US Physical Therapy Inc (USPH) 2011 Q3 法說會逐字稿

Good morning. My name is Misty and I'll be your conference operator today. At the this time I would like to welcome everyone to the U.S. Physical Therapy third 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. Mr. Chris Reading, President and Chief Executive Officer, you may begin your conference, sir.

Thank you, operator. Good morning, everyone. With me here in Houston, Larry McAfee, our Executive Vice President and Chief Financial Officer; Rick Binstein, our Vice President and General Counsel; Jon Bates our Vice President and Controller. Normally with us, Glenn McDowell, our Chief Operating Officer, is currently in transit in the air, coming back from a road trip that has extended through this week. So we don't have Glenn with us this morning.

Before we begin to review our financial performance and provide color in the quarter, I'll ask Jon Bates 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. I think it's going to be important for everybody to have basic financial information in front of them this morning before I provide the color and overview for an operations and performance standpoint. So today we'll begin with Larry's review of the financials. Larry?

Yes. Thanks, Chris. First I'll go over over the results for the quarter and then for the nine months. During the quarter, net revenue increased 11.8% to $59.7 million due to an increase in patient visits of 13.6% which was offset by a reduction in the average net revenue per visit of $2.68.

During the quarter, our largest physician services franchisee defaulted. As a result, the company recognized none of the $446,000 in revenue that was contractually due from that franchisee.

Total clinic operating costs were 72.8% of net revenue in the most recent quarter. The company's provision for doubtful accounts was $1,426,000 during the third quarter of 2011 as compared to $695,000 in Q3 of 2010. The bad debt expense attributable to the physician services franchisee default was $750,000. The combination of the lost franchisee revenue of $446,000 coupled with the $750,000 related bad debt charge accounts for most of the margin contraction in the quarter. To put this impact in perspective, the gross margin from physician services for this first 6 months of 2011 was $2.6 milion, or an average of $1.3 million per quarter. In the most recent quarter, physician services contributed a negative margin of $400,000. That's a swing of $1.7 million before minority interest and taxes.

Corporate office costs were $5.142 million in the third quarter versus $5.798 million in the third quarter 2010. Corporate office costs were lower due to a significant reduction in accrued incentive compensation.

So our operating income for the quarter was $8.652 million. Income tax rate for both the third quarter this year and last year was 39.3%. Net income attributable to common shareholders in the third quarter this year was $4.099 million or $0.34 per diluted share compared to $3.875 million or $0.33 per share in the same quarter last year. The third-quarter impact from the physician services franchisee default that was described was $0.04 per diluted share. Despite that, this was actually the most profitable third quarter in the company's history.

Same-store revenues for de novo and acquired clinics open for a year or more decreased 1.9%. Same-store business actually (inaudible) 0.07%. During the third quarter of 2011, USPh acquired 20 clinics and we opened 8 startup de novo clinics closed and six clinics. We ended the period with 420 clinics.

Now I'll go over the nine-month results. Net revenue year to date has increased 11.7% to $176.3 million due to an increase in patient visits of 10.8%, offset by a reduction in our average net revenue per visit of $0.82 from $105.45 to $104.59.

Clinic operating costs were 74% of net revenue in 2011 as compared to 73.1% of net revenue in 2010. Corporate office costs were approximately 10% of net revenue to date in 2011 versus 10.8% in 2010.

Our operating income increased in the first nine months of 2011 to $28.2 million from $25.4 million in the first nine months last year.

Net income attributable to common shareholders year to date has risen 11% to earnings per share of $1.06 from $0.97. Our same-store revenue for de novo and acquired clinics open for a year or more is basically flat. During the first nine months of 2011, the company has acquired 20 clinics, opened 16 and closed 8.

During the third quarter of 2011 the company again began to repurchase shares. We acquired 125,000 shares at an average price of $18.11.

Thanks, Larry. I'm going to take some time to walk through the various aspects of this quarter so you have a good understanding of where we are, where we're headed in various areas of our business and our operating structure.

First, when look at volumes we see an upward trend this year in visits per clinic per day, particularly noted in the third quarter, although impacted slightly in the quarter for that East Coast hurricane. We still had all three months of the quarter up slightly in volume as compared to the prior year quarter. This represents a reversal on what had been a downward trend over the past couple of years.

