US Physical Therapy Inc (USPH) 2011 Q1 法說會逐字稿

Good morning. My name is Christy and I will be your Conference Operator today. At this time, I would like to welcome everyone to the US Physical Therapy First Quarter 2011 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 will now turn the call over to Chris Reading, President and Chief Executive Officer. Please go ahead, Chris.

Thanks, Operator. Good morning, everyone. Thank you for joining us for our first quarter 2011 earnings call.

With me here in Houston is Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, Jon Bates, our Vice President and Controller. Before we begin, I'll ask Jon to review our brief disclosure statement. 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. Before Larry covers the financials in detail, I'll provide some color on the quarter as well as on our various operational initiatives.

Overall, we have a strong quarter from an EPS standpoint, the best quarter one we've delivered so far, in spite of some extreme weather early in the quarter that dampened volumes somewhat. Revenue grew a healthy 12.6% on approximately a 10% volume growth, coupled with a slight net rate improvement, in spite of the MPPR Medicare rate reduction, which went into effect at the beginning of the year.

Relating to our top-line improvement of more than $6 million for the quarter, compared to quarter one 2010, was more than $1 million and an increase in our physician services business, which continues to show strong demand.

In spite of increasing gross margins in 2009, in a very healthy fashion, and again in 2010, 80 basis points for the year, for this first quarter in 2011, gross margins improved 200 basis points to 26.7% as compared to quarter one 2010, as well as improving 140 basis points sequentially from the fourth quarter 2010.

A combination of a 10% increase in volume, coupled with modest rate margin improvement drove a 30.2% improvement in operating income for the quarter.

EPS rose $0.27 -- rose from $0.27 in quarter one 2010 to $0.31 in the quarter. Also recall in 2010, we were aided by a one-time gain relating to the sale of a five clinic joint venture that equated to approximately a $0.03 gain for that 2010 first quarter.

Development for the quarter was solid, with six start-up clinics opening and steady progress on the acquisition front. On the physician service side of our business, demand has been very good and that has -- and as we had earlier planned, we are further expanding our training and support team, so that we can continue to progress with respect to our service, to servicing our partners and clients as well as to steady demand that we have seen for osteoarthritis program and related services.

Relating to our fit-to-work initiative, we continue to expand here as well. We have grown to handling about 600 new patient referrals per month and about 250 reauthorizations per month in our Houston-based call center.

We continue to see strong demand and opportunity for new contracts. Our team continues to get requests to speak at national, regional and state conferences. We have developed a seminar series for case managers that's being offered around the country within our facilities for the dual purpose of providing these work comp case managers with information, education and CPU benefits, while showcasing our facilities and our capability.

Our team remains focused to grow organically and through acquisition as well as to further enhance our service offerings in our physical therapy as well as our physician services business.

Our balance sheet is very strong and we will continue to work hard to invest in our continued growth and expansion.

We appreciate your questions and your participation and before we open it up, I'd like to ask Larry to review the financials in greater detail. Thank you.

Chris hit most of the revenue margin and income items I was going to mention, so I won't repeat them. I will note that reported net income rose 18% to $3.7 million, or $0.31 a share. The analyst consensus estimate was $0.27, so that was -- so we beat consensus by $0.04.

If you exclude the gain from the joint venture sale, which happened in Q1 last year, earnings from operations actually rose by 29% from $0.24 to $0.31.

During the first quarter the company opened six de novo clinics and we closed one clinic. So USPA opened the period with 397, or just under 400, clinics.

Operator, we'd like to go ahead and open it up for questions.

Thank you. (Operator Instructions). And your first question comes from Larry Solow of CJS Securities.

Hi. Good morning.

Hey. Good morning, Larry.

Just curious, and maybe this is quarter-to-quarter looking at pricing as maybe a dangerous path. But just sequentially if the drop was like 2.6%, but the -- I guess the implementation of the Medicare impact should have been, probably a little bit less than that. So is there any reason for that? Or is it just more lumpiness and quarter-to-quarter like that, it's not really the best way to look at things?

I don't know about quarter-to-quarter. The overall Medicare is -- was 20% -- I think 23% of our volume in Q1. I don't know what it was for Q4. If that's what you're comparing it to. But --

Right.

But the overall impact on us, in terms of that rate, based on that 20% to 25% reduction, it was about 5% to 7% for net rate for the company in its entirety.

Right.

So, I mean, I think, honestly, I was pretty pleased with the net rate based on that kind of rate cut.

And now that you -- the -- have -- obviously this does take into account that the full cost -- since considering it was on January 1st, would you expect, obviously, of the drivers of your strong performance for the last few years has been able to get higher rates on the private side. And do you expect -- maybe it's slowing down, but do you continue to see some opportunities to increase that?

