US Physical Therapy Inc (USPH) 2009 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy fourth quarter year end 2009 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. I would now like to turn the call over to Chris Reading, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome all of you to U.S. Physical Therapy's fourth quarter and year end 2009 earnings call. With me here in Houston, 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 to discuss our results for the quarter and year, we have a brief disclosure statement we need to cover. Jon, if you would, please.

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 & Exchange Commission for more information.

Thanks, Jon. Before I ask Larry to cover the financials in detail, I would like to provide some color on 2009 and then shift attention forward and talk about what we expect to do in the coming period.

Over the past few years, we've worked to build a Company with solid foundation built upon the combined strength of our partnership model alongside a management team whose focus has been to grow the Company in a meaningful way. We have attempted to do that by improving service initiatives here in Houston to and for our partners which have helped them to broaden the service offerings as well as their referral base. Several years ago we said we would begin to look for tuck-in acquisitions that would be structured in a way that would preserve the cultural integrity of the original practice while the existing ownership groups took some but not all of the chips off the table and we work with them to add gas to the engine to assist and possibly accelerate their growth forward. We've been able to do that successfully over these past few years in combination with our organic expansion program and our Company is bigger, better and stronger as a result.

These last few weeks have been particularly busy for few important reasons. For one, we've been working to complete what will be a very, very nice addition to our Company and 2010's first acquisition announced earlier this week which is a great partnership with very capable and motivated management team who are already working on expanding our collective footprint further from the base of five strong locations over 50,000 visits and one of the most diverse referral patterns that I've ever seen.

Last week was busy also because we had about 30 of our partners in from around the country, including many of our top partners. As we worked significantly to expand our capabilities in the work comp arena, we had a multi-day program with them which included training and orientation. We have added a very talented leader to help us achieve our goals in this area and our partners response to excitement about what we have developed is very strong. We will look to build on the strength and depth of our partner's relationships locally and combine these relationships with capabilities of our seasoned leadership group who are incentivized to grow this business meaningfully and for the strength in our payer portfolio.

These past weeks have also been busy preparing for a Board meeting, a multi-year planning meeting which occurred late last week as well. That meeting further cemented our focus over these next few years and gives us great confidence we have the Board's support to take full advantage of the opportunities before us. Before we completely shift our focus forward, I would like to share with you a few of those things from 2009 as well as in years past which will be important to understand as we plot our course for continued improvement of our Company.

Since 2006, our Company's EBITDA has grown at a compounded annual rate a little more than 20% over that period. EPS over the same period has grown at a compounded rate of 23%. As part of this earnings release, we have updated our guidance for 2010 which Larry will cover in some detail. In 2009, in spite of the many difficulties in this nation's economy, arguably the worst in our recent history, we had a terrific year. Notice I did not say perfect, but it was a very solid year. We knew as far back as the fall of 2008 that we would need to adjust our efforts in 2009 in order to deal with what we believe would be significant pressure on our same-store volume as a result of elective care reductions, orthopedic elective care surgery reductions and general tightening of the purse strings due to the unexpected unemployment that has come and, in fact, has lingered at very high levels.

In an effort to help our partners without risking too much in the way of added cost, we went out and doubled our sales force by adding more than 40 part-time and full-time commission-only sales reps to help us find and connect with new physician referral opportunities. That program was and continues to be very successful. Our most recent months' numbers demonstrate the effect of that program is still paying considerable dividends and is also still growing in spite of some very tough winter weather conditions in the first few months of 2010.

Last week for our Board meeting we also reviewed the details surrounding our de novo or organic expansion program for both new partners as well as satellites. While I will tell you that none of us are completely satisfied with the number of new organic openings these past few years, their quality and overall production has been outstanding. In a continuing effort to increase the number and quality of the openings that we hope to produce, we have continued to make a number of changes and I hope enhancements to this effort, several of which I will review quickly.

We've engaged Dallas-based marketing firm to update all of our marketing materials including our Own Your Own Clinic website. They've helped us in retooling our message and refocus our marketing campaign and tying our success -- tying their success to an increased number of new partner openings over the next few years. In other words, their compensation is almost completely dependent upon driving new partner openings as a result of the initiatives. We've developed a very focused list of 6,000 highly qualified clinicians which we've targeted based upon their tenure, specialty and their location and we will be in contact with them on a frequent basis throughout this campaign regarding the benefits of joining our Company and the benefits of our partnership. Additionally, we've given our partner recruiters a list of all of our partnerships company wide where we feel we could add satellites if we had the right director quality clinician to fill that role or backfill to allow for that expansion.