Coupled with that and offsetting that, though, has been a rate pressure throughout the years as a result of the MPPR reductions, Medicare reductions, and a slight increase in our overall Medicare mix [of the past.] Attribute this to the fact that in a down economy, most patients with Medicare also have supplemental insurance; and, therefore, have minimal out-of-pocket expense for their treatment, while patients with PPO and commercial-type plans have greater personal economic responsibility for their care which can be disruptive in a down economic cycle.

The net effect of our volume growth with the rate impact that Larry earlier described still allowed for solid top-line revenue growth of about 12% for the quarter and a similar percentage for the year-to-date period. This quarter is a combination of the revenue impact, as Larry described earlier from our osteoarthritis franchisee, single franchisee, and bad debt accrual from that same franchisee coupled with the rate pressure created a more pronounced effect on our margins in the quarter.

In response, we've taken back a good part of that territory, the OA territory, from that single OA customer, and we are in the process of reselling those markets in smaller portions and at a higher expected price than we had sold them for originally.

Interest in this program and overall demand in the program and services remains very high. While unfortunate in the timing, coming at the end of the quarter with essentially no time to mitigate, we feel confident in our ability to remarket the territory and continue with the successful roll out of the OA program.

And currently, we're making further adjustments in our staffing models within the present rate environment which includes the possibility of additional reductions in 2012 fiscal year. Staffing reductions have been started, and we expect them to largely be complete over the next month or so, with some severance possibly carrying into December as well. This will occur across our network of facilities, although generally will avoid the most recent acquisition which is very well positioned from a staff to (inaudible) perspective.

I think it's important to understand that we're working closely to further align all these elements with the current environment which continues to have pressure, and at the same time we are creating efficiencies and adjustments in the field and further efficiencies in the home office as we work to hold down our costs.

Our OA program is going to continue to grow, but we will need some time in order to remarket and resell this territory. And if you remember, based upon how we have to recognize the revenue for the sale of the new territory, the revenue gets spread over a three month period. And so we have adjusted our year earnings for 2011 accordingly, although we do expect to be able to successfully remarket and resell this territory.

Before we open things up for questions, I'll point out that throughout this difficult economic cycle of several years, we have not had a down year yet, and we expect to address any of these challenges and opportunities head on so that we might continue our positive growth trajectory. As Larry mentioned, even with the challenges we've seen within this quarter, this is still the best third quarter we've had in the history of our company.

Further, our development this quarter was excellent with 8 de novos, which, of course, create a bit of a near-term drag for us, but in the long run, provide a very nice earnings and cash flow dividend over time. Coupled with that organic expansion, we put our very clean balance sheet to work in this quarter to bring home a terrific deal with great partners in what started as a 20-facility network in a very desirable and expandable market area. Since that deal closed in late July, we have a couple of new facilities already open and several more in development which will further fuel our growth going forward.

All the acquisitions we've done in the past 12 months, giving us about 40 new acquired centers, are doing extremely well and we are very proud of our association with these fine partners which complement very well our current strong network of de novo and acquired partners throughout the nation.

Finally, I will say that our team and our partners are committed to growing our company and addressing the opportunities with the same vigor we have employed over past few years. We appreciate your interest and involvement, and we expect that we will have additional questions surrounding our OA program and other aspects of our business. So with that, we'll open it up for questions.

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

Hi, Larry.

Hey. Good morning, guys. Hey, just to clarify, so the $0.04 hit for the OA default, did that also take into account sort of because I imagine you had lower corporate expense, and obviously lower minority interest expense because of that . And I guess because I imagine you had to you perhaps backed out some accrued incentive comp, and clearly the minority interest was also lower because of that. So does that take those two factors into account as well?

Yes, Larry. By the way, I just got a message that people are having trouble hearing me. So I'm going to move this speaker just a little bit. But, yes. There are a couple of ways to look at it. We said in the press release, the impact is $0.04.

Right.

And you're right. We did have lower incentive comp accrual because of the lower earnings guidance. As you know, a big chunk of our incentive comp is driven by our earnings per share. But again, as I mentioned during my talk, the actual swing, if you want to look at it that way from the second to the third quarter, is like the $1.7 million, between the (inaudible) of the reduced contribution on a margin level.

Right.

Take out the minority interest, which in this case is a 40% minority interest, and use a normalized tax rate, the swing from that item alone is over $0.05.

Okay.

So depending on how you want to look at it, we probably would have reported otherwise. If this had not happened, we would have reported, in my estimate, $0.36, $0.37 for the quarter.

