how proud I am of the entire team. Our clinical staff, led by our capable partner group,, have done a tremendous job delivering great value to our patients and our [referral] sources, while working to improve our collective efficiencies, and to wring out unnecessary costs.

To our Marketing Team and, in particular, to the Recruiting Group, who have worked tirelessly to add, train, and deploy what amounts to 150% increase in our marketing reps this year, and we still have more to come.

To our capable Operations Team, who have consistently led the charge all year with a very focused effort on all of these areas, which have created significant improvement. And to our many Corporate Support Teams who have worked very effectively behind the scenes in order to provide our partners with the necessary resources to enhance their success. These folks have worked very hard this year in a tough environment, and they've done a very, very good job.

The challenge, as well as the opportunity, remains for us as we work through this current quarter with an eye towards the next year, what opportunities remain. This year more than ever has underscored our Company's ability to weather a tough environment with creativity, commitment, focus, and execution.

While many companies have struggled this year in our industry and others, our partnerships have improved significantly year-over-year, and have done so without any dramatic reduction in clinical staff, which ultimately has an impact in the care delivery to our patients.

I think one of the big opportunities this year still resides in our ability to attract the best clinicians and leaders in our industry. We want them to have a home where they can thrive and make a difference, where they can enjoy the fruits of their labor. Our opportunity for new partners still, in my opinion, is the best in the business.

We have continued opportunity to grow through acquisition, which we will do with a vigorous effort. And I predict we will attract some great practices in the coming quarters and years, which will further propel our Company's growth, leading to more opportunity over the long haul, opportunity for organic expansion via satellites, opportunity to strengthen our team, opportunity to strengthen our most important resource, and that is our people, and opportunity to continue with the entrepreneur drive that's gotten us where we have come over the past 20 years.

We remain a great home for these private practice owners, large and small, who want to take cash off the table, while growing forward with a long-term committed partner in U.S. Physical Therapy.

We have further opportunities to grow and expand our programs as we have done in the last few years, and we have more opportunity yet to improve our many basic aspects of our business. We remain committed to working on all these opportunities, so hopefully we can all take heart. But even though the economy is still in a bit of rough shape, we have the leadership and the workforce to be able to work through this difficult period and come out a much stronger Company.

We will remain focused in the coming period to drive significant results, and we appreciate your continued support.

With that, Operator, we'll open it up for questions.

(Operator instructions.)

Our first question comes from the line of Larry Solow of CJS Securities.

Hi. Good morning, Chris and Larry.

Hi.

A question for you, and I asked this last quarter, as well, on the increase in revenue per patient it seems like you sustained sequentially around the $103 level and a nice year-over-year increase. Independent of any looming Medicare, Medicaid cuts, I mean do you still see room for growth on this number or is it starting to slow-down, or--?

Yes, this year we've had a pretty big increase.

Right.

And it's been on the order of between $4 and $5. I don't think you can expect that kind of an increase going forward. I think we still have some improvement. I don't think it will be as significant as we've seen this year. I think there'll be a leveling. I do think we still have some improvement. In fact, I know we do, on revenue per case, but possibly not as much in revenue per visit.

Okay, and what's sort of driving these higher numbers? Is it improved -- I mean I guess it's a combination, but is there anything that stands out? I know your contracts have been improving and your efficiency numbers.

I think it's a variety of things. The clinical programs that we've added -- hang on one second, excuse me -- the clinical programs that we've added have enabled us to expand our service model and our facilities, so our units per visit has gone up, that's been a driver. We've added and enhanced our contracts. We've gotten some clinical efficiencies, we've really gotten -- we've got a lot of great clinical folks who have gotten onboard. And I still think there's opportunity to improve our care model in some instances. And that's driven our revenue per patient.

Do you have both those two efficiency stats, units per visit and the therapist, handy?

Yes, we do. This is Glenn. Units per visit for the third quarter of '09 was 4.2, that's an increase from 4.1 in the third quarter of last year. Visits per FTE in Q3 of '09 was 11.2 versus 11.05 in the third quarter of 2008.

Okay, and then, and so the obligatory question for you, Chris, or -- I mean I don't know how much you can answer it, but in terms of healthcare reform and what's your best guess or potential scenarios you see in what could happen to you guys in 2010?

Yes, I think the ball has bounced back and forth a good bit, and right now there seems to be a little bit of a stalemate that's evolving currently. I think that we'll get something done ultimately.

I think that there, although there's some general reluctance on the part of a lot of people to have a very involved government run program, I think that there is certainly a push toward expanding healthcare benefits and eliminating some of the hurdles that have been put in place by a number of the insurance companies.