We didn't budget a rate reduction. I mean, we assumed a modest rate reduction this year, but it was less than what we achieved in the last couple of years. And you can see, really, most of the earnings increase for the quarter was driven by the rate, it was driven by the volume increase.

Right. Right. Right. But well then -- but then -- well then, was the volume increase, obviously is mostly acquisition driven, all right? Because your same store --

Right. Same store is clinics a year, open a year or more, so you're right. Some of its acquisitions. But we also had 19 de novos last year.

Yes.

Six in the first quarter this year. So that's 25 additional clinics.

Right. Got it. And are those clinics ramping up faster than they had been? Or is there any color to that?

Go ahead.

They're ramping up at pretty much as we perform, which it hasn't changed at all from what its done previously, in past years.

Okay. And I guess last question is just looking at actual patient visits per clinic. It looks like that number went up a good amount. Is it fair to assume that some of these acquisitions that you did in Q4 were of bigger clinics?

Hang on. Let me look at that number for a response.

20.2 to 20.4.

So it's two-tenths of it.

Its two-tenths of a visit. Honestly, without sitting down and looking at every single facility.

Right.

The one acquisition had -- didn't have big facilities.

Yes.

And that was the one with the greater number of locations. The other acquisition, with the smaller number of locations, had slightly larger facilities.

Okay.

I don't know that that moves the number necessarily.

Well, I mean, you're talking about 20.2 and 20.4. It's two-tenths. That is not statistically significant.

Right.

And we move around quarter-to-quarter, quite honestly. First quarter is typically the lower quarter, than first and fourth, at least.

Yes, that's a 1% increase.

Right. Okay. So just then -- I know the weather impact was pretty severe this year. But I do remember last year wasn't great either. Was it worse this year?

It was worse. But we're going to quit talking about weather.

Yes. Well, good. Let's hope -- yes. Absolutely. Okay. Great. Thanks a lot, guys. And congratulations again.

Thank you.

Your next question comes from Brian Tanquilut of Jefferies.

Hey. Good morning, guys. Congratulations.

Hey, Brian.

Hey, Larry, I know you don't want to talk about weather anymore. But I just had one quick question on this. Tornadoes here in the southeast, has that impacted you at all quarter-to-date?

We've had minimal impact from that, fortunately.

Okay. Got it. And then, Chris, physician services, I mean, this is something that you've had for a while now. But it seems like you're gaining some traction in this segment. So I just wanted to hear from you, just exactly what is happening there and what are you guys doing to drive that business forward?

The team has done a good job, the physician services business, I'll point out, will be a little lumpy, quarter-to-quarter. A lot of this revenue is based upon relationships with these clients, under a licensing agreement. We go in and do training, extensive training, and license these programs and services. And so those come -- those have been coming steadily, but that'll be a little bit lumpy from time to time.

Yes, just so you understand the revenue model, when we sign up a new customer or doctor group for that business, we get a big chunk of revenue the first three months when they sign the initial contract and we do the training and then they pay us monthly over five years, so that will smooth it out.

But early on, as we sign up new clients, you'll see -- you may see really good revenue one quarter and it may be down the next. It's not that the business isn't growing its base. It's just the timing of when the contracts were signed.

So, Larry, to that point that you just made, did you have a contract win that subsides in Q1?

Yes. We had --

Okay.

We had -- we have a -- I think we really ramped faster --

We did in the first quarter as well.

Yes.

I mean, we really --

Okay.

Discarded this under this license agreement from a revenue standpoint beginning in the fourth quarter, and it's continued in terms of the first quarter.

Right.

So, as I look forward, we should think of it more of a -- more as a constant revenue, as a -- kind of like a rental business instead of -- without assuming any incremental contract wins.

Yes. As we add more and more clients, you'll see --

Yes.

-- that those initial early periods that we get for the initial sign-up and the training. But then, at some point, the monthly stream from these, as you build your base, it will be like an annuity and it'll get -- it could get to be bigger as a percentage of the total revenue, and so it won't be as lumpy.

Okay. And then, Chris, you talked about how you've got a great balance sheet and you guys are positioned for -- to pursue acquisitions. And I know I ask you this every quarter about the acquisition pipeline, but I guess this time I'd ask -- I would ask it a little differently.

We're hearing more of private equity interest or activity in the space, and I just wanted to hear your thoughts on what you guys are seeing right now from an acquisition perspective, whether it's multiples or just deal sizes and deal flow?

You know, we continue to pursue the same kind of deals and there have been some -- the -- most of the groups that we're talking to, we'd sourced independently.

There's an occasional big deal that comes out, and they're -- the deals that we've done recently and the deals that we're continuing to look at we don't have any private equity in those. They'll focus primarily on the occasional big deal that's out there. The larger deals are going for higher multiples.

