US Physical Therapy Inc (USPH) 2015 Q1 法說會逐字稿

Good morning. My name is Angie and I will be our conference operator today. At this time I would like to welcome everyone to the U.S. Physical Therapy Q1 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

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

Thank you very much. Good morning and welcome. Good morning everyone and welcome to U.S. Physical Therapy's first-quarter 2015 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, Vice President and General Counsel; and Jon Bates, our Vice President and Controller.

Before we begin today's call, Jon will cover a brief disclosure statement. Jon, if you would.

Thanks, Chris. This presentation contains forward-looking statements which involve certain risk 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. Despite a strong start to the year from a referral perspective, we certainly were impacted very significantly these first three months by weather. In many parts of the country including the Northeast, Midwest and even the Southern areas were particularly hit hard causing patients to not be able to get in for all of their therapy due to the extreme conditions. As indicated in the release, we believe we lost approximately 20,000 patient visits in this January through March period.

Looking at the prior quarter ending the year 2014 which was quite a strong quarter for us, our comps remained nearly equivalent, actually slightly less in the quarter despite continued clinic growth and one non-clinic acquisition.

I feel like we did a solid job during the period with cost control. In the current quarter period, we have seen some modest improvement thus far on our net rate per visit from the prior quarter as well as the prior year. I believe this is due to several factors including the exceptional growth of some of our larger, highly profitable partnerships, the excellent job our teams are doing across the board with collections and AR management, and our continued focus on our comp related programs.

The weather-impacted volume caused our margins to drop. However expected as volume returns which it has, that margins will rebound. Corporate office cost as a percent of revenue was a little under 10% while we added some key leadership in service related positions in several departments to accommodate our continued growth and to assist in maintaining a high level of service and responsiveness to our partners across the country.

Despite the weather-related visit losses we still had a very respectable same-store volume and revenue improvement and increases of 3.8% to 4.2% respectively.

Last week we announced closing on a very nice acquisition that I am personally very excited about. The team there is excellent and the opportunity forward is significant. That as you will recall is the second closed deal of the 2015 year and we remain actively working on additional projects.

So for the remainder of this year, we will focus on the same key areas as we have recently. That being great care in service to our patients, referral sources and customers and great care in service to our partners with some recent adjustments we have made to ensure that we can continue to do that as we further scale the Company. Continued heavy focus on our work comp programs with an increased eye on using our preventative and testing relationships to get exclusivity on the treatment side where and when we can; focus on our referral conversion rate and our authorization and reauthorization processes to ensure that we don't lose any visits as we see some insurance companies deploying creative authorization and reauthorization processes designed to disrupt care. We will continue to roll out and deploy our Primal 7 functional training system which has been very well received. We will continue to focus on getting good deals done. It will be a long-term benefit to the Company.

Lastly, it remains persistently important that we do all of these things the right way and for the right reasons in order to build a great Company for the long haul. I believe that we can and will do these things and more with the help of a great team of clinician partners, a wonderful and talented support group here in Houston and around the country.

That concludes my prepared comments. Larry, if you would, please go ahead and cover the financials in more detail and then we will open up for questions.

Thanks, Chris. I will now talk about the first quarter of 2015 versus the first quarter of 2014.

Our revenue increased 10.7% to $77.2 million due to an increase in patient visits of 10.7% and as Chris alluded to, a slight increase in the average net rate per visit to $106.34 from $106.23.

Total clinic operating costs were $60.4 million or 78.2% of revenue in the first quarter of 2015 as compared to $53.1 million or 76.1% in the 2014 period. The increase is primarily attributable to $5.5 million in operating costs of new clinics opened or acquired in the past 12 months.

The gross margin for the first quarter of 2015 was $16.8 million or 21.8% as compared to $16.6 million or 23.9% a year ago. Corporate office costs were 9.9% of revenue as compared to 10.2% in the 2014 quarter. Our operating income for the recent quarter was $9.2 million versus $9.5 million a year ago. Interest expense was $0.3 million in both periods.

Income tax rate in the recent quarter was 40% as compared to 41% in the first quarter of 2014. Operating results were consistent at $4.2 million for both periods. Diluted earnings per share were $0.34 in the first quarter of 2015 versus $0.35 a year ago.

As Chris mentioned, same-store visits increased 3.8%, same-store revenues increased 4.2%. As Chris noted and I noted in my comment in the press release, by mid-March after the winter storms finally subsided, the Company's average daily visits picked up significantly so we ended the first quarter at a solid run rate. There is no doubt that without the weather, patient visits in the first quarter would have been higher as same-store referrals drew a strong 4.6%.

Our adjusted EBITDA for the first quarter of 2015 was approximately $10 million which is a 5% increase as compared to $9.5 million in the first quarter a year ago. For the trailing 12 months ended margin 2015, the adjusted EBITDA was $46.8 million which is an 18% increase from the preceding 12-month period. For additional information as to the adjusted EBITDA calculation, please see the 8-K we filed today.

Thank you, Larry. With that, our prepared comments are concluded and we can open it up for questions.

(Operator Instructions). Brooks O'Neil, Dougherty & Company.

Good morning, guys. Congratulations on overcoming the adverse effect of weather as we do in Minnesota every year.

I just wanted to mention to you I am in Denver today and the weather forecast here for Sunday is for a blizzard so we may not be by the weather yet.

Well, we are not in Denver so you enjoy your blizzard this weekend. It is going to be nice here in Houston.

I know you don't like to talk a lot about it but you did mention in your prepared remarks that you intend to continue to be active working the pipeline which sounds strong. Can you give us any more color on it? Do you just have a lot of deals and a lot of good deals and you are just going to continue to be disciplined or how are you thinking about it?