Got you. Okay. And then I guess looking out for the full year, so you're basically lowering numbers $0.07 to $0.08, if I take that top and the bottom of the range. Is it fair to say that (inaudible) $0.06 is from this, so the remaining couple of cents is really just a tweak and is that sort of just the pricing pressure?

Yes. You're right. Yes. $0.06 is from the OA default, and then $0.01 to $0.02 is really based on slightly lower PT margins which are primarily as a result of the (inaudible).

Right. Okay. And then, so revenues were sort of in line with my estimates and maybe not internally with yours. But I'm just curious, did the higher salaries or the percentage of revenues, is that really just tied into the lost revenue -- or primarily tied in to the lost revenues from the center?

Yes.

No. It's not. It's not directly affected. I mean, our overall operating margins certainly get impacted from that. But our salary percentage against revenue is particularly impacted by our net rate reduction. Our net rates is below our --

Okay.

-- what it was this time last year. We're in the process -- we've been in the process of addressing that. Largely the reductions that we've made thus far, not exclusively but largely, have been in the form of nonclinical, nonlicensed personnel.

Right.

Some of those clinical. We're to the point --

But they're all on the PT side. It's not on the OA side.

Yes. It's all on the PT.

Okay.

We're to the point now where we're beginning to address some of our licensed clinical reductions where we can make adjustments without impacting care. We've got to get our efficiencies in line with the current environment, and we're working on that aggressively.

Okay. And as you look out, I mean, obviously, we never know what's going to happen with the government, you know, reimbursing on the Medicare side. Do you see sort of some increases at least on your private side hopefully offsetting some decreases on the government side, or how are you viewing that?

Yes. You know, I think we've seen one or two private companies, and now beginning in 2012 they're going to employ a modest MPPR reduction. We've done the analysis on that, or we've started the analysis on that. This was pretty recent. One of those we think we can forestall for a little while because of some contractual provisions. But I think at best it's going to be a neutral environment next year. But I do think we'll continue to see some pressure. The rate for Medicare is a little bit up for grabs. I think on the low end it looks like 2% from the super committee with potentially some adjustments in the geographic index. And I'm not sure whether that will make it better or worse.

Okay. Okay.

I can tell you this -- in our budgeting process, we're not assuming rate increases. We're actually budgeting to a small rate reduction and staffing accordingly. If rates turn out to be better than that, it will only benefit us.

Right. That's an overall thing or is that just on your I mean, in other words, your overall assumption for net revenue per patient is down?

Well, we're using that for budgeting purposes. It may flat to up.

Right.

But nobody knows at this point, and you can't

Absolutely.

In this environment, you can't assume a rate increase.

I agree. Okay. Excellent. Thank you very much.

Your next question comes from the line of Brian Tanquilut with Jefferies and Company.

Hey, Brian.

Hey. Good morning, guys. Chris, you touched on this quickly, clinician efficiency. If you don't mind just sharing with us, you know, where that is right now and what how much more we can squeeze out of the clinicians in terms of average visit per day.

Yes. It hasn't you know, we've been flat this year, too flat. Now we have two measures. We have a licensed clinical measure which looks at the number of patients our licensed staff sees, and then we have an all-in measure which includes techs and other things. We've moved the needle on our all-in group. We haven't moved the needle enough on our licensed group. And it's just under 11. It needs to move with the staffing adjustments that we have on the books that are very specific, that are occurring real time. Assuming that we don't see a reversal in our volume trends, we're going to mechanically move that number. It needs to go up. It needs to go up above 11.5.

So are you still providing incentives for because I know about a year ago, you were providing incentives for clinicians to hit 12.

Yes. We are. One of our challenges quite honestly is a good portion of our facilities are in that in between no-man's land where if they are a start up or a young facility, we only have one clinician. and so there really are not any efficiencies gained by trying to re-jigger staffing. You can only grow volume in those situations.

And then in our bigger facilities is where we're really focused on trying to get that (inaudible) and to be very efficient. We are still providing the incentives we had provided before. And we're looking creatively at other things to stimulate our partners to really focus on staffing efficiencies and bottom line growth rather than just top line expansion.

Okay. And then, Chris, you guys have done a pretty good job in the last few quarters, improving the mix, trying to get more driving the business on the workers' comp side and really bumping up the revenue-per-treatment average. So is that something that's starting to taper off in terms of gains that you can drive in the mix? Or is that just did you just slow down during the quarter?

Well, Larry, you want to walk through what the mix is?

Yes. I'll give you the mix .

and then I'll address that.

