US Physical Therapy Inc (USPH) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the US Physical Therapy Second Quarter 2012 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 Remarks). Thank you. Chris Reading, you may begin your conference.

Thank you. Good Morning, everyone, welcome to US Physical Therapy Second Quarter and Year-to-date 2012 Earnings Call.

I'm on the road today, but with me on the call are a number of important people, including Larry McAfee, our Executive Vice President and Chief Executive Officer, Glenn McDowell, our Chief Operating Officer, Jon Bates, our Vice President and Controller.

Before we begin today's quarter and year-to-date results review, I'd like to ask Jon to please 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 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. Okay, this morning I'm going to start out and go through a number of things, to help you better understand our performance, then I'll ask Larry to review the financials in a little greater detail.

In our core PT business, we should discuss a number of positives including this quarter our visits per clinic, per day, increased from our first quarter, which was already very strong, and with nearly a full visit per clinic, per day, better than our quarter two performance in the prior year period.

This helped to improve productivity, which increased approximately seven-tenths of a visit from the prior year period, and came in at highest level we've seen, so far, for our Company, moving us closer to our previously stated goal of 12 visits per clinician, per day. Additionally, we were able to improve our net rate per visit to 10,565 for the second quarter, which was a solid year-over-year improvement, as well as the sequential improvement from the first quarter this year.

Salary and related costs at the clinic level was well controlled and actually decreased from quarter one 2012 to quarter two 2012, despite growing our facility base, which included an acquisition we completed earlier in the quarter, which added seven locations and a couple very capable and highly motivated partners. In Larry's portion of the call, he will discuss the financial performance, particularly related to the salary and other related costs in a little bit greater detail.

Our corporate costs were also well controlled coming in at 10% revenue for both quarters. Our work comp initiative, Fit to Work, let me just say that Ray and his team are doing an amazing job securing contracts and relationships for our partnerships across the country.

Our partners have bought in and working hard on this initiative, as well expanding as extending their relationships and capabilities locally. Our local, regional, and national relationships continue to expand with names that you would recognize such as Chrysler, Toyota, Pottery Barn and General Mills just to name a few of our recent relationship successes within our Fit to Work program.

Our cash flow in collections have been excellent with the [ADO] drop to approximately 50 days at the start of the year, down to 45 days in the month ending June. Despite the Mid-Atlantic acquisition completed several months ago, which required approximately $6 million in cash, we have been successful in reducing our credit borrowings from close to $27 million in January to approximately $20 million at the end of the quarter in June.

Additional positives. Same store revenues have definitely improved this year. so far, up 4.6% on the year, and moderating slightly in Q2 to follow a more normal seasonal pattern as weather was eliminated earlier -- as an earlier beneficial factor at the beginning of the year. So for Q2, this resulted in a 2.8% increase for the second quarter, which is a nice increase for us so far this year.

Shifting gears a bit, let's discuss our physician services business, which was the reason for our earnings miss this quarter. First, let me say that the clinical efficacy of this program remains excellent with terrific patient outcomes. This is a business in its infancy, and as a result will be a little bit lumpier in its trajectory than our core physical therapy business which is very strong, stable, and steady.

In order to better under the quarterly path of this program from a gross margin prospective, we have included a table in this quarter's earnings release. We're making something changes with respect to our target franchises in an effort to better position this program for continued future success.

Part of that has been to enlist the help of outside sales groups to help us better identify qualified medical practices where these programs can easily be plugged in to create immediate and positive practice impact. Toward that end, we have most recently seen some new territory sales -- excuse me one second. Apologize for my voice. To well-established medical practices.

This is important as it enables us to more efficiently launch these programs within established groups that have the necessary billing collections and related to core pieces in place, making for a more rapid progression to success.

Taking these changes into consideration, along with the current performance and trajectory of our physical therapy business, we have carefully modeled the rest of the year, and have updated and increased our guidance accordingly, as discussed in this current earnings report.

Larry will cover this in more detail in a few minutes. Let me close by saying I have great confidence in our team. In our partner group, in our dedicated therapist, as well as our corporate support team to execute on these focused areas as we have in the past over a great many years.

The environment, right now, gives us a significant edge over smaller, less resourced practices, many of whom are looking for a partner to help shelter them from the current and coming environment, which will be increasingly unkind to under-resourced and under-capitalized providers.

We will make progress with our physician services business, which is going to be lumpy for a little while until we can get a bigger base of medical practices in our facility base across the country. Larry, if you would, please go ahead with the more detailed financial review.

Thanks, Chris. First I'll talk about the results year-to-date, then I'll go through the more recent quarter.

