US Physical Therapy Inc (USPH) 2013 Q2 法說會逐字稿

Good morning. My name is Angie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the US Physical Therapy Second-Quarter 2013 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).

I would now like to turn the conference over to Mr. Chris Reading, President and Chief Executive Officer. Please go ahead, Sir.

Thanks, Angie. Good morning everyone, and welcome to US Physical Therapy's Second-Quarter 2013 Earnings Call. I have a number of people here with me in Houston, including Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, the Chief Operating Officer; Jon Bates, our Vice President and Controller; and Rick Binstein, our Vice President and General Counsel.

Before I provide some color on the quarter's results, as well as our focus for the remainder of the year, I'll ask Jon to cover a brief disclosure. Jon.

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

Thanks, Jon. Our team of dedicated clinical partners and directors, along with our entire USPh leadership and management support groups, have been working in a very focused fashion to position the Company for a very solid future during a period of tremendous change within the healthcare environment.

Earlier this year you will remember the series of federal payer reimbursement reductions were enacted first by Congress through a reduction we refer to as MPPR, or multi-procedure payment reduction. And then as an additional reduction which came as a result of the sequester.

These changes began for us and the rest of the industry in April of this year. So this quarter's results will be the Company's first quarter of financial reporting following these changes.

Despite those reductions for the quarter, we were able to grow revenues by over 5%, and we were able to offset the rate cut with the net revenue per visit coming in ahead of where we were at this time a year ago. Aiding both of those improvements have been our acquisitions, which have been excellent additions to our family of partnerships.

Clouding these improvements somewhat have been the additional costs borne out through these acquisitions, coupled with a negative contribution from our Physician Services company.

Within our Physician Services group, we have enacted a number of changes this year, including management realignment. And most recently we've approved the new revenue model to further assist in salability to physician groups.

While this entity has not performed as expected financially, we've had an outside group look at our patient outcomes, which have been excellent overall. Outlining and explaining this further, we have provided some specific information in the Q, which Larry will reference and cover in more detail in a few minutes.

We continue to work on behalf of our patients, clients, partners, and shareholders to find the best solution collectively for this service line, and further adjustments and/or decisions are being considered.

Shifting gears a bit, earlier this year we made some changes to our development team and resource allocation within our development department. We added a seasoned, full-time, well-respected and well-known industry executive to focus full time on acquisition prospecting and deal closure.

I continue to be active as well as I have in the past, meeting and networking with talented owner/operators. Thus far, I am very pleased with the results and the activity to date. We are meeting and having great discussions with a significant increase in those over the past 6 to 9 months.

These continued efforts should help us to continue what has been a very good development year thus far with three strong acquisitions, a number of tuck-ins, and a solid complement of organic openings among our strongest partnerships. I expect the remainder of the year to be active development-wise in all respects as well.

Fit to Work continues to be a bright star in the Company, driving new business and relationships across the nation with large regional, as well as national companies, as we work with them to be a solution for their aging workforce and for the rising cost related to healthcare and productivity pressures.

Currently, we are looking for expansion opportunities in the Fit to Work service line to further broaden and complement our existing offerings. This will be another area where we will look for good companies and good people with whom to partner to further expand our industrial offerings.

Lastly, before I turn it over to Larry to cover the quarter's results in more detail, I want to say a few words about our team and what they have done to overcome thus far-- what they have done and overcome thus far and what they still have to do.

This quarter, we were able to make a good deal of progress overcoming the slow start we had earlier in the year. They've dealt with the federal payer changes, rule changes, documentation and billing requirement changes. We're working to implement new programs throughout the Company in the right way.

They have had a lot thrown at them in a short period of time, and they have responded admirably and as I would have expected. I'm proud of all of them, those here in Houston, as well as around the country, support teams and clinical teams alike.

There is more work to be done between now and the remainder of the year, and everyone here is well aware of that. There are opportunities and decisions to make with respect to Physician Services. There are remaining cost opportunities for our Company to further dial in and adjust to the seasonal fluctuations that we experience, while remaining focused on growth and continuing to provide exceptional care to all of our patients. These are opportunities that I expect us to realize as we continue to work on moving the Company forward.

In closing, let me say that I think the environment today is creating a great opportunity for us to be in a wonderful position to attract the best providers in the market through our continued development and expansion efforts. I believe that there will be a significant consolidation that occurs in our industry. And as we remain active, as well as selective, with our deals, we have great opportunity with our excellent balance sheet to further grow our Company.

With that, I'd like to ask Larry to cover the financials in more detail.

Thanks, Chris. First I'll discuss the quarterly results.

Net revenue increased 5.1% to $67.2 million, due to an increase of visits of 4.6% and an increase in our average net rate, despite the rate cuts from the government of $0.65 or 0.6%.

