US Physical Therapy Inc (USPH) 2014 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 U.S. Physical Therapy Second-Quarter 2014 Earnings Conference Call. (Operator Instructions)

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

Thank you. Thank you, and good morning, everyone. Welcome to U.S. Physical Therapy's Second-Quarter 2014 Earnings Call where we will provide current detail regarding our 2Q and year-to-date performances, as well as to discuss our guidance increase for the year.

I am out of the office currently, however we have our normal cast in Houston on the line, including Larry McAfee, Executive Vice President and CFO; Glenn McDowell, COO; Jon Bates, our Vice President and Controller; and Rick Binstein, our Vice President and General Counsel.

Before we begin our discussion of results, I will 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. For those of you who have been on our calls before, you've heard me say a number of times how important our people are to our success. Our performance thus far this year underscores that theme. Our partners are in the clinics every day, day in and day out, taking great care of patients; taking great care of our physician referral sources; taking great care to be good citizens in the communities where they work, live, and raise family. They mentor young therapists to call on physicians that work very hard to make a difference.

The fact that we have partners makes a huge difference in how we are able to get things done. We not only believe in the partner-centric model, but we've been delivering it for the past 25 years at USPH.

This year we asked our partners to do something difficult -- to really dig in and manage part-time staff during the ups and downs of their seasonal patterns and the ups and downs of their weekly patient volume. This year, with the help of our talented IT group and our driven ops team, to give them much better tools to use to get the job done. And they, in conjunction with their ops team, have worked together to keep staffing dialed in at the right level.

On top of that, and most importantly, we have grown volume. Part of that comes from a focus the ops group has on what they refer to as their five-point sales plan, which is working to drive additional referrals, resulting in the best quarter we've ever delivered as measured in visits per clinic per day, among other measures. Adding to this in a significant way have been the contributions made by our acquired partnerships who have come into this family over the past few years.

We are seeing some really nice results from these very capable and talented groups. We're adding tuck-in, as well as organic facilities, on top of very solid same store volume numbers, all of which has further helped us thus far this year.

People. Outstanding people. I just want to thank everyone across what will soon be 500 facilities in 43 states for striving to make a difference every day. To our newest partners who have demonstrated faith in us to help them further their growth, while working hard to maintain their unique market position.

And to our team in Houston, who we ask so much of, who we ask so much from on a daily basis, I am hopeful that every one of them understands how appreciative we are for their efforts, producing record results for the Company in this quarter.

Some highlights include -- net income increased by 26.6% in Q2; EBITDA increased by more than 30%; revenues and visits increased approximately 17% this quarter, fueled in part by very strong same store growth from approximately 4.6% per visit; and savings in part by our strong acquired partnerships brought in throughout last year and in April of this year.

Across each of those partnerships, we have added a variety of organic [branching], as well as several tuck-ins, one of which was recently completed and announced earlier this week.

As earlier discussed, the combination of bringing some incremental volume, in combination with cost control -- not STE reductions; just good old fashioned weekly cost management, primarily with our part-time employee group -- has resulted in very nice margin expansion for the quarter.

Gross margins improved approximately 160 basis points to 27.9% for the second quarter. Corporate office costs as a percentage of revenue declined slightly to 9.7% for the current period.

All in all, we've had strong execution on our plan this quarter, and continued optimism for strong 2014 reflected in our updated guidance numbers. Now I'll ask Larry to cover the year and the financial results in more detail before we open the call to questions. Larry.

Thanks, Chris. First I'll go over the second-quarter results and then talk about the first half.

Revenue increased 16.9% to $78.2 million, due to an increase in patient visits to 17% and a slight increase in the average net rate per visit.

Clinic operating costs were 72.1% of revenue in the second quarter of 2014 as compared to 73.7% in the 2013 period. Clinic salaries and related costs were 51.3% versus 53.1%.

The gross margin for the second quarter of 2014 increased by 24.2% to $21.8 million. As Chris mentioned, the gross margin percentage was 27.9% as compared to 26.3% a year earlier.

Corporate office costs were 9.7% of revenue in the quarter as compared to 9.8% a year earlier.