There's not a lot of change from the last quarter. Private what we call private -- was 23.2%. Managed care was 28.6%. Worker's comp is 17.4% which is better than a year ago and actually a little bit better than second quarter, but lower than the first quarter. Medicare was a little higher, as Chris mentioned. It was 23.5%. Medicaid was 2%. And the other was 5.4%.

So we've seen a little bit of a shift toward (inaudible) payors as I described earlier. I think they're the heaviest benefitted and the least out-of-pocket cost.

We're still seeing on the fit-to-work side a lot of very good solid company-based contracts that are just rolling in. And so I don't think we've still hit stride with that. We're going to spend a lot more time looking at specifically what throughput is on some of those recently signed contracts and see what we can do to further maximize that. But we're getting some good company traction. We just have to figure out how to accelerate that a little bit.

And then, Chris, this is the first time that I've seen your same-store visits come in below the negative -- better than the 1% number. It's been tracking anywhere from is 1.8% to 3%, 4% negative. So do you think we're starting to see an improvement in that regard just in terms of same-store visits?

Oh, I hope so. I'll tell you specifically by month in the quarter we saw and this isn't exactly same store because it involves all of our facilities as we measure visits per clinic per day. But it was up a little less than a half a visit in July. It was up three quarters of a visit per clinic per day in August. And then we got hit with some weather on the East Coast, I think September, and it was up a little less than half a visit in September over the same month prior-year period. So we're working hard at it.

We just had a national sales conference with about 75 people in here last week and sent them back fired up with some new tools and some new things. And we've been very focused on it. It's been hard to produce. But, you know, I'm hoping we continue to slug it out and move it in the right direction.

Got it. And then, Larry. Just clarification, last question for you. On the OA write down, is that the last of the write downs that we're going to see, and basically we're just taking out all of the revenue for the remainder of the year? Is that how we think about it?

We talked about it. We're still in negotiation with the franchisee, but we didn't want to carry the last thing that any investor wants to hear is the same bad story more than one quarter. So we wrote off every dollar of the receivable and we reversed, did not recognize any revenue from the franchisee. And we assumed going forward that we wouldn't get any revenue from them. So this was a really unusual case. That franchisee was literally about 10 times the size of our second largest franchisee. So it was really a case where you had a portfolio and you had a huge position in one stock. And we've taken care of that position.

Yes. Let me speak to that for a minute. This particular franchisee had and they still have a number of centers that are open and will continue to and we've talked to them. They want to grow. But we need to rationalize. The number of markets that they had bit off, some of those, more than half, they had paid for. We had a receivable on another group of 20 markets that we were expecting payment and were told throughout the quarter that we would receive payment on. They had some investors into their funds that did not come through. And so that impacted the new territory. And that was revenue that had been booked that we felt at the time was good.

And then based upon some internal challenges that they had and some staff turnover on their side that we're -- we don't influence. You know, unfortunately, we're not involved in that. And their billing and collections department, they got behind on their cash flow. And, therefore, the roll out of their new facilities, which were proscribed fairly sequentially and in pretty short order and the payments for those facilities began to accumulate. And so that was part of the receivable, too. And it's just a case of, I think, unfortunate circumstance internal to their group.

They have -- their outside investment group has come in and in the process of taking control. We're in dialogue with them. We'll work it out, and then we'll resell the majority of that territory. And then as they get their feet under them and they want to expand further, we'll be able to do that on just a small incremental basis.

In the meantime, demand continues to be solid, and we feel like while it will take us a little time, we can remarket these and move these into smaller bits and chunks, maybe a more chewable size, to a number of different groups that are currently interested.

Got it. Thanks, guys.

Thank you.

Your next question comes from the line of Brooks O'Neil with Dougherty & Company.

Hey, Brooks.

Good morning. I just want to follow on with that conversation, Chris. So would you say it's possible that you've been overly conservative in the way you've handled the write-off?

No. I don't think, Brooks. I think we've been appropriate. I mean, I don't know how to be overly conservative. We did what I think we did the right thing. We took out the revenue that we had recognized that we will not get. And we reserved the rest in bad debt. Now, we do have the ability to resell these. So we'll begin the process of that. But, no. I think what we've done I think what Larry and Jon and the rest of the team did was entirely appropriate, neither conservative nor aggressive.

Obviously it sounds like it's a very unusual situation. So you have nothing else that's even remotely like it and probably going forward, you're not going to have anything else that's remotely like it. But you still see good opportunities in that market?