Finally, we're trying to move squarely into the 21st century with a variety of networking opportunities delivered in a social media context. To do this, we've hired a company out of New York which started back in the fourth quarter of 2009 and they have significant expertise in this area. Since initiating this program, we expect -- since initiating this program which we expect will include a web-based series directed toward clinicians thinking about opening their own clinics, our web traffic on Own Your Own Clinic has increased significantly. While I expect all of these things will take some time to produce the fruit we're looking to cultivate and new partnerships and expand the satellite development, I think that they will, in fact, bear fruit. This is important because these facilities produce tremendous amount of cash flow which we expect to use to continue to grow our company in a variety of different areas. In looking at our acquisition program, we expect to put some of this money to work this year and buy more good companies.

Looking at our acquired partnerships over the past few years, they've done extraordinarily well. Our partners have remained very engaged, excited and are a very capable and hard working group. Last year, in spite of the economic difficulties, 100% of our acquired partnerships had a better year in 2009 than they had in 2008 and that was a very good year as well. So, in recap, you can expect us to remain very focused on our core competencies for the foreseeable future. We'll work to improve both the service we provide to our customers as well as the underlying metrics of our business. We will work hard to drive our organic expansion program with new partnerships and satellites of our very capable partners. We will increase the size of our development staff -- we have increased the size of our development staff prospecting for new deals in much the same way that we grew our sales and marketing staff in 2009 driven on a success basis for bringing deals to the table that we get done.

We've expanded the sales force in the area of our physician services programs to drive additional business through our RMG and osteoarthritis service lines. We have added talent, focus and resources behind our fit to work initiatives in order to grow our work comp and industrial base. We have expectations for a very good year in 2010. With that, I'll say thank you one more time for your attention today as well as your support while I ask Larry to please go ahead and cover the financial highlights for the fourth quarter and year ending 2009.

Thanks, Chris. First of all, will go over the results for the year. In 2009, net revenue increased by over 7% to $201 million based on 1.8% increase in patient visits and an increase on our average net rate of 4.9% to $1.02 and $0.85. Our gross margin increased by 220 basis points to 25.7%. Clinic operating costs were 74.3% of revenues as compared to 76.5% in the preceding year. Clinic salaries and related costs reduced to 52.5% from 53.4%. Likewise, rent, clinic supplies and contract labor reduced to 20.1% from 21.2%. Our allowance for (inaudible) was down fairly flat at 1.7% as compared to 1.6% in 2008.

Corporate office costs for the year and for the quarter were higher. This figure of $23.2 million for the year includes $1.6 million related to a three-year long-term incentive plan that ended in December. Our operating income in the year increased by 19% to $28.4 million. Our margin percentage of 14.1% was 140 basis point improvement in 2008. Our net income attributable comp shareholders rose 17.6% and our debt diluted earnings per share increased by 20.5% to $1.00 from $0.83. Our same-store revenues despite the recession increased by 2.6%. During the year, we opened 18 new start-up clinics and closed ten clinics. We ended the year with 368.

For the quarter, our net revenue increased 5.4% to $50.4 million due to an increase in our average net revenue per visit over $5.00 offset by two-tenths of a percent decrease in patient visits. Our gross margin during the period increased by 250 basis points. Operating income increased by 11.3% to $6.3 million. Net income for the quarter was $2.2 million or $0.19 per share. Same-store revenue increased by 18% and during the fourth quarter we opened four new clinics and closed three.

As of year end, the average age of the Company's receivables was 45 days. We produced very strong net cash flow in 2009 despite opening 18 new clinics, using $5.6 million in cash for common stock repurchases and $3.5 million for earn out payments in the acquisition of minority interest, we were able to reduce our credit line borrowings and note payables by $12.4 million during the year.

In the release, we gave guidance for the year. We said that we expect the earnings for the full year 2010 to be in the range of $13.4 million to $14.2 million and net income equates to $1.14 to $1.20 in diluted earnings per share. I would note that that number is adjusted for what was incredibly severe weather in January and February which has cost us an estimated almost $0.05 in earnings. The market should not expect our Q1 earnings to be strong even though we should have an excellent year in addition to that $0.05 and lost weather visits in which I think Chris and Glenn will go in to some more, also will incur approximately at least $0.01 in earnings per share impact in expenses related to the acquisition we just closed last week.

Thanks, Larry. With that, I'm sure we have some questions. Operator, if you would go ahead and open up the lines and we'll handle those questions?

(Operator Instructions) Your first question comes from the line of Larry Solow with CJS Securities.

Good morning, Larry.

Hi, good morning, guys. How is it going? Can you clarify on the guidance, Larry, you said $0.05 impact or so from weather and I assume the guidance also includes the recent acquisition and should I assume that would be accretive this year?