Net revenue has increased 8.5% from $116.7 million to $126.5 milliondue to a 10.4% increase in patient business and increase in our average net rate to $105.10 from $104.67.

The increase in physical therapy revenue was partially offset by a decrease in other revenue of $2.1 million, due to a reduction of revenue from physician services. Our total clinic operating costs for the six months was 73.8% of revenue. Clinic salaries and related costs were 51.7% versus 52.1%. Rent, clinic supplies, contract labor and other costs were 20.1%.

I want to note that the entire increase in operating costs, both for the year-to-date and the quarter are attributable to new clinics and acquired clinics, so it was not -- it affected the margins accordingly. It was not that we had seen an increase in cost in our mature clinics. The provision for doubtful accounts was 9 -- 1.9% versus 1%.

In the first six months of 2012, as Chris mentioned, we put a schedule in there so people can see how the PT and physician service businesses did, respectively. The gross margin from the Company's core physical therapy business increased 12.5% or $3.7 million, and this was partially offset by $2.6 million reduction from physician services.

Our corporate office costs as a percentage of net revenue were 10% year-to-date as compared to 10.7% a year ago, so we've seen continued improvement with regards to that. Our operating income for the first six months of 2012 rose to $20.5 million, our net income was $9.2 million as compared to $8.6 million, and our earnings per share year-to-date has grown to $0.79 versus $0.72.

Same store revenue do novo and acquired clinics open for a year or more increased 4.6%, due to a combination of higher same store business and an increase in the net rate. I'll now go through the quarterly results.

End of second quarter 2012, net revenue increased 6.8% to $64 million, due to an increase in patient visits of 8.6%, and an increase in the average net rate to $105.65,as Chris mentioned, from $104.77. The increase in revenue from the Company's core PT business was offset by a decrease in other revenue in $1.3 million in physical services.

Total clinic operating costs were 73.4%, an increase from a year ago, but as I mentioned, that was due to the acquisitions we've done at the de novo clinics. Our provision for doubtful accounts for the period was higher, but it was still within our normal range of 1.2%. I don't think this is a trend. I think you're going see us, as we usually do, average somewhere around 1% to 1.5%, give or take a few basis points.

In the second quarter of 2012, the gross margins from the Company's core physical therapy business increased by $1.6 million or 10% to set a new record, but unfortunately that was almost entirely offset by a $1.5 million reduction from physician services.

As Chris mentioned earlier, corporate office costs were10% of net revenue both in the second quarter of this year and last year. Our net income and earnings per share were flat at $4.9 million and $0.41, but I'll note that's still a reported quarter if you look at both the second quarter of last year and the second quarter of this year, those are the best two quarters the Company has ever have.

Our same store revenue increased 2.8% for the quarter, as both the visits and net rate increased. In the earnings release, the Company announced that we're raising guidance for 2012 to an expected range of $17.7 million to $18.4 million in net income, and $1.49 to $1.55 in diluted earnings per share. The Company also announced a regular quarterly dividend of $0.09 per share that will be paid on September 7th to shareholders of reported as of August 20th.

Thanks, Larry. Operator, I think we're set. We'll ask you to open it up for questions.

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

Hi, good morning, guys. Chris, just a quick follow-up on your -- on the acquisition environment or even just organic environment openings. Sounds like maybe there are more rising amount of quality physical therapists looking to partner up, did I read that correctly?

I think we're seeing -- in fact, our phone is ringing pretty hard -- what I referenced in my earlier statement was just smaller practices looking to partner and particularly small and under-resourced practices. One of the things that we did earlier this year and it's bearing fruit, is we took our top partner groups through a multi-day training program on how to prospect for and begin to think about integrating and acquiring small little tuck-in deals.

These are different than our traditional larger, true acquisitions. We've begun to do a number of these little smaller deals and tuck them into our existing practices. I think that will only continue to grow. The broader environment is as it has been. I think there are plenty of people looking to -- for what the future holds. In terms of purely organic, new individual people, maybe working at the hospital or working in a local private practice, that continues to be about like it has been.

I think this year will be about like we did last year. Again, that's a little lumpy, too. Sometimes is moves around quarter-to-quarter, but the environment hasn't changed a great deal for organic openings, not that we've seen at least, thus far.

Okay. Just touching briefly on the physician services, which I know is obviously, still a small part of your business. I can fully appreciate the lumpiness. It looks like basically, a break in, plus or minus in the second quarter is that something you're building in the back half of the year, as well?

