US Physical Therapy Inc (USPH) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy Q3 2010 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 conference over to Mr. Chris Reading, President and CEO. Please go ahead, sir.

Thank you, Operator. Good morning, everyone. Thank you for joining us as we prepare to discuss our third quarter and year-to-date earnings performance. 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, I'll ask Jon to cover a brief disclosure. Jon?

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. On our last quarterly call, you might remember that I went off script a little bit and spent a lot of time discussing the reasons behind our strong performance this year with special attention and [applause] to our partners around many of our largest markets who have really done well making the necessary changes that have allowed us to navigate in an otherwise very challenging economic market over the past two years quite successfully. While I'm not going to revisit that discussion, I do want to highlight and explain our progress in a variety of areas and the underpinnings of that and to explain the challenges that we expect to overcome.

First, let me discuss our net rate, which for the quarter grew to $107.11, up from the prior-year quarter of $103.42. At a little under a 4% improvement, it was accomplished in a very thoughtful and systematic way. One of the things we set out to do most recently was to systematically create a meaningful shift in our payor mix by adding a very robust product offering, which we refer to as our Fit2Work program, designed to deliver a number of industrial and Work Comp friendly programs, services and resources, which we believe would be very marketable to industry and which would assist us in growing additional value and revenue, impacting our net rate per visit, along with our payor mix as we got more and more traction with this program. That has happened and will continue to unfold in a very meaningful and beneficial way for us and for our company.

We have tracked our percent Work Comp mix across all four regions systematically over the last few months and have seen improvement across each of these regions sequentially over these past months. The initiative, which is driving new business as well as volume, it generally comes at an incrementally higher rate than our average visits across the rest of the Company. It is one that will continue to be important as we look to further expand our revenues.

Also notable for the quarter was another 180 basis point improvement in our gross margins, now up to 27.2% for the quarter, you might recall, on top of a very strong margin improvement for the year ending 2009. I mentioned in our last quarterly earnings call that we are always striving to pull out all the stops and have everything exactly where we would like it to be and recognize that in our current environment, with persistent and high unemployment, weak job market, and lower than usual consumer confidence, that a quarter with net income growth of 25%, 21% for the year, a large net rate increase, significant margin expansion, and 25% improvement in EPS is a pretty strong improvement in this environment.

So what's left? Right now, that continues to be creating greater volume development, which I continue to believe we can do through Fit2Work and other internal initiatives designed to enhance our volume and growth through our partnerships while beneficially improving our payor mix. Additionally, we will continue to add to our sales team with an eye toward further expansion of our resources, with special attention to some of our largest markets where we already have existing sales in place with room for more complete geographic coverage.

On the development front, we have opened 13 de novo facilities through the end of the quarter, several more recently, and a number to complete before year end. We have discussed our continued focus on acquisition-related growth, and after completing our East Coast deal in the spring this year, while I won't get into too much detail, I will say that you can expect us to continue to do what we say we will do in these areas and all the other areas related to the growth and development of our company.

On the reimbursement front, let me say this. Year in and year out we have worked as a team very deliberately to move forward. There has been a lot of attention over the past few months relating to possible pending reimbursement changes by CMS, the most recent, which came as a surprise announcement this summer, which we refer to as MPPR, or multiprocedure payment reduction plan. After significant dialogue and comment with CMS regarding what we and the rest of the industry believe came about through flawed analysis and application, the final policy was released two days ago in an approximately 2,000 page document covering a wide landscape of reimbursement and rule updates by CMS across the entire healthcare landscape. While complicated, we have added a statement in our most recent filings that reviews the potential impact from MPPR and other changes to the RVU-based reimbursement system used by federal payors.

In summary, under MPPR final rule the practice expense portion of the second and subsequent codes billed in a single day for therapy services will be reduced by 25%. This, as you might remember, is down from the initial rule which was published prior to the comment period and indicated a 50% reduction for second and subsequent procedures. This reduction will result in an estimated 7% rate reduction for therapy services provided in 2011 for Medicare. Additionally, CMS has made other changes in the RVU and geographic practice cost index, GPCI, that would potentially mitigate the 7% rate reduction, assuming Congress acts to prevent the scheduled sustainable growth rate reduction, otherwise referred to as SGR, and that covers the entire physician fee schedule.

Regardless, we have a plan in place for pricing, utilization, productivity, programs, and scheduling for continued improvement in our existing facilities' performance and our market position. Combined with continued development efforts organically and through acquisition, along with plenty of available funds to fuel our future growth, we expect to continue to attract talented owner-partners who, like our current partnership group, will continue to assist us in expanding and propelling our company forward in a meaningful way.

With that overview, I'll ask Larry to cover in more detail our financial performance for the quarter and year-to-date period.

