US Physical Therapy Inc (USPH) 2012 Q3 法說會逐字稿

Good morning, my name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy third quarter 2012 earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). I would like to call the call over to Chris Reading, Chief Executive Officer. Please go ahead

Thank you. Good morning everyone, welcome to the U.S. Physical Therapy's third quarter and year-to-date 2012 earnings call. With me here in Houston, Larry McAfee, our Executive Vice President and Chief Financial Officer, Glenn McDowell, our Chief Operating Officer, Rick Binstein, our Vice President and General Counsel, and Jon Bates, our Vice President and Controller.

Before we begin our quarter and year-to-date review, I will ask Jon to please cover a brief disclosure.

Thanks Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the Company's current views and assumptions, and the Company's actual results can vary materially from those anticipated. Please see the Company's filings with the Securities and Exchange Commission for more information.

Thanks Jon. Before I ask Larry to cover the financials in detail, I would like to provide some color on our operational performance for the third quarter and year-to-date periods. One very nice trend that we have seen this quarter, is that business has picked up improving sequentially within the quarter, this helped move our same store revenue numbers up from the 2.8% area where we reported in the second quarter, 4.3% for the third quarter, and now up to 5% on the year-to-date period. Our partners, sales staff and management team all have been working very hard to improve our volumes and to move the market share, and these numbers are the reflection of not only that effort, but also the result to deliver a significantly better end result.

Also improving sequentially this year it has been our net rate, which has picked up slowly but steadily as the year has progressed, assisted by the continued growth within our Fit to Work program, which is signing up new companies continuously allowing our partners to provide a consistent product across our entire network of facilities, making it very attractive for larger companies to tap into the resources and expertise of our Fit to Work and our local clinical teams.

As revenue has grown as a result of the acquisitions and organic facility growth, along with same-store sales efforts, we have worked to lever our corporate base, which for the quarter and year-to-date periods, our corporate costs as a percent of our revenue has now dropped to under 10% on both a quarter and year-to-date timeframes. Cost controls were also solved this quarter, in spite of having one last work day compared with the 2011 period. Our salary and operating costs as a percent of revenue declined compared to third quarter of 2011.

Shifting gears a little bit, we discussed an initiative earlier this year surrounding a training program for our top partners, designed to assist them in identifying, prospecting, and reeling in smaller local tuck-in acquisitions, and I am pleased to say that we are getting good traction with that program, which has resulted in a number of additional locations and many more in discussion. Further, it has assisted our partners in networking more deliberately and effectively, and has seemed to fire up our top group, who now understand and believe that they have another very successful way to grow in an otherwise turbulent economic time. In fact I believe based upon the growing challenges of these smaller providers, that we will continue to see attrition, particularly in that smaller group, along with the necessity of further consolidation within our industry.

I continue to believe that our Company will be seen as a great potential home for many of these small as well as larger private practices. Younger therapists opportunities to start there scratch and successfully build a private practice if not already established, will grow increasingly difficult, and will be more and more rare without help and assistance at minimum from a larger fully resourced and experienced provider. I think that bodes very well for us, and over time as will continue to offer abundant resources, capital, and shelter while staying true to the fundamental belief in our partner-centric clinician and care-driven culture that will result in continued success for us on the development front.

On the physician services side, our team continues to make the necessary adjustments, and I am pleased to say that a recent look by an outsideresearch group regarding our outcomes and patient functional improvement scores were very, very encouraging. We have shifted our target sales focus to existing successful established medical practices, where our programs can provide a very nice boost in patient volumes, margins, and outcomes. We will continue to work on this area, although we expect it to improve going forward.

As l a wrap up my prepared comments just let me say that I am very encouraged with the improvement and growth of our business in what has been a very tepid economic recovery to date. I am proud of our team which has grown stronger and better resourced over time, and with our cash flow resources we continue to be well-positioned to maneuver and grow as well as expand into the future.

With that let me turn the call over to Larry to review our financial performance in more detail.

Thanks Chris. I will start with the third quarter and talk about the nine months year-to-date. In the most recent quarter, net revenue increased by 5.3%to $62.9 million primarily due to an increase in patient visits of 4.7%. Our average net rate per visit for the recent quarter was $105.73, an increase of $1.30 as compared to a year ago. Total clinic operating costs were reduced to 75.5% of revenues in the third quarter as compared to 76.9% in Q3 of 2011. Our provision for doubtful accounts was 2% for the 2012 period versus 2.4% in the 2011 quarter. And the gross margin from the Company's core physical therapy business increased by $1.3 million, or 9.1%. Our corporate office costs, as Chris alluded to, were 9.5% of revenue in the recent quarter.