We modeled what we think we will do for this year. It isn't a big year for us. You remember, one of the additional points of lumpiness had to do with the fact that we -- the way this revenue model is structured, there's a big initial payment, then there's a gap period until the facilities open, if they're not already open, which is kind of a shift in our model to an already open medical practice, and a focus on that.

Back to the comment. There's the big initial revenue slug and there's a gap. We had, at the beginning of last year, a few big groups take a number of territories, so the revenue slug was big, and now the process of getting those facilities open. One of the biggest had some internal trouble, really unrelated to the fact that the business model works. It's somebody that didn't do what they needed to do and there was a default, and that happened with revenue flowing in at the front half of 2011.

Then we ended up having to back that out in Q3, so the particularly for Q2 in a comparative sense, there's a lot of built-in lumpiness just with that. We think it can continue to grow, but it will be a modest contributor for this year.

Gotcha. Last question, Larry. I know you mentioned on the higher expenses were really attributable to the acquisition. As a percentage of revenue, were they skewed because of that? In other words, so you added the revenue -- did you add more costs because of that? Basically, I'm just looking at the rent and --

Let me give you a couple of figures and this will be in the 10-Q that will be filed later today. If you look at our overall increase in clinic operating costs, that's the line before rent and other, the first half of this year increased $1.6 million, but $3.3 million was the increase attributable to new clinics and acquisitions. So mature clinics were actually reduced by $1.7 million, so when Christ alluded to we've done a good job of cost control on the existing clinics, we have.

So that brought your margin down a little bit. Then for rent and others, all that increase was attributable to new clinics. The mature clinics were flat for rent, supplies and other clinic costs. To me, it's a good news/bad news situation, because you'll remember we've done large acquisitions in the past and their margins might be a little lower than ours, as an example, in the years that margins have increased significantly.

Okay. There's a good -- at least you try and (inaudible) to bring some down, hopefully due to those higher expenses. Okay, great. Thanks, guys. I appreciate it.

Thanks, Larry

Your next question comes from the line of Brian Tanquilut of Jeffries.

Hey, Bryan.

Hey, Chris, good morning. And Larry, good morning to you. Quick question. First question for you. You did a 2.8% comp in the quarter. Wondering with employment levels appearing to be flattening out, are you seeing any change in the volume trend, whether it's quarter-to-date or just towards the tail end of the second quarter?

Let me -- rather than comment on the quarter-to -date, because we tend to seasonally move around a little bit with volume, anyway. Towards the end of the second quarter, particularly the last two weeks in June, we saw a little bit of dampening in terms of overall volume. Prior to that, been very strong and very steady. It wasn't bad at the end of June, but it's off a little bit.

I don't know whether that was employment related or just a lot of pent up demand from a prior period in the beginning of summer and a lot of people on vacations. We'll have to see. I expect that we'll still have a positive same store visits in revenue year. At what level it can continue? We're in the middle of summer, it's hard to say right now.

I'll remind people that aren't as familiar with the Company. We have definite, well-defined, seasonal pattern, so typically you're going see a slowdown in summer as those patients and doctors go on vacations.

Got it.

We would typically see the beginning of a slowdown at the end of June, anyway. We hadn't -- we had a much better Q1 than normal this year, and a really strong Q2, very, very strong. So the fact that it slowed down a little bit doesn't give me great concern, but we're working on it hard just to make sure that we can continue to keep good volume growth in our facilities, and as we've talked about, we've worked on our costs and efficiencies, so we expect all of that work to continue.

Okay, and Larry, just very quickly on the same store, what's the breakdown between price and volume for the quarter?

I don't have it in front of me. I think it's in the release It was a combination of both. If you call me later, I can give you the actual data, but I just don't have in front of me. I apologize.

Not a problem. Chris, the CMS issued their physician fee proposal for 2013, last month, just wanted to hear what you guys think of that? I mean what's the -- If it goes through as proposed, what would that look like for USPh?

Larry, you and Glenn want to handle that? Brian, I apologize, I'm on the road, and I don't have the number crunch in front of me. I think from everything that we've seen so far, it's certainly good news.

Well, CMS -- this is Glenn.

Hi, Glenn.

Right now, when you look at the physician fee schedule reduction, as of January 1st, it's supposed to be a 31% reduction from Medicare and physician fee services. Now, Congress has kicked that can down the road, again, we don't know what's going to happen, but we assume that Congress will do something again this year. When you look at general geographic payments from Medicare, payments will be flat or slightly up depending on the geographic index that we're in. Depending upon what happens with the physician fee schedule, we expect Medicare to look quite good unless physician fee schedule reductions go into effect in some shape or form.

Glenn, what was the proposed rate increase or decrease for 2013 in the physician fee schedule?