That said, I don't know that we're going to see something before the end of the year. There is a statutory decrease on the books. There's been I think a lot of activity surrounding eliminating that decrease and giving us effectively a neutral environment.

Right.

Or a [point 5] increase that we've seen. I think the big question is whether that happens before yearend or we get into the early part of next year before those things come to bear.

You'll remember in prior years sometimes the Medicare price change didn't come through until after the new year and then they made retroactive changes.

Right. That does seem to be kind of the consensus, and the push is to sort of keep the physician rates, at least if they don't make a long-term neutral, at least another year push out before any real decisions, I mean which they've been doing for the last six or seven years, right, just keep pushing it out.

Well, the challenge is if they truly want to get more people in store to keep people out of hospital ERs, which I believe they do, they can't decimate the primary care market in this country. And certainly a 21% or a 22% increase --

Right, would be --

-- would be catastrophic --

It almost doesn't make any, it doesn't make sense, I mean it just seems to be completely out of the -- out of line, but right, exactly. Well, and that's why they keep -- I guess been pushing it off the last five or six years, right? So.

It's been awhile.

Am I reading anything into the fact that you're same store sales volume I think this year, the volume I guess of patient visits was down [3.8] this quarter versus like [3.4] last quarter? I know it's a slower quarter in general, so maybe that's just exacerbated, but anything beyond that?

I mean I think we expected this year, in fact, some of the -- most of the activity that we focused on this year kind of pre-anticipated that this would be a tough volume year all the way around. Third quarter is typically a little slower for us than second quarter. Our visits per clinic per day went down a couple tenths, which is the normal seasonal pattern. I think they'll -- as unemployment begins to improve, I think that there'll still be some lessening on that same store pressure, hopefully.

Okay.

I think the converse of that, as unemployment hangs out there around 10% for a longer time I think we'll still see pressure on volume, and I think we'll certainly see that through the fourth quarter, possibly the beginning of next year until jobs begin to be added, instead of just the job loss rate slowing. So I think we'd better get some jobs back before we see that pick-up a lot and the situation needs to improve.

Right. And then you guys had a little bit of an acceleration in closings this quarter, or is that just more timing related, anything else, closings?

Glenn, I think most of those were lease related timing issues. They were --

Yes, we didn't have significant charge offs. As you know, every time we have a lease come up for renewal we look at the clinic and see if it makes sense to keep it open or if we'd be more profitable if we closed it.

Right. Okay. And then acquisition environment? It sounds like you're at least talking like you're still -- I know you're obviously always out there looking? Any change in the environment, any reason for more optimism, or--?

Yes, I think beginning this year, I mean we're, as you know, we're pretty selective in terms of who we talk to and the kind of people that we want to bring in, the kind of practices that -- and I would tell you that really good, bigger practices, when the market was apparently at the bottom those guys weren't in distress and they weren't interested in selling at what they felt like was going to be at the bottom of the market. And so they stayed the course earlier this year. There's begun, now that I think there's a greater sentiment toward things improving, we've seen a fair amount more activity.

Okay.

And we continue to be very active. Now, again, we may go through quarters and periods where we don't have any, but I'm very positive that we'll get deals done in the foreseeable future.

Got it. Great. Okay, great. Thanks a lot, guys.

Your next question comes from the line of Rob Hawkins of Stifel Nicolaus.

Hey.

Hi, Rob.

Hi, good morning. I just wanted to dig into a couple of issues. You mentioned you've added a fourth Operations VP.

Right.

And that's going to let some of the others focus more deeply on organic growth. Now, what are the priorities as you do that? I mean can you give me a little color around that and kind of what things are they doing? I mean you call them regionals? Are they set-up as regionals? What are they doing on a regional basis, I guess, with these individual practices in times like, what's the low-hanging fruit?

Well, and let me tell you the focus will continue to be very similar to the focus we've had in the past. I think the low hanging fruit for us potentially is that they'll have more time because we've added this fourth person to focus on a smaller number of partnerships, both for growth, both to wring out metric improvements, and we're going to have a big training element that we focus all the way down to our clinical staff this year, which we think will help improve on the traction that we've gotten with some of the other initiatives but to broaden the affect of that.

And, other than that, it's more of the same thing that we've been talking about. We still have opportunity in the Company to be better and to be more efficient, and I think the team has -- continues to get stronger, and I'm very pleased with the direction we're headed right now.

Okay, and then maybe kind of on this other addition in terms of development expansion, I appreciate the color you just gave on maybe some of the bigger guys are now considering that they don't want to sell at bottom.