Yes, we still see good opportunities. We haven't had anybody default in the past. We have 25 facilities open.. And we have an opening scheduled that's going well. And this was, unfortunately, a collection of circumstances outside of our control with a fairly large franchisee. And it hit us late in the quarter. Had it hit us earlier, we may have had a chance to mitigate some of it. But it just came very late. No, I think the opportunity is very strong, continues to be strong going forward.

Good. Can you talk just a little bit -- I don't how much you're willing to talk about your pipeline on both the acquisition side and the new center development side?

I'm always reticent to talk about it just because we're lumpy. You know, this deal that we just completed in July has taken us a while to do. In fact, I contacted them a few years ago. And we've been in intermittent dialogue since. And finally able to get them across the line. They're great guys. So I'm not going to get into predicting when the next ones will come. We currently are in discussion with a variety of different people at different stages. Organically, this was a good quarter for us. We had been a little slow in the second quarter as kind of a catch up. We expect a solid organic year. And some of these deals are spinning out additional satellite opportunities. So I think you can expect, you know, more of the same type portfolio growth over the next few years. But it's going to be lumpy as it has been.

Sure.

The last 12 months, we've added approximately 40 locations. And that may be off by one or two. I'm trying to remember exactly between three deals, two in December, the one in July. We have a couple of little things we're looking at right now that potentially would be bolt-ons to existing partnerships. And then we continue our organic process which has been pretty steady when you look at it over the years. So more of the same.

Yes. Okay. That's good. And now I'm going to tread into some water I'm not 100% familiar with. But obviously, the home health industry has been rocked by issues with Medicare and reimbursement

Yes.

and over too many visits, I guess. I'm curious, is the reimbursement pressure or concern you feel tied to that or is it separate? And if so, can you give us some background on the thinking cutting reimbursement for you guys?

It's completely separate. And for those folks that follow the home health industry, there were some specific thresholds that were alleged to have been targeted and points of a certain number of visits where there was additional revenue incentive to get to X number of visits. And that doesn't exist in our world, in the outpatient world. Most people have a particular plan. That plan may have an annual visit cap. It has a copay. It has a deductible. And the home health reimbursement is particularly separate.

And has a huge, much higher concentration of Medicare.

Right. Very heavily weighted to Medicare. So --

[From] the home health you mean.

Home health. Yes. Those are independent. No, the reality is is that CMS is under some pressure to figure out sustainability of the physician fee schedule and get a fix on that side. And then there's general pressure on the government to get an overall fiscal fix on the total spend rate across not just healthcare but many different parts of the government. So we'll have to see how --

And home healthcare, though

(Inaudible)

-- I'm just guessing, but I've got to believe 75%, 80% of their revenue is Medicare normally?

Yes. At least.

Yes. And so ours is 23%. Home health reimbursement rates even for the same course of treatment were different than for outpatient physical therapy. There is no incentive to see X number of visits with Medicare patients for us. So I mean, it's really apples and oranges.

That's good. Thank you very much.

Next question comes from the line of Jason Stankowski with Clayton Partners.

Hi, Jason.

I just had a question on the bad debt expense, is that really just revenue that you recognized already that you're writing off? We're not loaning these guys money, right? Or are we investing alongside of them?

No. No. No. None of that.

No. That was revenue from prior quarters written off. That's all our that's the only kind of bad debt we have. We don't lend money to any franchisees.

Okay.

This is not, you know --

It just says, "bad debt," but it's really just foregone, already recognized revenue.

Correct.

Correct.

Okay. And can you talk about what the circumstances were a little bit that, you know, without naming names or if you want to, but just with the model being as compelling as it seems to be for people, what made them get upside down?

Yes. Well, I'm not going to name names. I don't think that would be right nor fair. So going to stay away from that. But two primary things -- we give all of our franchisee partners thorough training and a playbook. And that involves clinical training, clinical execution, which they've done well with in most respects, and then back office -- billing, collections, coding related for those very same clinical things. They, unfortunately, hired somebody that had healthcare billing experience, but hospital billing experience, who believed that she knew better about how to code and bill for this. So they didn't use the information that we had provided. And virtually 100% of their claims were rejected.

So cash flow issue?

It became an acute cash flow issue. And then overlaid with that quite unfortunately were a series of investors that they had coming into their fund to fund this new territory expansion that didn't end up writing the check. And I don't know whether that was because they felt or saw their cash flow issues or some other issues. We weren't part of that either. And the end result was those two things intersected, they got behind. And then it became clear that they weren't going to be able to turn it around. So they had some changeover on their team. They brought in a new billing person. They brought in a new CFO. We're working effectively with them now. So there was some internal turmoil on their end that created this problem that ended up impacting everybody.