If you're looking at the physician fee schedule reduction as of January 1st for 2013, it's a 31% reduction. If you look at the geographic index piece, it's anywhere, depending on the geographic index, it's about a 3% increase or rehab standpoint across the board on average.

Got it, okay. And then, Chris, you talked about Fit to Work. Just wondering, are you guys able to track how that accrues directly to your same store? It seems like you're getting a lot of good traction there. Just wondering if you can associate the volumes directly, and how you're gauging the success of that initiative?

It's difficult to track for a couple of reasons. One, because this last year we've seen a huge migration across a -- into a different billing system, so we don't have an absolute homogeneous environment from one year to the next, but we are seeing some very good volumes come from these contracts. Some are in the visit line and some are just in the revenue line, for the consulting and related services that we're performing.

Glenn, you want to talk a little bit about how we look at that, and ultimately, it flows into, primarily, into more comp revenue, although there's certainly some in other income. In these markets, just anecdotally, where we've these larger contracts, we're able to see a pretty significant change, and track that based upon a payer, whether it's at Chrysler or TPA at Sedgwick, and so -- but it's a lot of cut and paste. right now.

Yes, this is Glenn. When you look at the Fit to Work and the work comp piece, typically what we've seen, and I don't have the numbers in front of me, is we've seen an increase of our work comp revenue as a percentage from a net revenue standpoint, quarter-over-quarter, many of these contracts are on a local or regional basis with the opportunity to grow larger as we go along. We're tracking visits, we're tracking revenue. I don't have the numbers in front of me right at this point in time to be able to do that, but it does give us the opportunity to potentially grow these to a greater market as we continue to manage these services across the board.

Got it. Larry, last question for you. Free cash flow is really good this quarter. I know you've got seasonality over the course of the year, but outside of seasonality, is this sort of -- is this cash flow momentum something we should be considering for the back half and going into next year?

I don't know how far you can project it out. I mentioned on the audit committee call that we had the other day, this is the best cash flow, I've been with the Company, considered that we've increased our dividend and did an acquisition and have actually paid down debt year-to-date, and now with a slower summer period, it's been a really strong cash flow.

I don't know how far you can project it out. I mentioned on the audit committee call we had the other day, this is the best cash flow I've seen since I've been with the Company. Consider that we have increased our dividend, and bid an acquisition, and have actually paid down debt year-to-date. Now we're in -- (inaudible) with the slower summer period we have really strong cash flows.

But like from a [DSO] perspective?

We were at 45 days. When I (inaudible) the Company we were at 70 days, to put it in perspective. I don't think we're going go to 40. Maybe go down a couple of days. As more and more billing migrates online and you have less paper processing, typically, the timing gets better, plus we've been very aggressive, stepped up our collections effort, which was frankly, already better than most of our peers.

Got it. Alright. Thanks, guys.

Thanks, Bryan.

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

Hey, Brooks.

Good morning, guys. Congratulations on the solid quarter and particularly the outlook. I think there's probably a lot of new people thinking about your Company, so I was hoping you could describe in a little bit more detail what exactly the Fit to Work program is, then maybe take a minute or two to describe what exactly the physician services or osteoarthritis program is?

Yes. Just real briefly. I think most people are pretty familiar, but Fit to Work is a branded program that we have across the country. We've done the first year we rolled it out, which was about two years ago, we did across the board partner training for standard FCE product. We have people that do very specialized consulting at an industrial level. So with some of the companies that I mentioned earlier, they go in and they write legal job descriptions. They do ergonomic analysis.

We bill for all that. We help them analyze their claims history and implement programs, services, and changes within their business, some of which ends up resulting in visits to our facility, and some of which stays as services that we provide within those local industries.

As Glenn mentioned, those can be local relationships that spin in regional relationships with large companies, all of whom you guys would recognize as brand names. We've begun to expand those into some more national looking contracts, 8, 10 states, multiple states, discussions about the country. And so that's been a branded effort for us from the physicians services side.

It's a series of programs in and around musculoskeletal medicine, a core of which are focused on osteoarthritis, particularly osteoarthritis of the knee, created a brand there, a franchise, a franchise model, which created for -- which established a territory that somebody would purchase and enable them to deliver these services within an existing or new facility than a particular territory for a fee. That fee is actually going to change, probably here in the near future, and will likely go up.

We haven't finalized that yet, but we've been talking to some franchise consultants, probably one of whom we will enlist to help us push this forward. And we've done some other sales related efforts in that regard. So these are programs that are offered, not in our own facilities but in facilities that are now become franchisees of these programs, or this product or series of products.