Thanks, Chris. First, I'll discuss the quarterly results. For the third quarter, net revenue increased 4.6% to $53.4 million due to an increase in our average net rate, as Chris discussed, of $3.69, and an increase in patient visits from 479,000 a year ago to 483,000 in the recent quarter. The Company's gross margin improved to 27.2% as compared to 25.4% a year ago. Our provision for doubtful accounts was somewhat lower at 1.3%. That said, our bad debt reserve remains near an all-time high and our collections have been excellent. The average age of our receivables is presently running about 47 days.

Our corporate office costs were 10.9% of revenue in the recent quarter as compared to 11.3% in the same quarter of 2009. Our operating income increased by over 21% to $8.7 million, and our operating income margin improved 230 basis points to 16.4%.

As Chris mentioned, net income rose 25% to almost $3.9 million, and our earnings per share increased to $0.33 from $0.26 a year ago. That $0.33 for the quarter is as compared to the analysts' consensus estimate of $0.31.

Our same-store revenues increased by 3.3%. We have continued to experience some soft volume primarily related to the recession. Same-store visits were off about 3.7%, so basically same-store revenues were flat.

During the quarter, the Company opened five clinics and closed two.

Now about the nine-month period, net revenue has increased 4.6% to $157.9 million due to an increase in our average net rate per visit of just under $3, and an increase of 1.4% in patient visits. Our gross margin for the nine months has improved 90 basis points at just under 27%. Our provision for doubtful accounts for the full nine-month period is 1.6%, which is right in the middle of our historical range.

Corporate office costs were 10.8% of revenue for the period. Our operating income increased in the first nine months of 2010 by almost 15% to $25.4 million, and our operating income margin improved 140 basis points. Our net income for the nine months rose over 21% to just under $11.5 million, and our earnings per share have increased from a year ago to $0.97 from $0.80.

We ended the third quarter with no bank borrowings and less than $5 million in other indebtedness, and our cash balance as of the end of the quarter was $9.7 million.

Thanks, Larry. I know that a number of you have questions and comments, and so with that, Operator, we'd like to open the lines for questions.

(Operator instructions.) We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from the line of Brian Tanquilut with Jefferies & Company.

Hey, guys, good morning. Congratulations.

Brian.

Hey, Chris, let me just make a clarification. When you talked about MPPR and you mentioned the GPCI, or the mitigation, and I was reading your 10-Q here as well, am I right in interpreting that as basically flat Medicare reimbursement for 2011?

No. It's only been two days and we're still going through our analysis. This was a huge document. But the original MPPR reduction, we feel, is around 7%, and with the other factors, our early assessment is that we think that they, at least partially, mitigate that adjustment. We've got more analysis to do. We haven't -- we've spent a lot of time on it, but literally it has been the last day and a half. So the document's publicly available. We'll continue to work on it, but we don't think that the net reduction is going to be 7%. We think it's much more favorable than we expected.

Okay.

Again, all this is subject to there not being a physician fee schedule cut, which -- what, Glenn, there's two scheduled, one in December?

Yes, at the end of this month, there is a 26% reduction that would take place, and then January 1st another 6% would take place on the SGR.

Yes.

Right.

As everybody knows, in every year since 2002 or 2003, Congress has intervened, and so these reductions haven't taken place, but it's all subject to that. So the question is will the lame duck Congress act or will we have to wait until early next year for it to get corrected if they're going to do so.

And again, that SGR covers the entire spectrum of everything that falls under the physician fee schedule, so it's not just therapy services related by any means.

Got it. And then, Chris, also on the rate improvement, obviously you guys are doing a good job with Fit2Work and the Workers' Comp push. How much more opportunity is there? I know you're investing on the new -- adding new sales [guys], but how much more runway do you have there in Workers' Comp?

In Workers' Comp, we have a lot of runway. There isn't -- I get excited about a lot of things that we have going on, and that is the one thing that we're just now scratching the surface on. We have a very, very good team in place. It's a new team here for us. They are very motivated. In fact, we have 25 partners here right now, and we spent a good part of yesterday going through this program again with this group. We've gotten very, very good traction externally with client companies and insurance companies and internally with our partners, and we're just getting started in that front.

In terms of the potential net rate impact, as you know, Work Comp varies by state, so of course we're trying to concentrate our efforts with our biggest partnerships in our most profitable areas to have the biggest net early effect. But we're also looking at where the best opportunities are in aggregate to drive volume. But literally, this initiative started after the first of the year and we're just now, through training and a lot of work, beginning to make some good forward progress. So I'm very encouraged in that regard.

So the net rate improvement that we saw this past quarter, we should expect more of that going forward?