Yes, it includes the acquisition which is accretive but that guidance was adjusted down from the impact from the weather in January and February. It would have been almost a nickel higher had it not been for that.

Got it. So fair to say it is probably going to be down year over year just on a Q1 to Q1 because of the weather?

I can't tell you that but it will be a lot less strong than it normally would.

Got it. Okay. Then in terms of some of your productivity measures, do you happen to have those numbers, the units billed per visit and the visits per PT?

Yes, this is Glenn. Our visit per [FTE] for the fourth quarter was 10.6 which was down slightly from the prior quarter. Units per visit was at 4.2 which was up slightly by a tenth of a unit where we were for the prior quarter.

I will mention that the fourth quarter typically on a productivity basis, because we tend to be a little soft late in December, tends to go down a little bit and that has followed the expected pattern. We expect to make continued progress this year on that side of the ledger.

In terms of revenue per patient, if we assume the Medicaid, Medicare piece is sort of flat and obviously gains have been accelerating over the last couple of years, I imagine these will slow. Do you still expect higher revenue per patient in 2010 versus 2009 excluding whatever Medicaid impact there is?

Yes, we've done our budget. We expect 2010 our rate per visit to be up from where we finished the year in 2009 or from where the year we finished the year in 2009 or from where the year averaged in 2009. We expect our durations to be steady. And overall we expect to have a good year. And at this point it seems like the government is going to attend to their business, at least they have done that in the short term and expect that to continue through the year. So, we expect an up year from a revenue per patient standpoint.

It seems like the consensus view is the government rates will be held flat. Is it a question of how long they freeze it. Will they have to readjust it in a year, two years or whatever. Is that a fair statement?

It has been constantly shifting but that appears to be the general sentiment from everybody that we talk to right now.

Okay. Just for clarification on your visits, same-store visits, I think you said they were down 2.2% for the year but if I look at the individual quarter, they were all over 3% down. So, what am I missing there? You follow what I'm saying? Like the same-store visits this Q4 was down 3.4% which I think is actually the lowest drop of the year but yet your full year number is only down 2.2%.

Larry, I'll have to check that out. I know the figure is correct. I'll have to look at prior quarters and call you back.

That's fine. That's fine. I'm sure it is something I'm doing wrong. Thank you very much, guys.

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

Hey, Rob.

Hi. Good morning. Can you -- I understand that this is accretive deal but is there any more? The press release didn't discuss kind of geography, pricing or anything like that. I mean can you at least -- can you tell us status, are there any other points since the press release that you guys can discuss at all?

Let me just say this. Pricing is very good.

You can back into their net rate. It is slightly higher than ours.

Pricing is higher than ours. Geography, we made the decision that unless we're forced to by the nature and size of the deal, we're not going to disclose the geography just because I think it gives our acquired partners more time in their market to continue to focus on what they do without the news getting out and people doing things that could be seen as disruptive. I will say that in the past all of the deals we've done have moved forward. This is something that we don't feel is material to the information at this point.

Okay. That's fair enough. The 100% improvement factor for your partners, I mean obviously not bottom line 100% but I mean the fact that all of them showed improvement over 2008 in this down market is pretty amazing.

Those were acquired partnerships.

Oh, okay. I'm sorry. I apologize. I missed that. Okay.

If all of our partnerships improved, we wouldn't be here anymore, we would be at the beach.

Yes, I was going to say. Didn't jive with the numbers exactly.

We always have to --

Yes, okay. Fair enough. Sorry about that. Well, still, I know you don't like to discuss trade secrets but where you've seen improvement in rate and maybe even improvement with some of those folks, I'm just trying to get a sense of is it still a little bit more productivity than say new services?

I think the rate really is more of a service focus than what you and I would constitute as productivity. Productivity really is measured in terms of visits per clinician. And that year over year, not necessarily quarter to quarter but year over year, is up slightly incrementally I think a lot of the rate things have been service focused initiatives and contracting for the most part.

Okay. Would you be willing to characterize kind of where you are, your regionals and you've added some folks to kind of -- for lack of better words, strategically implement and improve operations to help your partners. Do you have a sense or can you give us a sense of say, if it was a baseball game, what inning we would be in? How far along is that progressing?

I think the prior CEO did the whole baseball game thing. I'm not sure it works.

Fair enough.

I'm not sure it worked out great for him so I'm probably not going to go there. I will tell you that we have added some talent in this past year and it has been because we've been able to grow and do some things and attract some people. We've divided our regions. We've gone from three to four which give our VP's of operations slightly lesser footprint so they can focus on development and continued improvements. That just happened at year end. So, whatever inning you want to attribute to that, I think you can.