Operating income increased by 18.2% (sic - see press release, "28.6%") to $14.2 million.

Adjusted EBITDA from continuing operations in the second quarter was $13,526,000, a 28% increase from a year earlier.

Net income for the three months ended June was $6.4 million. Net earnings per share from continuing operations was $0.53 compared to $0.42 a year earlier. The analyst consensus estimate for the quarter was $0.43, so we beat the estimate by a dime.

Same store visits increased 4.6%, and same store revenue increased 4.1% as the average net rate per visit decreased by $0.58. For all clinics, new and old, the average visits per day per clinic increased by 7.9% from 21.6 visits per day to 23.3 visits per day.

Now I'll go over the first six month results. Our net revenues increased by 14.2% to $148.0 million, due to an increase in patient visits of 14.4%. The average net revenue per visit remained relatively the same year over year.

Clinic operating costs were 74% of revenue for the six months as compared to 75% a year earlier. Clinic and salary-related costs were down 100 basis points at 52.7% versus 53.7%.

The gross margin increased by 18.6% to $38.5 million. The gross margin percentage was 26%, again, 100 basis point improvement from 25% a year earlier.

Corporate office costs were 10% of revenue in both periods.

Operating income has increased by 21.8% to $23.7 million.

Our net income for the six months ended June was $10.7 million. Earnings per share were $0.87 as compared to $0.74 a year earlier.

Same store visits increased 2.7%. Revenue increased 1.9% as the average net rate per visit decreased by $0.83.

As noted in the press release, our cash flow remains strong. During the second quarter, total debt was reduced despite a 13 clinic acquisition for $11.2 million in April.

As Chris mentioned, we've raised earnings guidance to $1.64 to $1.70 for 2014. Earlier guidance was for $1.53 to $1.60. The analyst consensus estimate has been $1.61.

Also, we declared a quarterly dividend of $0.12 per share, which will be paid on September 5 to shareholders of record as of August 18.

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

(Operator Instructions) Larry Solow, CJS Securities.

Pretty phenomenal growth there at the 7.9% visits per day and great same store sales growth. Can you maybe, Chris, help parcel out what you think -- I realize it's a combination of factors that you mentioned, but sort of in ranking order, you have this five-point sales plan, Fit2WRK. Maybe given it's still per patient is rising, and maybe environment is getting a little better, too. Could you sort of parcel out the bunch of variables that are driving pretty damn good growth, I must say.

Yes, thank you. The environment I think is -- I mean there hasn't been a lot of jobs growth, but the environment's been steady, and so the environment I think we no longer look at as it's certainly as a negative factor.

I think it really comes down to a strong, very focused theme with our partners and this five-point sales plan. Not just the partners, but our partners that are a sales group which includes the directors who are running these partner-based facilities, our sales teams. They're doing a great job. The ops team has stayed very focused on that.

Fit2WRK, I can't say enough about that group. They are just hitting it really hard. And they're landing new [towns] each and every week to drive additional volume to our partner-based facilities. And they have not had a let up in that. That's been very, very strong.

I think those are the two big catalysts where I think you have the removal of any negative winds from a macro basis, and it's been good.

And does your guidance for the back half of the year incorporate this similar type of patient growth, or do you sort of assume it reverts a little bit back towards the mean and hope for the best?

Our business, as you know, is seasonal, so we took into consideration the seasonal factors. Typically the second quarter is your strongest quarter of the year. The summer is soft. July and August are going to be lower volumes. We assume some improvement from what we had in our budget, but I'm not saying that every quarter is going to see the same kind of same store volume growth we had in the second quarter.

Got it. Okay, great. Thank you, guys.

Thank you.

Brooks O'Neill, Dougherty & Company.

Terrific quarter, obviously. Chris, you commented I think on the first quarter call that you saw a big uptick in volume into March. I'm just curious if you can give us sort of a sense -- Larry mentioned seasonality, which we understand -- but has volume continued to be strong month to month, as you look at it?

We're kind of on a completed month basis just through July. And so we're following a normal seasonal pattern, although July's been in pretty good shape. So I was happy with where July was. Typically we do, as Larry mentioned, we cycle off a little bit in the summer as doctors and our own staff -- myself included -- take vacations. But July's been solid.