So nothing with regard to the efficacy or the drugs being used or the protocol or anything? Just purely a mechanical cash flow and operations snafu it sounds like.

Correct.

And with 20/20 hindsight that their roll out schedule was much too aggressive.

It was way too aggressive.

And so again, our typical franchisee contract''s for one to five locations or territories. I mean, that's manageable, especially if you're a -- if it's an add on to an existing practice. But when you're doing them de novo, everybody knows startups aren't that easy, and they were just too aggressive.

Okay.

And we had prescribed fees that were the monthly fees that began to roll out the way that we did this contract. And it gave us some apparent protection at the time. But those were according to a monthly schedule and when they got in arrears they slowed their opening schedule down until they began to have fees due where they didn't have centers open either and just -- that was the smaller part of it.

Snowballs.

All of those things ended up intersecting at the same time.

Okay. Well, good job on the other side of the business, and hopefully that corrects itself here over time. Thanks.

We're working on it. Thank you.

Thanks, Jason.

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

Hey, good morning, Mike.

Good morning, guys. All right. So I just want to make sure that I understand in terms of modeling a couple of things. On the bad debt, Larry, you know, historically you guys have been kind of around 1%, 1.5% somewhere in that range. You know, as we look at, I guess, Q4, and then next year, and I know you're not giving guidance for next year, but just generally speaking, is 1.5% for Q4 and going forward, is that roughly the range? Or now with this, you know, the physician services business maybe there is a little bit more risk. Not necessarily that you're going to have something like this happen in this scale. But, I mean, what's a good way to think about this.

I don't think it will be I think the 1.5% is if you take this out, we weren't even at 1.5%.

Okay.

So if you look at the average age of our receivables which is in the press release, it's 48 days. That's exceptional for an outpatient business like ours.

Okay.

So I think this is a one timer.

Okay. All right. Great. And then on the and this, I guess, is more revolving around well, I guess, Q4 and into next year. In terms of the corporate office costs, I understand the incentive comp piece. I mean, should Q4 corporate office costs essentially be somewhat similar to Q3, or does that bounce up closer to $6 million for the quarter?

I think it will be a little bit higher, but it will be lower than a year ago. I have to back into it. But, again, the big swing with incentive comp accrual which will be -- frankly we'll pay out less incentive comp this year than last year.

Right. So maybe, and again, I'm just kind of round numbers. So maybe it will bounce up to like 5.5% and then it returns to kind of that 6% range per quarter next year?

Really pretty closely linked to where we are on the EPS side. It depends where in that range we fall. I'm a little hesitant to put an exact number on it.

Yes. I don't think it will be 6%. It will be less than that. But I think it will be a little bit higher than the most recent quarter.

Yes. I do too.

Okay. All right. Okay. And then, I guess, Chris, can you just comment on what your expectations are for the resolution of physician fee schedule. I guess, timing and just ultimate resolution. Where do you think these guys come in?

On the physician fee schedule?

Yes.

I don't know. Again, we're back to predicting the government. I don't think you know, I saw a statement come out of CMS earlier this week, the head of CMS who said that the country could not sustain the physician fee schedule reduction that's on the books statutorily. And interestingly, in the last week, the analysis they put out had that reduction which is and I don't have it in front of me right now. It was on the books for 29%, I think. It was about 5% lower because the growth rate had slowed. So there was some mitigation of that just based upon the spend and the growth rate. So the head of CMS said, "Listen, this can't happen. You know, we need Congress to work on a fix." So I don't think it's -- I haven't talked to anybody that thinks that that is going to happen. What the super committee does -- I think it's up for grabs. I really don't know.

I think there will be a reduction next year. I think we've seen that pretty much across most of the specialties. The ones with the most significant out-of-whack alignment, like home health and maybe long-term care and some other areas, have obviously gotten hit already. But I expect that we'll see something.

And then I also expect that they'll come up with a physician fee schedule fix. MedPAC has made a proposal that has been out now for a little while that addresses the entire physician fee schedule over the next 10 years. And for us, it would be a year one downward reduction if that were enacted in the 5%-plus range and then a freeze over a 10 year period. Whether that happens or not, I don't know either.

You know, if the government did something like that, whether it's for us or other sectors, that lets management and companies plan -- the problem is the way it works now, we literally don't know at the earliest we know in November what reimbursement will be for the following year. And in some cases, it's taken them until March to get it down. And it makes it very difficult to plan your business.