Our total clinic operating costs were 74.3% of revenues as compared to 73.4% in the 2012 period. The increase was entirely attributable to the operating costs of the new clinics as the costs at our mature clinics were reduced by $335,000.

The provision for doubtful accounts for the quarter was 1.8%.

Our gross margin for the second quarter of 2013 increased in dollar terms by $312,000, but declined as a percentage of revenue. The gross margin percentage reduction is attributable to slightly lower average number of PT patient visits per day and a larger loss for the Physician Services.

Our corporate office cost came in at less than 10.0% of revenue.

Our operating income for the second quarter 2013 was $10,684,000.

Net income for the three months was $4,914,000 or $0.41 per share.

Same store revenue decreased just slightly.

Now I'll discuss the results for the first half of the year. Year to date, our net revenues increased 3% to $130.3 million due to an increase in visits of 2.2% and an increase in our average net rate of $1.27 or 1.2%.

Our total clinic operating costs have been 75.5% as compared to 73.8%. This increase is primarily attributable, again, to operating costs of new clinics. And year-to-date, the provision for doubtful accounts is 1.8%.

Our gross margin in the first half of the year was 24.5%, down from 26.2% in the first half of last year. The gross margin decrease, again, is lower due to an average number of patient visits per clinic per day and a negative gross margin year to date in Physician Services.

Our corporate office costs for the six months was 10.1% of revenue.

Net income was $8,635,000, and our diluted earnings per share is $0.72.

Our same store revenues year to date were flat. I would note, as we discussed when we announced first-quarter results, visits really in the first quarter -- and that's what's affected the six months -- were off because of weather and flu.

As I noted in a quote in the press release, our cash flow has been terrific. Receivable collections have been excellent. Our average A/R days is at an all-time low of 40 days. And despite having added 21 clinics through acquisition in the first half of the year, we've actually been able to reduce our credit line borrowings year to date.

Thank you, Larry. That concludes our prepared comments. With that, we'd like to ask the operator to open up the lines for further questions.

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

Hi, good morning, guys.

Good morning, Larry.

Wondering if you could just give a little more color on the net revenue per patient growing sequentially, despite the implementation of the higher multiple procedure cuts and the sequestration. Was that just a factor of higher rates at your acquired businesses, or what else was in there?

Yes, that's some of it. That's certainly some of it. The deals that we've done particularly this year -- and it won't always work out this way -- but the deals we've done thus far this year have been very solid net rate providers due to their operating model, their programs, in some cases their geography. There have been other things that we've been focused on here, so the combination of those two things has resulted in a net rate that's a little bit more favorable.

Another thing is a little bit of an increase in workers comp because of Fit to Work, which typically has a higher net rate.

Do you think these are sort of sustainable? Is this sort of a sustainable base that you could, assuming no other government cuts. Years out, who knows what's going to happen. But in terms of near-term sustainable revenue, rate per patient, perhaps that grows a little bit sequentially through the year?

Yes, I don't know that-- again, it may move around a little bit, depending on deals that we do and the rates of those deals, but I think probably in the ballpark.

Ballpark, right. And the-- I guess I assume this is partially offset I guess by a higher cost structure at some of these companies, in some of these acquired companies.

The thing to remember is when we buy these companies, we're buying them on a multiple of their EBITDA, which takes into account whatever their cost structure is. And we're not trying to go in and dismantle things from the get go. In fact, we're trying to add resources so they can grow going forward without changing their staffing model at all, if we can help it.

So in many cases, they might have a little bit higher cost structure. In some cases, they might also have a little bit higher net rate. We start with that and then we look to build that going forward. So, it does cause our numbers to move around a little bit.

In terms of the modest drop in average patient visits per day at the existing clinics, is that just a function of a difficult comp, any change in the environment, or any color there would be great.

Our average visits per day for the quarter as compared to the same time last year are off a half a visit a day.

You know, I don't know. I don't know that it's a comp related issue. We're focused on it. We've got the operations and the sales teams focused on it. Honestly, I think some of it is as a result of just the physicians having a lot more to think about and worry about these days in running and dealing with their own decisions and their own practices.

We've made gains in some areas which don't show up on the visit column within Fit to Work where some of those revenue gains and some of those programs and procedures don't result in actual visit counts. And so we're focused on growing the whole base, but we're attentive to the fact that our visits are-- we'd like to be a little bit higher at this point.

Okay.

I think it's fair to say that visits are a little lower than we'd like, like Chris was alluding to. It's obviously put some pressure on the margins, if you look at not just acquired clinics, but existing mature clinics. So that's caused us to focus on operating costs. We were able to reduce those at mature clinics by over $300,000 in the quarter, but there's more to be done.

And just lastly, did you give a number -- I may have missed it -- just on the losses on the Physician Services segment?