What is kind of the environment right now? Is it, as we pull off bottom, is it one more -- there's pent-up interest in selling, is there kind of a reform bent to this behind some of these actions? It seems like you're making a key move here to try to expand possibly acquisition, or am I just reading it wrong? Is it also for the de novo side?

Well, it'll be both. There's no doubt that we have a very strong focus on organic growth, and we have a continued focus on acquisitions, as well, just by virtue of the size of some of the practices we do one deal and that contributes a significant amount. But the organic growth is going to continue to be a significant part of our foundation.

I don't think there's pent-up supply of companies to be sold.

Okay.

I mean and prices have definitely come down. Multiples have come down from a year, two years ago. That said, we're in discussions with a number of groups right now, and like Chris said we'll do some more deals but we're not a roll-up. We don't do a deal every month or every quarter.

No, no, and you've got a clean balance sheet, so I thought well maybe if there's financing issues with others, you don't have that, I was trying to see how this might kind of play out and how that might match-up with kind of the strength that you have.

And then on the clinical programs, I may have missed some of the early comments. Which ones are giving you the greatest traction? And then can you give us an update on osteoarthritis?

Yes, actually, in terms of the clinical programs, and just because of who sits on these calls --

For competitive reasons?

-- I don't really go into that in great detail.

That's fine, just is there anything you can -- if, you know, whatever you're comfortable giving, color on that?

Yes, well, we've added a lot of different clinical programs this year. They're all orthopedic in nature. I will say that most of our partners come to us with a particular clinical specialty, and then we look to expand on that with the addition of the right people over time.

And I don't -- there's no magic pill in any of this. It's a lot of blocking and tackling, and trying to do things exceptionally well. And beyond that I really don't want to provide a whole lot of color on the clinical program side.

On the [OA] side, we've taken a pause. We're still working on profitability on those couple of centers that we have in Florida. We've tweaked the model a bit, and we're looking at some different offshoots. The RMG part of that OA process has done extremely well. We've added a lot of contracts, and we're kind of redoubling our efforts in that area. But it continues to be a small part of our Company at this point.

All right. Great. Thanks for the color. Well, let me just ask one clarification on the clinical programs, and I don't think this is competitive.

All right.

If I'm hearing you right, are -- there's no, as you said, no magic pill. There's not kind of a one size fits all program that you're trying to roll out. If it's anything it's -- they're all pretty -- it's more market specific, is that the right way to think about it?

Yes, we have --

Or clinic specific, I guess, or--?

We have a number of different programs that depending upon the background of the partner, you know, he or she will have some affinity to -- I mean we have a group upstairs right now, of about 30 partners, and they're being introduced for the very first time to a new clinical program, which we're just at the beginning of rolling out.

So we do get behind things, and then we continue to add to our portfolio. And as we get traction those partners come in and become experts to help train our other partners. And so we have some new things.

Oh, cool.

And then we have some expansion opportunities within our existing partner group of things that we've been doing for a few years but they just haven't adopted yet. So we still have opportunity out there.

Thanks, I appreciate the color.

Thanks.

Our next question comes from the line of Mitra Ramgopall of Sidoti.

Yes, hi, good morning, guys. First, I was wondering if you can give us an update regarding sales force? I believe you had planned to add about 20 in the second half of the year, if you can give us an update on that?

Yes, I mean we, right now, for our traditional sales force, which is our full and part-time sales reps, we have 42 covering 229 locations. We then also have a straight commissioned sales rep group, which is now is up to 36 reps. They cover another 139 locations. So in total right now we have 78 total sales reps covering about 270 locations.

Yes, we've ore than -- we've about doubled our sales reps this year effectively, and we have more to come.

Okay, and if you can also just comment on the recruitment market for therapists?

Actually, the recruitment market for us has gone quite well. Our Recruiting Department has, at least on the clinical staff side, has beat the numbers from the prior year, and has grown their recruiting from a quarter-over-quarter standpoint. So we're finding the recruiting market actually has eased up a little bit, and there's still some challenges depending upon the geographic area. But otherwise we've been able to fill positions as they've come up for us.

Okay, and then again just looking on the cost side of things, given the economy and the real estate environment, are you seeing any benefit, for example, in being able to reduce your rent expenses?

Yes, we've actually at the end of last year and the beginning of this year, (inaudible) program, started here with our Home Office, we were able to take, create a savings of about three-quarters of a million dollars over the term of, the remaining term of the lease.