Yes -- no. Well, no, I don't think I said that. I don't know what to expect in terms of net rate. We've had a great last few years where we have worked very, very hard to get our rate up. We've got some moving parts now with some of this recently discussed things regarding CMS, MPPR, physician fee schedule things. We continue to do that analysis, but we continue to be focused on managing, where appropriate, our ability to enhance our revenue stream, and one of those areas is net rate development. Some of that is programmatically, some of that is through utilization [and] other things. I can't promise that we'll have a year in, year out $3 increase. I don't think that's probably practical in this environment. But I do think we have things we can work on.

That's fair. And then, Larry, the cash flows were really strong during the quarter. Was there anything unusual with this quarter or is that something that we should think of as almost a sustainable rate?

Well, seasonally, the third quarter, second maybe only to the second quarter, is your best quarter, so we normally would have good collections cash flow during that period. So the first and fourth quarters are seasonally softer, so I wouldn't take the third quarter and project it out forever.

But other than that, though, we didn't have any unusual --

No.

-- thing happen --

No.

-- in the quarter --

Yes.

-- that would have --

No.

-- stood out in any way.

No.

Okay. And then with the cash flows that you have, I mean, you've paid down your debt, you're sitting on $9 million of cash. Historically, as we look at the acquisitions that you've done, the average you've put in $10 million of -- maybe $20 million of acquisition spend in a given year. I just wanted to hear what your thoughts are in terms of cash and deployment as you build more cash on the balance sheet.

What we've said before, really for us there's four prospective uses of cash. And in terms of rate of return payback, the best use is a start-up, and we're doing better on start-up clinics, de novo clinics. Second best use is acquisitions and we're working on some, and as Chris alluded to, we think some are going to fall here in the not-too-distant future. And then third thing, you can either buy back shares, which we actually did buy back some shares, a modest amount, about 1.6 million if I remember right.

4.

1.4 million in the third quarter at an average price of about $16 a share. And then the fourth thing we've talked about in the past, though we're not committed to doing anything necessarily, but is the possibility of paying a dividend or doing something else. So I don't think we'll change our priorities in terms of how we use cash.

All right. Thank you. And I'll let the other guys ask questions. Congrats, again.

Thanks, Brian.

(Operator instructions.) Your next question comes from the line of Mitra Ramgopal with Sidoti.

Hey, Mitra.

Yes. Hi, good morning, guys. How are you?

Okay.

I just wanted to follow up first on the acquisitions. Again, I know you said you're sort of going through the reimbursement potential impact, et cetera. Are you more likely to be aggressive on acquisitions depending on how you see the impact, or is it going to be sort of independent?

I think we'll continue to view these as they come through in the same way that we have historically. We're looking for good deals where guys are going to stay around and keep a significant stake in the business. I don't know that the potential rate reduction slowed anything down for us. I think in most of these deals, we've seen upside opportunity in pricing and other things anyway. So I think we continue to look at them as we have in the past, understanding that each is unique and each has operational upside and potentially some occasional challenges. And we've talked to a lot of people. These deals don't always come evenly, but we're talking to some great folks and we expect to get some things done here in the near future, as Larry mentioned.

And as you look at the deals, would you say the valuations are more attractive now than, say, maybe a year ago or pretty much the same?

No. I think it depends on the deal size and who's at the table. I think valuations aren't necessarily anymore attractive now than they have been, other than for distress deals, which are not the kind of deals that we typically do. I think large deals, the valuation may be up slightly depending upon, again, who's at the table. On the private equity side, there's money that's in the wings and on the bigger deals, we sometimes see those guys show up. Most of our deals are singularly sourced, so we're typically the only ones at the table because somebody wants to stick around and they want a good life after. So I think it's a stable environment overall. I don't think it's down necessarily.

Yeah, there's quite a bit of disparity between what the larger deals go for, and when I say larger, 40, 50 plus clinic groups, and what the small private local practices go for. And so I don't think the range has changed for the, say, 5 to 20 clinic group size. We're still looking at paying the same multiples we have in the past.

Okay. And I know we saw pretty nice improvement in margins in the quarter. Was there anything in particular that you might have done differently to bring costs down?

We're not -- we continue to be cost focused and we have a focus in our facilities globally to work on our pricing opportunities, productivity, utilization, our scheduling, and just some very basic blocking and tackling things. We've been able to add facilities and integrate deals without having to change our corporate staff much at all. Where we've added staff, for instance in our Fit2Work program, we've seen a fairly immediate impact, and so we've gotten good coverage there. And I think as we continue to grow the Company, while we'll occasionally need to add some folks here, we'll see some continued expansion hopefully, depending upon what we can do with our net rate.

Okay. And since you touched on adding some bodies, I think last quarter you mentioned you had a few areas where you thought you could look to hire full or part-time sales reps and there were some markets where you're looking to maybe increase your presence. Could you update us on that?