Our operating income was $9.4 million. Net income increased 11.3%, to $4,563,000. Our earnings per share of $0.38 matched the consensus estimate. Same store revenue increased 4.3% as a result of a combination of higher same store visits and an increase in the net rate.

I will now go through the nine months results. Year-to-date net revenues increased 7.4% to $189.4 million due to an increase in patient visits of 8.5%, coupled with an increase of $0.72 year-to-date in our net rate. Our total clinic operating costs thus far are 74.4%. Our allowance for doubtful accounts year-to-date is 1.9%. Gross margin from the PT business has increased by almost $5 million, or 11.4%. Corporate office costs year-to-date are 9.8%, as compared to 10% a year ago. Our operating income has risen to just under $30 million. Net income has increased 9% year-to-date to $13.9 million. Earnings per share increased from $1.06 to $1.17. As Chris mentioned, same store revenue has increased 5% year-to-date through a combination of the visits and rate.

As I noted in the press release, our continued strong free cash flow from operations has enabled the Company to reduce our debt by more than 30% thus far in 2012. As of September 30th the average age of receivables was 42 days, that is a record low. Also in the release we announced that a regular dividend of $0.09 will be paid on December 7th to shareholders of record as of November 16th.

Thanks, Larry. With that, Operator, we would like to go ahead and open it up for questions.

(Operator Instructions). First question from Larry Solow with CJS Securities.

Good morning, guys. Chris, I know you don't like to give the inter quarter update, but just in terms of momentum through the quarter, it looks like you had a pickup in quarter-over-quarter same store sales growth. Is that a function of just easier comps, timing, hard to say, or does your business look like it is even doing better as you head into the stronger part of fall season?

Well in terms of comps, I think we had for the first quarter just based on the good weather that certainly was a quarter where to the benefit of the weather it was an easier comp. Through the summer we typically slow down, and we did a little bit this summer. But sequentially August was better than July, and September was better than August, and we will speak to it here on the call. October started out very strong through most of the month, until we got hit with the storm the last two or three days of the month. We will discuss that here in a little bit, but I guess, Larry, why don't we go ahead and do it now.

Yes. We had over 50 clinics affected by the storm. If you look on our website at the map of our locations, obviously we have a lot that were in the path of Sandy. We expect that it is going to impact earnings for the fourth quarter net of business discontinuance insurance of about $0.01 to $0.02. We are not revising our guidance, but we will probably be at the lower end of the range as a result of the storm.

Otherwise volume has been very, very good net of that one incident. Business is strong. The economy is still I think tepid, although better maybe than a year ago by a little bit. Teams are working very hard. One of the things we are seeing right now in the marketplace is that smaller providers, based on the rate of calls into our Company with interest, smaller providers are struggling. Until we are able to move market share, in some cases we are able to do these tuck-in deals for very cheap right now.

Right. Great. Just could you remind us, an update on your pricing outlook on the government side, Medicare side as you look out into 2013? I know there was the CMS adjustment, have they made an adjustment already, has that officially gone through for next year? Where do we stand there?

Medicare released their guidance, or the physician fee schedule rates for 2013 on November 1st . From a therapy cap standpoint, the therapy cap will increase from $1,880 to $1,900 for PT and speech combined. And $1,900 for OT. The exceptionprocess will expire at the end of the year unless Congress passes legislation as they seem to do every year to extend it. With the November fee schedule they also said that there is going to be a 26.5% physician fee schedule reduction related to the SGR, unless they again kick the can down the road. If they do that, and they keep the physician fee schedule rates flat, thenMedicare rates will go up 3% to 4% based upon your geographic index.

Great. Okay. Thanks so much.

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

Good morning, guys. Obviously with the storm and the soft economy those are a couple of things that are not going well. It sure sounds like you are executing very well. Is there anything out that stands out that you would say is not going well? It sure sounds like things are going pretty darn good.

No. If we get to the point where we could control the weather, we would be really happy. But that being out of our control, the things that are right now within our control, I am pleased to say are either doing well or definitely moving in the right direction.

That is great. I know that Larry probably would get mad if you said anything about M&A pipeline. If I am reading through the lines there is plenty of M&A opportunity at very good prices right now?

Let me make a distinction. There are two different initiatives that we have. One is rather new, and one has been ongoing and established. The tuck-in initiative there, we have done a number of those. We don't even announce those. They are small. You might as well think of those as a jump start on organic expansion. Those are very cheap. We could talk about some examples. But typically cheaper than what it takes to start one from scratch. They already generally have volume. Most are at a breakeven point or better. We are tucking those into existing strong practices and converting those.

Those are typically single locations so it is not.