Okay.

We've recently, very recently added a little bit of a twist to try to prospect an increased number of acquisitions and so we've engaged people on a success basis. And I can tell you I've been busy on the phones as a result of that. We've added some talent on our fit to work initiative of which I mentioned briefly. All of that is fairly recent. The team here is otherwise intact and excited and focused about what they're doing.

And this is Glenn. From an operations standpoint, no matter how well we're doing, we always know there's more that we can do. We've got some very good plans we're implementing in 2010 and we look forward to those bearing some fruit for us.

I probably know the answer to this, knowing Larry, but my sense is those kind of improvements probably aren't in the guidance yet?

Oh, no. We do our budgets and our plan, we take into account good and bad things.

Yes.

The guidance is not intended to be a low ball estimate.

No, no, I didn't mean that. I hope it didn't come across that way. I was just thinking that until you really saw some of this stuff.

We don't know.

You probably wouldn't bake it in yet.

I think it will have an impact over the next few years. There's no way to predict how much of an impact it will have in this calendar year.

Sure. And then just a quick update on OAS. Any kind of new things happening down there?

Well, we've added a number of commission sales reps for RMG which interfaces also with 2008 facilities. We've seen some improvements in the volume down there although I'll tell you, it is still not quite where we want it to be. Working on some things to change that up a little bit and improve that. And we expect a growth year over last year for our OA program although at this point, it is still fairly modest.

Okay. Thanks. I'll jump back in the queue.

Your next question comes from the line of Mitra Ramgopal with Sidoti.

Good morning, guys. Just a few related questions. First, sales force expansion. I believe you mentioned you added about 40 full, part-time in 2009, is that correct?

I was going off the top of my head. How many do we have?

We have right now 71 total sales reps covering 279 locations. Of those, 44 are what we call traditional full-time or part-time sales reps. The rest of those, 27, are what we call commission sales reps and we're continuing to add on the commission sales rep side.

And the guidance assumes, I guess continued expansion there? You baked that in?

Yes. I think we baked everything in. Our guidance is a reasonable range of where we expect right now to end up.

Okay. And if you look at clinic expansion, you obviously added a lot of clinics back in 2007 with the acquisition of STAR and looking at 2008-2009 you expanded the network maybe 2%, 3%. Is the plan to be a little more aggressive in light of what we saw with the recent acquisition?

We expect this will be a good year. Last year, quite honestly, with the shape of the overall economy was in, we saw a lot of good sellers not want to go and part with their company in what they considered to be a down market or a market trough. We're seeing a fair amount of activity in terms of interest right now. Companies doing well. We've got good teams. So, I expect that whether by location, number or EBITDA, I think I would focus particularly in this area or on EBITDA, for instance, the deal we just did had a nice EBITDA contribution but not a big number of locations. STAR obviously had a big number of locations and a big EBITDA in combination. We're focused on deals that are up reasonable size that will grow our Company meaningfully and as I talked about on the organic side, we're always focused on that. We continue to change that up so that we can see if we can improve the pace on that side, too.

We didn't retrench from our acquisition program last year. We just couldn't find any deals that we could get done. The balance sheet remains underleveraged. We're talking to enough people now that I'm confident we'll do some more deals this year. But we stayed very focused on adding companies internally and through acquisition but only if they're willing to retain a significant equity interest.

Okay. And I notice on the management contract, it bumped up a little. Anything going on?

Most of that management services revenues, RMG related. Most of it, I think -- services related. We really haven't added or changed the number. We have very few, most are in STAR, but we really haven't changed or added the number of physician services contracts. Don't really intend to do that but on the RMG side we expect continued expansion of that footprint. Those guys are doing a very good job.

The growth you saw not only for the year but for each quarter came almost exclusively from RMG.

Okay. And Larry, if you can remind us sort of what the (inaudible) mix was for the year. And again, with the reimbursement sort of being put to rest now with Medicare if you expect any will shift there for you.

I'll give you charges in terms of billings for the fourth quarter and kind of tells you where we are and really the first two categories you can kind of lump together. Private insurance was 26%. Managed care was 34%. So, combined, that's really 60% related to traditional insurance or PPO type plans. Worker's comp was 14% for the period. Medicare and Medicaid combined was 22% and other was 4%. So, those numbers still have not -- they may move around a percentage or two from period to period but they're still very consistent over the years.

Okay. Finally, the tax rate. It bumped up a little in the fourth quarter going forward, what would be more reasonable?

Well, our tax rate normally runs at 39% or 39.5%. It was higher during the period because part of the (inaudible) consideration was not deductible for tax purposes. That's the only thing that caused the tax rate to bump up. It should go back down.