Yeah, this is Glenn. On the sales rep side, we currently have 75 sales reps covering 321 locations, and we're aggressively looking to increase that number in urban markets in some of our larger partnership areas, even where we already have existing coverage.

Yes, so what you might see is the sales rep number may grow, the location number may grow slightly. We're looking to create some additional density within our top partner markets where we may have existing coverage but where we feel like we could get some additional traction, particularly in our largest markets, our more urban markets, with some additional bodies.

Okay. And as you look to expand the Company, could you comment in terms of the ability to sort of recruit therapists, build out the sales force, et cetera, just given the overall market conditions out there?

Yes, I think -- and I'll let Glenn speak to this in a minute -- I think right now we see market conditions moving in the direction of more favorable as compared to more difficult looking back over the past few years. Things have definitely felt like they've improved. We continue to have an occasional market that's a challenge, but generally speaking, I think we're seen as a very favorable home, a stable home, a place that's growing, which, for most people, is exciting. And I think as some of these changes in healthcare reform continue to play out and the economy and other things and we see other people tighten, I think it's going to continue to get better.

I would agree with Chris. On the clinical staffing side, we've definitely seen the market, at least on a national basis, tend to ease up a little bit so that the therapist shortage is not quite as difficult in filling positions as it has been over the last six to nine months, so we're seeing that ease up. On the sales rep side, we're actually seeing that tighten up a little bit relative to what it was before the economy improved slightly, but we're still fairly confident that we'll be able to aggressively fill the positions that we're looking to do.

Okay. Thanks again, guys.

Thanks, Mitra.

Your next question comes from the line of Larry Solow with CJS Securities.

Morning, Lar.

Good morning. Most of my questions have been answered. And not to sort of beat a dead horse with a stick, but it sounds like on the revenue per patient, obviously sequentially you're not going to continue getting these type of improvements, but looking out over the next few years, with all the puts and takes, sounds like you think this number will continue to at least grow, whether or not it grows this percentage is hard to guess, obviously.

I think the real question mark that I'm not too worried about, although we certainly don't have any control over it --

Right.

-- what Congress does in the short-term. It doesn't just affect us, it affects everybody. Absent something there that would be negative, and I expect it to continue hopefully to be neutral, but I think we've got some modest upside.

Got you. And then if you look out at some of your competitors, obviously I know -- I think Select, which is the public competitor, I think they were running at like 105, last I looked, revenue per patient. How do you guys stack up against these other providers? Is there any way to look at that?

Well, you know who they are as well as we do. Rehab care is in a slightly different revenue model, so the only other public provider is Select.

Right.

I don't remember that they were 105. I thought they were 101, but in any event --

Yes, I think we're a little higher than them actually.

I think they release either tonight or tomorrow, and so you can look at them. Anecdotally, with the other private providers, it really depends on where they are situated geographically. And there's no global access to that information --

Right.

-- other than what comes casually. I think we're in a pretty good position.

Got you. That's fair enough. And do you happen to have just the billed units per visit and visits per FT?

Yes, the visit per FTE for the third quarter was 10.89 and the units per visit for the third quarter was 4.21.

All right. And I guess those are slightly up, I guess, year over year?

The units are up slightly. The visit per FTE is down slightly, but not by a large percentage.

Okay. Okay. Great. Thank you.

(Operator instruction.) Your next question is a follow-up from Brian Tanquilut with Jefferies & Company.

Hey, guys, just a quick question on the acquisitions. Larry, if you don't mind reminding us, when you normally do these deals, whether it's 5 locations or 20 locations, how quickly does it ramp up in terms of accretion or profitability?

Well, we won't do a deal that's not immediately accretive.

Okay.

Now, you have -- at the time you close the acquisition, with the change in the accounting rules, you have to expense the legal and other costs associated with the deal, so you get a little hit. But we have not done a deal -- the nine acquisitions we've done have all been accretive immediately. We don't do turnaround, so --

And then what kind of multiples are you seeing in the market right now for anywhere -- let's just talk about 10 to 20 location kind of deals.

Well, the smaller deals, I'd say 15, 20 on down, most of them are like 5, 6 right now.

Yeah, I think even -- it really depends. Number of locations is less of a predictive, then EBITDA, density and significance. And I think that 5 to 6 range covers a pretty wide range of facility numbers when you look at it that way.

When we -- the multiple we pay is really more a function of not how many locations, but are they having EBITDA growth. Businesses that are flat, you're not going to pay the same multiple for as one that's still expanding.

Right. All right. Thank you. That's all I needed.

(Operator instructions.) There are no further questions.

Great. Well, listen, thank you, everybody. We appreciate your questions and attention this morning, and we're going to get back to work. Thank you. Have a great day.

Thank you. This concludes today's U.S. Physical Therapy Q3 2010 earnings conference call. You may now disconnect.