Good. Obviously you were quite active with all kinds of development activities, including M&A. I know you don't like to talk about the pipeline, but would you think -- what do you see out there in the marketplace? Are there good opportunities for you still?

Yeah, there are still good opportunities. We're in good discussions. We're going to be lumpy like we always are, but we're going to continue to do the kind of things we've done in the past with the groups that we think give us the best long-term opportunity for success.

I think we've been very, very blessed with the groups that we've brought in thus far. I think there's been a lot of attention and focus on the kind of people that we bring into the Company, that are not disappointed. We continue to be selective, but we'll continue to get things done.

That's good. I recall a few months ago, I went on your website and sort of posed as a prospect, and they quickly rejected me, which was probably good choice. (laughter)

Glad to hear it. Thanks, Brooks.

Brian Tanquilut, Jefferies.

Good morning, guys. Congratulations. Chris, first question for you. As we look at the landscape in the physical therapy space, in the past we've talked about pressures in the smaller providers. If you don't mind just giving us an update on what you're seeing among your competitors.

You know, to the extent that I can, I think it's something [maybe] we'll wait a few more hours. Select I think releases their numbers after the market closes today. I don't have any particular insight into the large companies, other than I have friends there. And I think that generally speaking, my expectation is that this is an up year compared to last year where we had a lot of Medicare and other related noise last year. But I really don't know to the extent that that's occurring.

On the small provider side, I think we continue to get calls daily, weekly, multiple calls from smaller providers. Many cases we're not able to do anything because they're in markets where it doesn't make sense, where reimbursement's really really low, or it's a single site or somebody wants to leave. So, I think there's going to be continued pressure on smaller providers.

Even when the economy is going okay, the complexity in the regulatory environment continues to evolve and become more difficult, and I think scale matters. And so I think that will create opportunities for the larger groups out there to selectively acquire those groups who are meaningfully different.

Thanks for the color. Larry, you mentioned how the rate was down $0.58 during the quarter. Just wondering what the driver of that is.

Well -- don't know if it was for the quarter of the six months; I don't remember right now. You have the -- Medicare rate reduction went into place in the second quarter last year. I don't know (multiple speakers). Our rate is around $0.50, $1.00, up or down.

Okay. Nothing worth highlighting there that drove the client --

The Medicare rate reduction impact was a couple of bucks. So we actually mitigated that by our mix of business, more workers' comp, some of the recent acquisitions, and just all sorts of efforts to offset that.

And Brian, remember, as we do these deals, some of those are in areas that have a little higher net rate. Some are in areas that have a lower average net rate, in many cases that we can get up over time. So that moves our number around a little bit as well.

Okay, that makes a lot of sense. And then Larry, to follow up on that, on the Medicare rate, they published the physician fee schedule proposal. And assuming that the SGR is fixed -- I'm sure you guys have done your work -- what is your expectation on the net rate next year, if the physician fee schedule holds?

Well, it would be neutral to slightly favorable if it holds, but nothing seems to hold anymore.

I look at it as a near-term, new-to-market. I don't think there's a lot of up, and I don't see a dramatic down. I think there's a little pressure, and we did that offset with the work from delivery from our Fit2WRK group. So I think that's a near term, the way it's going to be for a while.

And Chris, to that point on Fit2WRK, it's obviously been a bright spot for the Company. And if you don't mind just giving us some updates on client wins there and where Fit2WRK is going.

You know what, I normally -- I apologize; I'm away with my family this week. And I normally call to get an updated list, which literally changes every week. I didn't do that before this call. I'm really not prepared to do that right now. Glenn, I don't know if you have anything we can share, but it's -- they've done a great job.

I'm in Virginia right now, and earlier this week, I talked to [Chester Raley], and he was telling me he signed up 7 or 8 new groups. Now I don't have the detail on all of those, but they're doing a great job.

This is Glenn. We've renewed our fourth contract just this July for another two years. The Fit2WRK group and Ray continue to bring on clients on a local and regional basis. There's too many to really list. But it continues to be a good focus for us, and we continue to see opportunity to expand it on a regional basis as we grow it.