Okay, thanks again.

Thanks, Mitra.

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

Morning fellows. Great year. Just -- I guess number of my questions have been asked and answered but if I could get you guys to kind of look out over the next three to five years, I was just wondering, I guess two questions. What could that visits per FTE -- could that be a 12 or 12.5, three to five years out realistically? And then just generally, I mean three to five years out, do you guys envision this business kind of looking the same or are we going to see more 2008 type add-on type businesses if we look out a few years?

I don't want to go out too many years but I think over the next few years, two or three years, you'll see us largely continue with things that we have right now. So that would be an expansion of everything that we've got. You'll see us continue to try to bring in more deals of size and use strength of our balance sheet to grow. You'll see productivity continue to pick up because our partners understand that it is going to be necessary in the current economic environment and we're still low compared to most private practices. I think 12 is a reasonable and realistic goal considering the fact that we're -- we still open up a modest amount of centers from scratch and that drains us a little bit. But we'll continue to communicate with our base and our shareholders as we think there are new opportunities that are related to what we do but right now I would say that we're very focused on accelerating what we've already done and then looking for opportunities as opportunities arise. I don't think you'll see us go too far field, but if we think there's something out there down the road, we'll certainly not surprise anybody. We'll let people know.

Fair to say that right now, internally generated free cash and your credit facility primary use of acquisitions not share repurchase or anything else?

Right. In terms of returns, the best use of a dollar is to start up the de novo clinic or a satellite. Next best use is an acquisition. I will say that from a management standpoint, we're in a much better position now both operationally and administratively to integrate acquisitions. So, we wouldn't hesitate to do a deal of size if we could find what we thought was a reasonable price and we thought it could grow after the acquisition.

Actually, since you brought that up, you guys said that more activity you expect a good year for acquisitions. I mean in terms of size, I mean are there many sizable deals out there? A handful that you guys are looking at? Can you characterize that all and quantify that at all I guess?

Part of the problem is, and I got a call about this the other day, after we announced the deal we did is people tend to focus on the number of clinics but, for example, the acquisition we just closed, whereas our clinics average 20 a day is averaging like 47.

Close to 50.

I mean, so you really got to focus, like Chris said, either on visits or EBITDA or something like that. From that standpoint, there are lots of practices out there that maybe only have five to 20 clinics but they're producing a lot of cash flow and earnings. And so -- we have 3% market share. It is not -- and the biggest player has seven. So, it is not like there's not an opportunity for some consolidation.

Are there deals you're actually looking at now in a serious way that are say $10 million to $20 million?

Yes.

Okay, great. Thanks, guys.

(Operator Instructions) I want to clarify something. We say $10 million to $20 million, I'm not talking $10 million to $20 million EBITDA. We're talking $10 million to $20 million purchase price. But the multiples we are paying are still in that 5 to 7 range of historical. Now if you look at what they've done post-acquisition, including the management fees we get, they're less than 4. That's the same parameters we've been using.

Your next question is a follow-up from the line of Larry Solow with CJS Securities.

Larry, just to clarify, that usually comes down to about four time multiple. Is that within a couple year period or usually within -- ?

We just showed this to the Board last week. That includes all of the deals we've done. Some of those now obviously we've had for a number of years. We've added satellite locations as well.

Larry, some of the deals we did just 13, 14 months ago we performed and what it was doing when we closed was about $1.1 million in income and at the end of the first anniversary it did $1.8 million. Sometimes it is quicker. Sometimes it is more incremental. But across -- pretty much across the portfolio it has been a forward March.

Right. In terms of another driver I know of your rising revenue has been improving contracts. Do you still see further work to be done there on contract trends?

Yes, I think we do. I think on the comp side we have opportunity. I think there's always opportunity. I know our team's focused on that. And I will characterize it, none of it as being easy but it is no different than it has been the last few years. So, we remain focused in that area as well. I think there is still more opportunity.

Okay. Then just lastly, certainly congratulations for reaching your long-term incentives and your three-year goals, do you -- should we expect something, a new plan to be implemented and I guess will have to be voted on a shareholder meeting?

We'll have probably on our proxy this year, another plan, new plan and it will be submitted for shareholder approval.

Got it. Thanks again.

At this time, there are no further questions.

Okay. Thank you, operator. Thanks. Listen, I want to say one more time, thanks to everybody. Larry and I and the rest of the group are here today to handle any questions that might come following the call. And we appreciate your support and we look forward to talking to you soon. Thank you.

This concludes today's U.S. Physical Therapy fourth quarter year end 2009 earnings conference call. You may now disconnect.