Single therapists, too?

It varies on the size of the clinics. Sometimes it is solo therapist, or sometimes it might have one or two additional clinicians. But they are typically small practices. That is cheap. That will continue to increase in opportunity as the market is difficult. On the other side, if the market continues about like it has been. We will be lumpy from time to time. We are talking to a number of folks, but that pricing and that market continues to be what it has been the last year or two. So there are really two different sub-sets. We tend to be focused on deals of size, but as an opportunistic situation, we are able to take advantage of these little tuck-ins very cheaply and pretty easily right now with the team that we have here, so we will do both.

That is good. I confess I might have been a little distracted during your prepared remarks, but did you give us an update on osteoarthritis and Fit to Work, and how those are going in the marketplace now?

Yes. Fit to Work is going great. We talked to our Fit to Work head last night, he had a major national comm conference, and he had meetings scheduled through practically midnight last night. Very, very strong demand for Fit to Work. On the physician services side, we are retooling that. That continues to underperform where we were a year ago. We have confidence that we can get that back, refocused, and dropped in. We recently went to a few large physician based national conferences, traffic and interest was very solid. It is going to take a little time. It is still small. We are feeling our way through and making some adjustments, and right now it is not helping us a lot, but I think as that improves, certainly if we can continue to keep everything else moving forward, that would be a pickup compared to where we are now.

Maybe early in 2013 or what are you thinking?

I think that is a 2013 opportunity more than anything. I don't know if it is early or mid. It is small and we are marching forward. I think it is going to take a while to get this to the point where if anything of significant size. But I think we will definitely make progress.

That is good. Thank you very much.

Your next question comes from Brian Tanquilut with Jefferies.

Good morning. Just hitting on the cost side of your business, when we started talking about the corporate overhead years back, the goal was 10%. Now that you are under that, do you feel like this is where we bottom out on corporate overhead, or do you feel like you still have enough room in your staffing to support the growth going forward?

Understand as we grow we do occasionally have to add some positions. Typically the positions that we are adding are more support level folks. We have added some to the management team over time, and over a period of years, but it will slowly move down over time. It is going to move around a little bit quarter to quarter based upon our seasonal trend. If you look out over a period of a few years as we grow and add more deals, yes, it will continue to go down a little bit over time.

If you go back and look at the dollars, the dollars have increased. They just haven't increased at the same rate as the top line. There is no reason we won't continue to add locations, both denovo and acquisitions, and spread the corporate costs over a bigger and bigger revenue base.

Thanks for the comment on Hurricane Sandy. Do you still have locations that are closed as of today?

Yes.

They still do, okay. Chris, in the past I know you and I have talked about some of the challenges the industry is facing in terms of staffing, with physical therapy now being a doctorate requirement based. How does that impact you guys good or bad?

Let me understand. When you say doctorate requirement. That phased in a number of years ago for the most part. Initially when there was a transition from a master's level program to a DPT, or a doctorate level program, yes there was some initial reduction in capacity. I would tell you, I think the market is back to a reasonable supply and demand market. Long-term care and home health and some areas where people gravitated to five, six, eight years ago when they were blowing and going, that has gotten a little bit more tepid. I think that has changed some supply and demand, and in individual markets sometimes it takes us a little while to find the right person, but it is not as bad as it was a few years ago.

Okay. Last question you talked about gaining market share, so is there anything that you guys are doing differently from a year ago to drive the market share at this point?

We are doing the Fit to Work, that has helped. We are not ready to talk about it, but we are going to be working on some marketing opportunities to get that into even more places, and we will talk about that in a quarter or two down the road after those things are in place. Right now it is just that we are well resourced, we are not afraid. We compete largely with hospitals and smaller private practices and some well resourced private practices in that regard. Generally speaking we are very well resourced. Our folks are able to go out and make things happen. When this challenge is in the market, I hate to say it, but sometimes we benefit from those. I don't see the market getting easier as we go forward from a regulatory perspective particularly, and I think that bodes well for us long-term.

If you don't mind one last question just because of that comment that you made. Regulatory environment, I knowMedPAC has talked about adjusting the therapy caps. How are you guys thinking about strategically preparing for that possibility? Thanks.

For a couple of days' worth of disappointment with respect to the election, and trying to predict what the government is going to do. I don't know that I want that job right now. We are trying to be as efficient as we can, trying to make sure that we are making a difference in people's lives, and being effective with what we do. We are using our cash to grow and to gain market size, and we will deal with what the government does along with everybody else, may of whom will not be as well resourced as we are to deal with that, but I don't expect anything draconian at this point.