Got it. Thanks, guys.

Mitra Ramgopal, Sidoti.

Just first following up on the Fit2WRK question. If you can give us a sense as to how big this market is and how meaningful this can be for you over the next few years as you continue to grow.

The comp market is huge. We're focused on the majority of the space that have good comp reimbursement, which for us is most of the places where we are with just a few exceptions. It's multi-faceted in that it drives visits on a typical basis. And it also drives other service elements that we perform and bill for on an a al carte and sometimes on an hourly basis that don't show up in visits.

I can't even begin to quantify what the entire market would be or what a reasonable sale would do for us. I just know we're growing as fast as we can, and we're having good success with that. And it's a focus, I wish I could quantify it more succinctly, but it's a big opportunity and we're still scratching the surface.

Okay, thanks. And on the same store growth that we saw in the quarter, certainly the best we have seen for some time, but I was just wondering if it's anything in particular driving it from your end, or is it more just from a macro front; competitive maybe falling by the wayside as a result of a tough reimbursement environment, for example.

I don't know how many competitors we're seeing falling by the wayside. I certainly think the environments prefer smaller, one and two size groups. We're certainly better resourced than most.

I really think it comes down to a very, very focused execution on the part of our sales team, on the part of our partners, and maintain focus on the part of our operations group right now, and a pretty neutral macro environment currently. And so I think it's a good combination.

There's no way the market could reach 4.6%, which was our same store growth rate in the second quarter. So we had to have taken market share. As Chris alluded to, unfortunately, there's very limited data available out there for the sector. Select will report this afternoon after the market closes. It will be interesting to see what their same store volume growth was, if any.

This is Glenn. We're not seeing less competition at a local level, so that's not a factor. As Chris has talked about, I think it's really been a people approach. We've got a number of plans that we've put in place to try and attack sales and marketing, but it really goes back to we've got a great operations team that we restructured and expanded at the end of last year, which has allowed us to spend more time with our partners in the field and do what we needed to do. The partners and directors and the sales reps have really done a fantastic job of implementing the plans that we've come up with and going out and going after market share. So it's been a combination of factors.

And finally, Larry, I don't know if you gave this already, but I was wondering if you had the payer mix handy.

I've got it. Insurance, 52%. Workers' comp was 20%. Medicare and Medicaid combined, 23%. 5% other.

Okay, thanks.

Thanks, Mitra.

Peter van Roden, Spitfire Capital.

Just a quick question on the guidance. So, if I look at last year, you guys were pretty flat first half to second half. It seems like first quarter is weak, second quarter's strong, but then first half to second half, there's not much change. And if I look at your run rate, EPS for the year, you're in the mid-170s range. Is there anything that you're seeing in the back half that is giving you worries?

Part of that being flat last year was timing of the acquisitions.

Got it.

But normally, your first half is stronger than your second half, if you were to exclude the acquisitions. And we're not -- I don't think we're being conservative with our guidance range, but we're not being aggressive. Hopefully we'll do as well as they said or maybe even a little better.

But July and August are just slower months. Then you get to November, and the week around Thanksgiving is slow. And then you get to December, and it's dead as a doornail for the last two weeks of the year.

Pertaining -- to specifically answer your question, I think Larry's alluded to, we're not seeing anything in the back half of the year that's a huge worry for us. We think we've captured the seasonal pattern. And I hope that we can do better than we've guided, but certainly within the guidance range, and we're working to do that.

And then I think it was suggest earlier in the call, mentioned that your -- on a calculated basis, your visits per clinic are up 8%, and your same store sales visits are up 4.5%. Is that just the new clinics that you've bought are that much more efficient? What's driving the [bulk] of that --?

That includes all clinics. That includes new de novo clinics as well, which are normally going to grow faster than a mature clinic.

Okay, got it. That's all, guys. Thanks.

Mike Petusky, Noble Financial.

Good morning, guys. Great quarter. Do you guys have -- I didn't catch it if you mentioned it earlier -- the updates sales force number?

We currently have 84 total sales reps covering 334 locations.

And do you have how that compares to last quarter, by any chance? Is that up?