The Q was out this one, and I would refer--

Okay. I didn't actually get a chance to listen to the Q. Do you just happen--

I'm happy to give you the numbers, but I think it's worth spending some time on the Q today.

Absolutely.

It's in three different places, but I would refer to page 20 where we have Management's discussion. In the-- for the three months, Physician Services lost $280,000. And we talk about in there the management change we made. We've actually, we closed, if you recall last December, one of the brick and mortar OA sites.

Then we had two. We're closing the second one in August this year. And then as Chris talked about, we're reviewing the business structure and the long-term plans for RMG. If we don't-- if it doesn't turn around, frankly, we're going to have to take a write-down, and so we talk about that in there, too. It would be a non-cash charge as [those] monies were paid several years ago. But we've got to make-- do some things with Physician Services.

Okay, great. Thanks, Larry. Appreciate it.

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

Hi, Brian.

Hi, good morning, guys. Chris, just wanted to hear your thoughts on what you're seeing in terms of the pipeline for new partners. I know that's something that you used to discuss quite a bit. So just wanted to see if that has changed in terms of the willingness, or just the number of people looking to partner with you guys.

And also on the acquisition front, what you're seeing. I know you've done a few deals already, but just wanted to hear your thoughts on that.

We shifted gears a little bit, Brian. For the last few years, our ability to find the kind of people who could predictably open brand new facilities in markets where we had no penetration at all was becoming increasingly difficult.

And then we shifted -- and we talk about this at the end of last year, the beginning of this year -- we shifted some resources out of that prospecting area, devoted more resources to finding talented director-level people that could further develop existing markets, and that's gone really well.

And that's helped our top partnerships continue to be able to expand our organic openings this year, running very solid. Those are much more-- have been for some time much more predictable in their performance than have the new partnerships over the last few years, particularly.

We continue to get calls from new partners. We continue to look at new partner openings. But our focus really has been to intensify existing markets, and then to open in new markets by acquiring or partnering with, through acquisition, existing, strong, privately-owned facilities. And so we've continued to focus on that.

On that side, discussion flow, if that's the right term for it, has been very strong, and with really good quality companies and good quality people and that we're very encouraged about. So we expect to continue to be active.

And as Larry mentioned, the balance sheet, certainly we're in a great position. For us it's about combining the timing and the people and doing that in what makes sense for everybody, but we'll continue to be active this year. You'll see that in our results.

And then Chris, it's pretty public that one of your larger competitors is going through some financial struggles right now. Just wanted to hear your thoughts on whether that's already trickling down to the unit level operations where you're picking up share from those guys. And then expanding that further into the impact of MPPR on the smaller guys, if you're seeing benefits for your operations as well?

Yes. So, obviously Physio's had some challenges. And I don't know that the challenges are over. There are, in some markets, some impact from that.

I think what we have to do is look at our overall Company as an aggregate. We've got opportunity, certainly, whether it's related to our competitors or just related to our own internal opportunity. We've got to execute on those things. We're not so focused on what a single provider is doing or not doing. We're really focused on what we're capable of doing ourselves.

And so we've-- we have a good team, and they understand what's in front of them. They understand where there are challenges in the marketplace to create opportunities for us, and we need to realize those. So everybody's working on it.

To compare it to some of the other healthcare sectors, our sector is so fragmented. Select has 6% market share. Physio has like 3.5%. We have 6.5%. I mean it's-- so in most markets, our primary competition still remains private practitioners and the local hospitals.

So our overlap with Physio and Select is only in certain markets. And if you ask most of our partners, they wouldn't name them as primary competitors.

Got it. And then Larry, last question for you. So you talked about how gross margin was impacted by a half visit decline in the visits per unit. Is there ability right now to flex the labor at the clinic level, or is it the right staffing level to think of, going forward?

I think it's a combination. I think we do have some ability to flex some staffing. We certainly have within our partnership some part-time staff. We need I think to do a little better job in being real time reactive to daily and weekly staffing for volume fluctuations rather than in retrospect. And we can improve that.

I think on the other hand, we've had a lot to do this first half of the year with a lot of changes that have come down the pike, federal and otherwise, in what is not a particularly easy economic or healthcare environment. The team has done a really good job. Now they've got some more chewing to do as we chew our way through some of this, and the ops team is very focused on that. But we'll make some progress.

Got it. All right, thanks, guys. Good luck.

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

Yes, hi. Good morning. Just a couple of questions. First, I believe you had mentioned the last time, given the reimbursement headwinds, there were a number of initiatives you were looking at. I was wondering if you have started along that line and how far are you in terms of maybe when we can see it affecting or helping margins.

Well, I think you're seeing some of that in our net rate. What we've got to do is we've got to get the volume back to where the volume ought to be, and make sure that as we have-- as we made progress on this quarter with some cost reduction in our mature facilities, that that continues to be dialed in.