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

Good morning. Couple of questions. First if you look at the same store numbers thus far this year, it looks like the best we have had since maybe 2008. I know you talked about some easier comps maybe benefiting a little from the weather and maybe an improving economy. Is there anything specific that you are doing on your end as it relates to maybe expanded sales coverage, et cetera, that is maybe driving some of these numbers?

I think that the market is a challenged market. Most of our big markets we have multiple sales people, or at least one full time sales person across our big partnerships. Our competition for the most part does not. We have Fit to Work, which continues to gain more and more traction. For good reason, because we are saving a lot of companies a lot of money. We have a great network of facilities that are now fully trained. I think those are enough small difference makers to add up to a decent difference when you look at it. Our comp was definitely helped in the first quarter. It is difficult to tell where that was, but it hasstronger since then, and we have had no benefit of weather. So it is good right now.

Third quarter there was no weather benefit year-over-year.

I knew in the first quarter it helped in terms of for the year numbers. Again, Larry, if you look at the balance sheet again, certainly it is pretty underlevered in terms of where you are. Are you more likely to be aggressive, or is this a question of just waiting for the right opportunities as you look at expansion?

Nobody is waiting on anything. I just went to the Private Practice Convention meeting last week, where one of the biggest brokers in the industry did a very nice, and it was for his business, but we got a very nice commercial out of it, in terms of our Company being a very, very good home, based upon their experience and deals they have transacted with us. We will continue to be picky. We are talking to a number of folks right now who are very good providers, some of whom won't do anything yet, but we will continue to be engaged over time, and we will get more than our fair share of those deals, so we are not waiting on anything.

Thanks, Larry, quickly on the tax rate I notice it picked up a little. Going forward what should be a sort of normalized rate do you think?

I think it was 39.3%. If it moves, it doesn't move much. We actually may have a little tax benefit in the fourth quarter. 39.3%is what I normally use when I am doing analysis.

Okay, thanks.

Next question comes from Mike Petusky with Noble Financial.

Good morning, fellows. Larry, I am bedeviled by your bad debt expense, I keep modeling it lower than it comes in. Is 1.92% a better range rather than the traditional 1.6%, 1.7%?

So we are talking fractions of a percent. I don't know it typically runs 1.5% too 2%. It was a little lower this quarter than the same quarter last year. If you want to use 2% that is fine. I think it is be a little less than that. I don't know what it is going to be until we incur it.

We are not doing business that we expect to be bad downstream. So we are being pretty aggressive on the collections side, and also being realistic on things that we are not going to get to. It is not a very high percentage of our business.

For a healthcare provider to have bad debt expense of 2% or less is pretty phenomenal. And as I mentioned our average age of our receivables is down to 42 days, which is the lowest in the Company's 23-year history. It is not like we have got a bunch of bad receivables.

And on the operations side, we have really focused a great deal on over 120 accounts, and bringing that down, and it had an impact.

Yes I understand, nit picky. Let me nit pick slightly more. Is the fact that it is maybe up a little, and again I know it is fractional, is that related to the fact the physician service business is bigger than it used to be a year or two ago?

Yes some of it is Physician Services, we had one contract for a management contract that we took a decent reserve against. The core PT operations have not moved very much.

Do you guys have some of this housekeeping stuff, I guess payor mix, sales reps, and productivity visits, FTA, et cetera?

Yes. I have the payor mix, and Glenn can give you the rest. I rounded these to whole percents. Private and managed care in the recent quarter was 53%. Workers Comp for the first time averaged up to 18%, Medicare and Medicaid was 24%, and Other was 5%.

The Medicare and Medicaid is largely Medicare. About the only place that we have Medicaid is Texas.

Medicaid is 1.5% of that 24%, so it is not significant.

On the metric side from a sales rep standpoint we are at 69 sales reps covering 294 locations. Productivity visit per FTE was at 10.99 at the end of the third quarter, which was up from 10.55 from the third quarter a year ago. We had 4.2 units for the third quarter. Our durations or our visit per referral was 10.77, up from 10.58 in third quarter a year ago. So all of our metrics look very good.

Okay. In your guys view is there much more you can do on it? I know you are always striving to do more. Realistically speaking are you hitting it fairly close to optimal at this point in your view, or is there actually a material amount more that you can do in terms of the productivity metrics?

On the productivity side there is room for us to increase that up into that mid-11 range, which is the goal we are looking to get to. There is still opportunity there.

In the recent quarter the visits for FTE were under 11.

Alright. Thanks, guys.

At this time, you have no further questions.

Okay. Those were great questions. Thank you for your attention. Thank you, operator. We are here if you have any follow-up questions the rest of the day. Have a great day.

Thank you. This concludes today's conference call, you may now disconnect.