It's up a little bit. Probably by 5 or 7 sales reps where we were. We at any point in time have anywhere between 10 and 15 opening positions that flux that we fill and then lose. I don't expect our sales team to expand a whole lot more or shrink a whole lot more at that. But we've got pretty good coverage in most of our major market areas.

And then --

Mike, I will tell you, on our acquired partnerships, consistently we've added sales and it's been a big boost. It's continued to help. Our sales folks within those partnerships are doing a great job.

Okay, great. That's helpful. I guess then on the subject of M&A, for several years you guys were fairly conservative. Maybe one, maybe two deals a year. Here in recent quarters, you guys have picked up the pace. I guess I'm just wondering, between the reimbursement environment, the regulatory challenges, particularly for some of these smaller groups, and just the fact that you guys are really executing and have shown an ability to really develop good relationships with new partners, I'm just wondering, are we in a new normal in terms of you guys and your ability to go out and maybe do more deals than was the case maybe 3, 5, 7 years ago?

I would say this, Mike. I don't think our standard, nor our thresholds, have changed at all over the years. I think people are ready when they're ready. I know that the group that we acquired and partnered with in April this year, myself and another gentleman on the development team met with some originally 3.5 or 4 years ago and stayed in touch, and they weren't ready then.

So, the people that we identify as our really strong folks get ready when they're ready. We're not necessarily able to accelerate that process. It's somebody's family situation or their view of the world aligns or it doesn't, but we continue to work those.

I still think we'll be lumpy from time to time, but we have the ability in our balance sheet to get whatever deals done that we feel are ready and that fit within our parameters, and I think we'll continue to do that.

Okay, very good. Thanks, guys.

(Operator Instructions) Dana Hambly, Stephens.

I just wanted -- you did announce a small tuck-in acquisition earlier this week. I just want to get the update on the expectations for de novos and tuck-insurance. And are you seeing -- are you empowering your partners to go do more of these tuck-ins? Any change on that front?

Dana, I don't think any real change. Tuck-in that we just did was a nice little deal, that three-clinic deal as earlier announced. The tuck-in to one of our recently acquired partnerships; a group that's been with us just a little more than a year and doing a great job.

And so we continue to encourage our largest partnerships, our top 20 or 30 partnerships, to look for those opportunities. And we continue to be selective with those as well. They're not always easy to do. But, yeah, we'll continue to be active on that front.

And in terms of our aggregate de novo and tuck-in numbers, I think you can expect what you've expected in the past -- 20 or so a year right now. We really haven't guided to that, or we haven't guided to that. I think we did 19 or 20 last year. I expect to do somewhere in that neighborhood this year.

And Larry, when we think about closures of under-performing sites, is that kind of on the same track?

Yeah, we'll close 10 to 15 clinics a year normally.

And just last one from me. I know you guys already run very lean at the corporate and the center level, but is there any room for improvement on staffing at the center level, or are you guys kind of maxed out on that at this point?

I don't know that we've maxed out. We run -- we do run very lean at the corporate level, but I will say that we've brought on some -- we've made some nice hires this year. We had budgeted for a number of additional positions this year. In anticipation last year, which we got done, you have the deals we got done in December and later in the year and earlier this year. So I think our staffing's in pretty good shape. We continue to attract very good people, though.

On the center level, I think it's about keeping things dialed in. And about slowly, very slowly marching forward as there are adjustments that we could make and as we get size and scale in some of these markets. I don't think it's dramatic. I don't think it will be dramatic. But I think there's a little bit there over time. Not quarter-to-quarter, necessarily, but over a period of years.

A good chunk of the increase in margin came not from -- well, there were certainly cost control, but it was really a productivity issue. When you increase your visits per day per therapist, it makes a big difference in the contribution.

Sure. That makes sense. Thank you.

Thank you.

(Operator Instructions) There are no further questions at this time.

All right, everyone. Thank you so much for your questions and your attention today, your interest. We appreciate it very much. Larry's available I think through the rest of the day for questions. I'll be back next week. And we look forward to continuing to work on our shareholders' behalf. Thanks again. Bye now.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.