Well, yes. The -- there's a couple of really big -- I think it's pretty common knowledge, there are a couple of pretty good-sized deals out there. And the private equity guys pay up for those because they use them as a platform.

But, when you're talking about buying 5, 10, 15, 20 clinics, you can't fill the Company off of that, so the multiple would naturally be lower. Those are the type of acquisitions we look at for the most part.

And if you look at the 11 acquisitions we've done to date, I think 7 of them we sourced directly. So, our model is so different. If somebody wants to sell out, they may use and intermediary and go to an auction process.

But if they want to stay with the company, retain a significant equity stake and continue to build the business, that doesn't really lend itself necessarily to a private equity type structure. But, they can certainly partner with you.

Okay. And then I was just going to ask Glenn, the de novo pipeline, if you -- how does that look now? You guys did a good job in Q1, six de novos. Is that a good run rate to think about for this year?

I would say that Q1 was a good one for us. We're -- we've slowed down a little bit since then, but we continue to look for more opportunities through the year and expect to find them.

Yes. I --

Okay.

Again, I expect we're going to have a very good development year between acquired and organic facilities. But, we're going -- it will move around. We're going to be lumpy in that regard.

We try not to rush things to the point where we're not doing it right. And so in that regard, sometimes like we did in the fourth quarter, we had a huge fourth quarter, which isn't -- even though we had a very good first quarter wasn't replicated again in the first quarter.

But, we've got good acquisition traction. We've got a solid activity on the organic side, and I think for the year when you look back it'll be a good year.

Okay. Thanks, Chris. And then the last question, Larry, on the overhead side you're at the 11.4% now. Do you still think kind of like a 10% target over time is where you want to be?

Yes. I think, again, as we expand the revenue base you'll see it go down. I think we were down incrementally year over year like one-tenth of a percent.

Yes.

We took -- we actually built up some reserves and stuff during the quarter, so that affected us a little bit. But, yes, I mean I think ultimately we can still get to 10%.

Got it. All right, thanks. Congratulations again, guys.

Thanks, Brian.

(Operator Instructions). And your next question comes from Mitra Ramgopal welcome to the Fidelity.

Yes, hi. Good morning, just a few questions. First on the reimbursement side, absent Medicare how did the other payers stack up as you had to look at it a year ago or sequentially from a reimbursement standpoint?

In terms of reimbursement or our payer makes, Mitra?

On the reimbursement, I guess the only pressure you saw was from the Medicare side?

Yes. I don't think we've had any big major --

At this point, we haven't had any significant --

Contract.

Any significant pushback, although that always could change based upon what happens after. But, we're -- we continue to look fairly strong at where we're running with the payers that we have.

All right. So, pretty much is just isolated to Medicare?

Yes. We haven't seen any bleed-over from Medicare, if that's the question.

Right, right. And again, if you can just remind us as you look at the sales coverage in terms of the 300 -- or over 400 clinics you have, how many are really getting sort of assistance or coverage from sales?

Right now, we have 74 sales reps at the end of the first quarter, and those are covering about 319 locations in the Company.

Thanks. And with the improvement, gradual improvement I should say, with unemployment, et cetera, are you seeing any uptick as it relates to, say, your Workers' Comp business or any other areas?

We've seen some increase or a small percentage increase of Work Comp and continue to create the platform with Fit to Work to have that grow over time. Work Comp is a little bit different, so it takes a little longer to develop it, but we think we've got good plans in place and we'll continue to see some expansion there throughout the year.

I don't think that Workers' Comp increase we've gotten has been from -- due to the unemployment situation. It's because we've got an active program that's expanding.

Okay, thanks. And finally, Larry again, if I look at the bad debt it's certainly come down pretty nicely. I don't know if there is anything --

Yes.

Driving that?

No. It bounces around quarter to quarter. Normally, we'll average for a year 1.5% to 1.75%. I think it was 1.1% Q1, which is lower than normal. I wouldn't read a lot into it. I will tell you that our bad debt reserve as a percentage of our total receivables is at an all-time high, so I'm not concerned about bad debt.

Okay. And quickly on the balance sheet, I know the accrued expense looked a little high.

What that was is we bought a -- in March, and you'll see in the Q today, I would urge everybody to look at the notes in the Q, but in the first quarter we bought part of the minority interest from the Star Partners.

And it actually didn't get funded until the beginning of April. So, it showed up as an accrual -- accrued expense whereas now that we've borrowed under the credit line you'll see that it will -- we'll be paying debt down during the quarter. But, if it had happened earlier in terms of the timing of the payment, it would have showed up as more borrowings under the credit line.

Okay, thanks again.

And at this time, there are no further questions.

Okay, listen. Thanks, everybody, for tuning in. Larry and I available later today or later this morning if you have any questions and, again, thank you for your continued support.

Thank you. This does conclude today's conference call. You may now disconnect.