And the challenge this year is they didn't -- weren't able to figure out how to pay the MPPR reduction until almost five months into the year. And so we had billing and cash flow disruption (inaudible). And that's been true across the broad range of provider groups.

We caught up, but a small provider, he doesn't get paid and has, [say,] a higher Medicare percentage than us just gets absolutely killed during that period.

So any type of stability or forward continuity regardless of whether that was modestly down or flat or whatever, gives us the ability to long-term plan and adjust, as Larry said. And it's a much better environment for providers if they do that. Whether that will happen, I don't know.

Okay. All right. I guess a quick housekeeping as well. Usually I think Glenn gives this. But do you guys have sales reps and sales rep coverage across facilities by any chance?

Yes, we've got it. He gave me his notes. Let me find it. Sorry. It will take me a second.Yes, I've got it here. Okay. As of the end of the quarter, we had 78 sales reps including commission only covering 326 locations; 73 of those are traditional reps, 5 commission-only. So the number of commission-only reps has declined which is what we expected.

We just had these folks in last week. It's a good-looking group. It's a very capable group. They're fired up. And we'll continue to add reps. For instance in this new market that we acquired in July with 20 first facilities, we've added our very first rep. We've brought in -- they had an existing rep there that does some other things including a sports talk radio show -- but we brought both of those people in. We'll add several more in that market over some period of time. And so we continue to grow our base in that regard. And we'll do that opportunistically.

I guess it's fair to say then this, at least on the sales side, you know, reductions are kind off you know, unless they have a very under-performing rep. I mean, generally speaking, you're not looking at that part of your business in terms of staffing reductions.

Yes. We make adjustments from a performance standpoint --

Right.

-- pretty regularly, particularly when there's a pattern. But on a wholesale basis, we're going to continue to grow in this area. We're not going we don't look at this as an expense line. These people make a difference, and we're going to keep it.

And just I just want to make sure I understood what you said on staffing reductions. Are you essentially saying you kind of feel like you'll have right sized your business by year end?

I think it depends on how much more the reimbursement environment changes. I think we're working hard to do that and to come up with some additional options to the revenue. We have some of our facilities where we literally we can't right size other than to drive more volume.

We started making cuts a couple of weeks ago. And as part of the budgeting process, that's a huge focus for us. It's got to be in this reimbursement environment. So I think we'll have most of it done -- Chris, do you agree by the end of the year?

Yes. We have a we're not going to give a number, but we have a good chunk that each of the regions has identified on a very specific basis. And we'll have that done before year end.

And as Chris mentioned, what we're talking about primarily are people, you know, at the front desk or (inaudible) or techs or aides. Though we'll have to make some licensed clinician cuts, that's not where most of it's coming right now.

And most of that (inaudible) part-time labor group where we just haven't we haven't as effectively as we needed to exactly matched that part-time group to the volume that's in on any given day. It really needs to be much more surgical than it's been.

And very last one, I promise. Larry, can you remind me, how much stock do you have available to purchase?

It depends on the price. I think it's little over 5 million. Actually we'll have those figures in the Q. I just don't have them in front of me.

It's around 5 million.

Hang on a second. You know what? I think I do have it on me. Let's see here. [5.88] million is how much we -- after the end of the quarter that we still have available that we can purchase.

All right. Very good. Thanks, guys.

Thanks, Mike.

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

Hey, Mitra.

Hi, good morning, guys. First, just a couple of questions on the reimbursement side. Chris, I know you mentioned, you know, it's still not clear exactly how it's going to play out. But you've already started to make some staffing reductions, et cetera, in anticipation. But, as you look forward to next year, et cetera, you look to grow the net worth in terms of expansion, the acquisitions or de novo, are you more inclined to look at the revenue mix of the new clinics? Or is it going to sort of slow down the expansion in any way until you get more clarity?

No. We've always looked at the revenue mix. You know, we stayed out of deals in areas, particularly on the organic side, but really across both acquisitions and organic expansion, when they've been tilted heavily in one direction that gets us out of shape in the portfolio. So specifically, you know, we've not done much of anything in Florida in the last few years. It's been quite some time and in other markets that are heavily penetrated with either Medicare or Medicaid. So that will continue. That's really not a deviation from what we've done here, though, for a long time.