We're also in the process of looking at some other service offerings within that brand. It's young. It's new. We're just getting our legs under us, so to speak, and if anybody has any additional questions, because I'm traveling today, Glenn is in the office and he will be able to take those if you have some more specific clinical related questions.

That's great, Chris, I appreciate it. I'm just curious. Doesn't sound like there's anything that's changed in terms of your overall optimism about your opportunity in that physician services area, it's just a matter of sort of continuing to work the bugs out of the model.

Yes, well we do have some bugs, and we do have to make changes, and I think one of those changes is really to focus on existing practices rather in -- where there's been established patient flow and medical success, rather than trying to do as many ground-up facilities where there isn't a complete team in place. The resources it requires of us is pretty significant.

So while I think we'll do some of those with well-resourced groups, our focus will be more on the practices that already have established medical facilities, large and small, in place. That may cause us not to have as many 10, 12, 15 market sales that are in big chunks, and therefore somewhat lumpy. I think it will be a little bit more linear, and maybe a little bit more plodding, but I think with these additional sales efforts, I think we'll get there. It's just going to take us some time.

Good. And then just lastly, curious if you've seen any change in the competitive environment in any general or specific sense?

Well, there's been consolidation in the industry, so you have some more bigger players in the environment right now. You have more private equity, a couple of deals transact here this last quarter, both [Physiotherapy and Drayer]. I think , in general the environment -- the care environment is the same as it has been. The access to therapists is about the same as it has been recently, which is pretty good, not easy but it's not like it was a few years ago, which was particularly difficult.

So I think for us, as a couple of the guys have earlier mentioned, our cash flow is good, our debt is very modest and we have the ability to deploy that in a thoughtful way to continue to grow the Company in both organically and in chunks as we come across these acquisitions that we like. So, we'll continue to do that.

Great, thank you very much.

Thanks, Brooks.

I just wanted to note for financial reporting purposes, Fit to Work or worker's comp revenue goes through the PT portion of the income statement, patient net revenue for the most part, whereas the physician services is in other revenue. When somebody is trying to find this, that's why we put the gross margin analysis in there this period.

Thank you, Larry.

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

Hi. Good morning. First, I was wondering if we can get an update in terms of the sales force and now what [percentage] of clinics are currently receiving sales force coverage?

Glenn?

Basically, at the end of the second quarter, we had 67 total sales reps covering 289 locations. From a key indicator standpoint, or a metric standpoint, second quarter was probably the best quarter we've had across the board. Our visit for FTE was at 11.4 versus 10.7 in the second quarter of 2011. Our units were at 4.23, and our durations were 11.4 versus 10.7 in the second quarter of 2011. We had a very good metric second quarter.

And does that make you more inclined to add to the sales force, because you're generating sort of greater productivity?

Always looking to add to the sales force. We have about 17 open positions, right now. We continue to look, but we've churned our sales force. If there are under-performing reps we're replacing over a period of time. But, yes. We're looking to add more sales reps across the board.

Thanks. Larry, is it fair to assume, absent any new acquisitions, you'll probably look to use the strong cash flow you're generating and pay additional debt?

Well, yes. Normally we get any cash, once or more a week we pay down the debt. Obviously, the best use of capital is do a start-up, second best use is a acquisition, and can you debate whether paying dividends or buying back shares as your third best use.

Perchance, do you have the [PR] mix handy?

Yes, I've got it right here. The private and managed care, I'm rounded these numbers to whole percent. The private and managed care is 53%, worker's comp is 17%, Medicare and Medicaid is 25%. By the way, Medicare is most of that, Medicaid is only 1.4%, then others is 5%.

Okay. And again, based on the business you're doing, you really don't see that changing significantly over the next year?

If you go back 5, 10 years, the mix in these high pieces hasn't moved much, other than worker's comp has increased a percent or two compared to a few years ago as a result of the Fit to Work.

Thanks. Finally on the guidance. Again, it looks like you're pretty confident despite several [UNINTELLIGIBLE] In the general economy that the business is continuing to be strong for you?

Yes. I mean you can -- if you look at the guidance figure, we expect the second half to be a little slower than the first half, but most of that relates to seasonal factors, including -- you've got summer and you've got more holidays, including the Christmas and Thanksgiving breaks in the fall.

Okay, thanks again.

(Operator Instructions). At this time, there are no further questions.

Okay, well, listen, thank you everybody for your time this morning. We appreciate your questions, your interest in the Company, and we're happy to answer any further questions as the day or the week progresses, so please let us know. Have a great day.

Thank you, everyone, for joining today's conference call. You may disconnect your lines at this time.