We've broadened that to include all of the facilities where we felt, particularly in our big partnerships, that we could withstand even in the current difficult environment, a lease extension, and then further renegotiate the terms, and the savings we've created in that are about $300,000 now, and that continues to -- actually, in the most recent months it's improved a bit as the real estate market, the reality of that market and the difficulty in that (inaudible) hitting home to some (inaudible). So I think there's more savings there, certainly. There'll be an end to that at some point, but we'll have these beneficial rates locked in for a period of time.

Okay, and just finally two sort of housekeeping questions. I don't know if you can update us in terms of the payer mix, especially what sort of Medicare is as a percentage of revenue?

Okay, payer mix for the most recent quarter -- private was 26%, managed care 33%, workers comp 14%, Medicare, Medicaid is 23%, and other 4%. So Medicare, Medicaid continues to run in the quarter anywhere from 20% to 23% for us.

Okay, and did you buy back any shares in the quarter?

Not during the quarter.

Okay, thanks again.

Thanks, Mitra.

(Operator instructions.)

Your next question comes from the line of Mike Petusky of Noble Research.

Hi, Mike.

Good morning, fellows. I guess kind of a question where I guess I wanted to get a little thoughtful, Chris, just kind of thinking back over the last few years that you've been running the show there and looking out over the next few years.

I mean essentially to me in my view as an outsider, it seems to me that you guys have probably done the best job in the last year of managing your business, I mean forward-looking, and coming up with some initiatives that seem to me to be creative and really battling a tough environment.

That said, if you look over the last four or five years, essentially the stock has gone sideways, when you look out over the next three, four, five years, I mean what are kind of some of the big things that you want to get accomplished that you think can take the Company to the next level and then presumably the stock price follows?

Yes, well, Mike, I mean if you look at almost every decent sized company that trades in the market today, over the last four or five years and you go back, everybody is sideways. So I think if you look at where we were before this massive market crash, and we were in the $18 to $20 range, and certainly we're a better Company today and this last year than we were then.

And so we've got to do what we need to do to run the Company and do what we do, and the stock price over time will follow. I think what we've got to do is scale the Company. And we've got a very talented group of folks here. It's not me, it's all the team, that includes our partners in the field, you know, our various support departments here, and our senior team, our executive team, we're a cohesive group.

I think we -- there are deals out there that we can do. There's more development to be done. I think there's some opportunity in some related areas that we can continue to grow our fundamental orthopedic musculoskeletal basis around. And I think we're going to have to lever our balance sheet in order to get some scale on the Company.

And I think we're capable of that. Every deal that we've done has performed. We've gotten it integrated, and we have significant growth or growth opportunities, certainly, depending upon how long we've had them.

And so I think we just need to do, need to put the foot on the gas carefully, and stay focused with what we do, and I think we'll grow the Company, and I think the stock will follow once the noise has settled out of healthcare reform and pricing anticipation and all those things.

Yes, I mean if you look right now at almost any healthcare stock, particularly healthcare service stocks, until national healthcare reform gets settled and Medicare pricing gets set, nobody is going to trade at a premium. I mean our earnings are up 20%, and our stock is down to 21 to 15. It's not because we haven't performed.

Right, well, I don't want to get all argumentative here on a public call, but I mean the fact of the matter is I mean if you go back to the beginning of the decade, the stock is kind of sideways. And I understand you guys weren't running the show in 2001, but I guess I was just kind of after what maybe the next three, four, five years -- I mean I can't imagine that you guys are satisfied with where the stock is trading, and I guess I was just kind of after are you essentially willing to lever up a little bit or are you going to be a little bit more aggressive in terms of acquisitions, that sort of thing?

We'd love to lever up.

Okay.

I mean our balance sheet is way under levered.

Right.

But if you look back five years when we did take over, because I ran the numbers yesterday just out of curiosity, and this is not any great shakes because the market has been so lousy, we've outperformed the NASDAQ over the last five years, and the Russell 2000, that's really our peer group. But I think the stock is worth a lot more than it's trading at, but it's not going to trade significantly higher whether we did an acquisition or not until healthcare reform gets finalized.

Right. Okay. All right. Fair enough. Thanks, guys.

(Operator instructions.)

At this time there are no further questions. I will now return the call to Management for any final remarks.

Okay, thanks, Operator. Listen, thank you, everybody. I know you have a busy day, a lot of releases. I appreciate your time on the call today. Larry and I and the rest of the Team are available if you have any questions as the day progresses. Have a great day.

And that does conclude today's U.S. Physical Therapy third quarter 2009 earnings conference call. You may now disconnect.