You know, on the flip side of that -- as you know, a couple of our acquisitions that we did, they had average [net] rates in the 80s versus ours that's over 100. So there are cases where when you take out their Medicare mix, there's still room for improvement on the commercial side. So I mean each deal is different. But we do an extensive analysis of their payor mix.

(Inaudible) the payor mix., the only pressure you're really seeing is on the Medicare side. Is that true?

You mean rate pressure?

Yes.

Well, you know, I wish it was totally true. But we have a couple of commercial payers that have announced they're going to employ an MPPR reduction in `12. And one of those we have fairly limited exposure with in the markets that they're rolling it out and another we have a little broader exposure. So it isn't just limited to Medicare at this point.

Okay. And just a quick followup on the issue on the franchises. How many other franchisees do you have? And again, it just seems like the message is the OA business, itself, is fine. It was really just a specific issue related to one operator and you feel very comfortable in terms of continuing to grow that segment for you?

Yes. We have 25 open right now. We have somewhere between 60 and 70, I think, total in terms of licensed markets. We lost the better part of, I think, 35 or 36 markets that we expect probably to re-contract. So we had just over 100 in total. We'll resell a chunk of those as we talked about earlier. We've got about 25 open at current, you know, today.

Okay. And again, there shouldn't be any issues in terms of litigation, et cetera, from this I assume?

There sure could be. We're not planning on it. But there could be. You never know what somebody's going to do.

Okay. All right. That's it for me. Thanks again.

Thanks, Mitra.

You have a followup question from the line of Brian Tanquilut with Jefferies and Company.

Hey, guys, thanks for taking this follow-up. Chris, on the de novos, you did pretty well this quarter with 8 additions. Are you accelerating de novo? Should we expect that level in Q4 or early 2012 as well?

You know, again, we tend to be a little lumpy. We probably had planned on a couple of those moving into the second quarter and not roll into the third quarter. We had a couple of landlord issues. We continue to do as many de novos as we can possibly do and have them maintain the quality that we expect. I wouldn't necessarily expect them to accelerate. If we can do that, great. We're working hard. But it's --

Yes. We did 16 through 3 quarters, which is obviously a little over 5 a quarter if you look at it. Looking back, we normally do around 20. So I agree with Chris. I think it's just that we had more in the quarter, but it's not going to be I still think we'll probably finish up close to the average.

Okay. Got it. And then, Larry, just piggy-backing on one of the earlier questions about being able to adjust the cost structure. Clearly, you guys have started doing things already to address the cost issues on the PT side. You talked about staffing. Is there anything else outside of staffing where you can potentially flex?

We've already done --

Yes. Well, if you look at -- the nature of the outpatient PT business is that your field -- your people costs are well over 50% of your cost. So if you're going to attack something, I mean, that's the lion's share of your costs. We went back over the last couple of years and renegotiated a lot of leases, you know, since the down real estate market and the recession. We did a number of other things.

We aggregated our supplies.

Yes.

We cut our costs pretty significantly there. But those are things if you remember the last couple of years, we had some very, very solid margin expansion as a result of some modest net rate increases coupled with some cost reductions in efficiencies, both on the clinical side and the cost reductions that Larry mentioned on the real estate and the supply side. And now we have those reductions in place. We just have a tighter net rate involvement. So we're feeling some of that pressure.

But honestly in terms of dollars, the biggest dollar opportunity, unfortunately, is with people.

Okay. Got it. And then, Larry, you mentioned last question on the budget, budgeting that you're doing. So the other day we saw the physician fee schedule released, [basically] announced, and it seems like if you assume flat physicians' fee rates, whether there's an [SGR] fix or whatever it is, you are 4% above everyone else. So APTA -- first, Chris, has the APTA commented on the physicians fee schedule yet on the final rule? And then, Larry, am I right in thinking that you're not assuming any increase at all from Medicare even with the final rule out today?

Well, everybody's talking about it. Actually, APTA did have something. But their thing is so late, physician fees, the mandatory cut or the statutory cut, which I don't think is probable.

Yes.

You know, you're right. If they kept everything else flat, we could actually get a modest increase in that rate. But we're not assuming that because I think honestly the government is under too much pressure. I think that would be a surprise. (Inaudible)

Got it. So you're being conservative about it. All right, got it. Thank you so much.

At this time there are no further questions.

Okay. It's been a long call. Thank you, everybody. Larry and I are available if you have additional questions after the call. We appreciate your attention and support. Have a great day.

This concludes today's U.S. Physical Therapy third quarter 2011 earnings conference call. You may now disconnect.