You know, with the business offerings that we've added, some of the home care things, just we've said it's going to take a little time to develop.

The Fit to Work's gone terrific, and we continue to add resources there, and we're looking to add more to that area. And that's been-- that's helped on the net rate side.

And then we've got, we have to continue to grow organically and through acquisition. So you'll see us continue to do a combination of those things. It won't be any one of those things that is the deciding factor. We're going to have to execute on all of it.

Okay, thanks. And coming back to acquisitions. I know you said the pipeline looks good. And in light of the pressures out there, you probably are getting more interest. But as you look at the acquisitions, are you going to be making more of a conscious effort to avoid acquisitions that might increase your exposure to Medicare in light of--?

We have in the past, Mitra. I don't know if I would characterize it as more of a conscious effort. I would probably characterize it as a continued conscious effort to bring companies in that support our long-term view and vision, and have more of a portfolio effect in terms of payers. Or certainly potentially more of a tilt in the direction of work comp or our ability there, maybe as a bias. But we stayed away from heavily-weighted Medicare federal payers for some time.

I don't think we've done any acquisitions where Medicare was more than 30% of their business. And typically if that's high, we're doing it because we think we can shift the mix.

Right.

For a long time, we thought that the government is not a rational buyer of goods and services, so we've avoided government pay.

Okay, thanks. And finally, just maybe a quick update as it relates to the sales force in terms of are you looking to expand anymore on that front, or you pretty much feel comfortable with the coverage you have?

Yes, we'll be expanding the sales force. We actually dropped down to 62 reps in the second quarter from where we were before. We lost about 16 reps in the second quarter. 10 of those were for underperformance. So we're looking to fill about 20 positions on the sales rep side, which I think will have a positive benefit once we finish all those positions and get them ramped up.

Okay. Thanks very much.

(Operator Instructions). Your next question comes from the line of Mike Petusky with Noble Financial.

Hi, good morning. So just following up on that last question. I didn't hear this listed as a factor in the visits, but could you essentially point to the number of sales reps that were either let go or left the Company as a factor in the visit issue?

Well, I think sales reps, we have a strong belief in the ability of sales reps to impact our business. I think that as we add more should have a positive impact. But we also need to make sure that we're getting the action that we need at the local level from our partners and directors, that we continue to do sales whether we have a rep in place or not. And I think it may be a factor, but it's one that we need to continue to focus on anyway.

I mean, Mike, I would say looking back or looking around, we probably had more change in this last quarter than we've seen in some time. Some of that, as Glenn mentioned, we initiated. But to answer Mitra's question, I think we're at a rep level, with the number of facilities we have, that it's pretty well covered.

Where we see rep increases is with our newer partner companies through acquisition. And then as we continue to expand in some of our largest markets with Fit to Work and other things, we've added reps. So still continue to be growth. We need to get that number back up to where it was.

Okay. All right, great. And forgive me if you've commented on this already, but last quarter, you talked about some new disability coding and reporting requirements that might be a challenge. Can you talk about how that's going? I think that was supposed to get going in this quarter, I believe.

Yes, July. So, Glenn, you want to?

Yes. July 1 is when the functional G codes went into effect. We're just beginning to get the reimbursement back from that to see what the impact is. If you do your G codes, it should not have any negative impact because there's not any rate effect to it. It's just if you don't apply the G codes, you don't get paid.

So we're seeing a very good response both in the field from our clinicians and from our billing collection offices. As Larry mentioned, our A/R days are looking in very good shape. So, so far we've seen no negative impact from the G codes.

Now we were very much ahead and on top of this. Guys did a great job. We actually rolled this out in advance of the date that it was required to come out, and so we've got a lot of people that are monitoring it. But I would say that the guys have been very, very on top of it from the get go.

It's just one of the things that's going to hurt the small operators and put more pressure on them. And the government seems to be not only cutting rates, but trying to make it more difficult to operate.

All right, great. And Larry, do you have that -- I didn't catch it, again, if you mentioned it, I didn't catch it -- payer mix for the quarter?

Yes, I've got it. Our managed care, really traditional insurance, was 53%; workers comp was 18%; Medicare and Medicaid, which is almost all Medicare, was 24%; and then other, which includes self-pay, is 5%.

All right. Great, guys. Thank you.

At this time, there are no further questions. I will now turn the floor to Management for closing remarks.

So we appreciate everybody's time here this morning. Larry and I are around the rest of the day, as well as tomorrow. If you have any follow-up questions, we're happy to spend some time on the phone. Thank you, and have a great day.

Thank you for participating in today's US Physical Therapy Second-Quarter 2013 Earnings Conference Call. You may now disconnect your lines at this time.