We are thinking about it just like we have. So anybody that has followed the Company for a while, we continue to be in discussions with a number of different people at any given point in time. I think the market will continue to be an active market and we will definitely continue to be disciplined as we have in the past.

Great. Any comments on reimbursement outlook? Is there any indication of either up or down reimbursement at this early stage looking out for next year?

Yes, I think it is safe to say that we expect this year to be maybe up a little bit compared to where we were a year ago. I think that is how our budget has been represented. I don't know that that is indicative of the market necessarily but rather some things that we have worked on here. Larry, (multiple speakers)

In the first quarter, our actual net rate was actually higher than we budgeted. We saw some rate pressure at the end of the year but things are better than we expected.

Great. Just one or two more quickies. Larry, I know historically you have talked about G&A costs below 10% as kind of being goal. We are obviously below 10% right now. Do you think there is any more room to squeeze out cost at the G&A line?

Yes, I think over the long-term as a percentage of revenue, it will continue to decline. It will bounce around from quarter to quarter.

The first quarter is usually not a great quarter for us from a cost as a percent of revenue standpoint just because visits are less.

But we were also behind plan. So our incentive comp accruals were lower too. Hopefully our incentive comp accruals will be higher this next quarter.

Yes, ahead of plan. I agree with Larry. I think over time it is going to move downward. I don't expect it to be dramatic in the near-term.

Okay, just one last one. I was hoping you might talk a little bit about the performance of recent partnerships that you have gotten involved with. Obviously I think that is a key driver of your growth. Tell us how some of the recent partnerships are performing.

Yes, generally speaking they have done very, very well. We are real excited. Everybody is growing, everybody is opening new facilities in our group that we did in the upper part of the country, in the middle part with a heavy work comp focus. They had a gangbuster year last year and continue to open new facilities. We have a few new facilities open in an adjacent state here that we are working on. Our newest acquisition, the one that was completed at the end of January opening a new location and so --.

The deal we closed last week is up year-over-year.

And the deal that we closed last week is on a really nice run rate and that with a guy I have known for 20 years and he is a very, very capable guy who has a great team with them and they are going to do terrific.

So again, we have been (technical difficulty) about this. We try to choose carefully. We are talking to some good people and we expect that some of that will bear fruit, maybe not all of it but certainly some of it and those deals that we have done have been certainly a good part of our success.

That is great. Congratulations. Thanks a lot.

Thanks, Brooks. Good luck with the snow.

Brian Tanquilut, Jefferies.

Good morning, Chris. Good morning, Larry. Chris, so first question for you, as I think about the de novo base, that was obviously a big part of your strategy a few years back and as we look at the number of units that you have at the end of the quarter and where you are now, it seems like the unit count is coming down outside of acquisitions. So is that just a function of you still shutting down locations but not necessarily doing de novos at this point?

So let me explain. So our de novo number of clinics that we have that are -- and all of these are satellites right now. We are not really for all intents and purposes going out and doing brand-new partnerships with people we have never worked with before. We may occasionally do one if it is a home run we think but we are primarily adding satellites to existing successful partnerships and this year we are on pace to have a good year.

We have continued to close underperforming clinics where leases are due and people haven't been able to make things happen or we have a location in a partnership with many locations and maybe just doesn't make sense there anymore. So those in the recent period have been roughly equivalent where openings on an organic basis have kind of offset some of the closures.

We actually haven't had bad openings. Normally the first quarter we don't have a lot of closures but we had seven and that is a lot for us.

A lot of that has to do with the timing of when these things come up.

And their leases end.

When their leases end. But I expect a good organic year and these organic openings that we are doing are all part of very successful partnerships. So they should perform well. The clinics that we are closing are all under water clinics for the most part.

And there is no significant cost associated with it. One thing I want to point out too is I don't know why but people just naturally presume when we do a closure that it is a former de novo clinic. A fair number of these closures are in acquisitions. In fact I would say it is not uncommon for us to buy a five or six clinic group and they've got one or two underperformers. So we will work with them to try to turn those around but at some point you've got to pull the plug on them.

Got it. Separate topic, what is your view or what are you guys doing as it relates to the therapy caps since Congress did not renew the cap exception this year?

So we are really not doing anything.

They renewed the cap, the exception process for two years.

For two years, okay.

Through the end of 2018.

What I was going to say is there really isn't any change for us. We are not doing anything differently. The cap is not a huge deal for us with or without. We've got a couple of year period now where things are pretty steady. It is kind of the same as it has been for us.

There was a proposal, a separate build to waive the cap. That got defeated but the cap itself didn't change.

Okay, yes. That is what I mean. Okay, sorry.

The vote was two votes shy of eliminating the cap totally so it passed but they did need approval to basically approve the cap and the exception process through December of 2018.

Got it. Last question for me. Larry, as we think about your staffing levels so your salaries and expense line, it was flat on a dollar basis essentially sequentially. What percentage of your comp at the clinic level is fixed versus variable? I know in the past you have talked about doing more variable comp whether it is in the PTAs and (inaudible) so just wanted to get a little bit of visibility into that.

Your fixed costs are typically going to be 15% or less because the only true things that are fixed are rent and utilities and phones. Pretty much everything above that is either payroll costs or you have some soft goods but that is function of -- I think the vast majority of our costs are people costs.

But I look at some of our people costs as almost relatively fixed. I mean we have to have somebody at the front desk, we have to have a certain ratio of therapists, many of whom are full-time, some of whom are part-time. So it really depends on how you look at -- I'm not sure your question in terms of the framework but we do have some part-time labor that we are actively working to control and match very specifically to volume and beyond that most of our cost as Larry said, salary and related costs.

That was my question, Chris, at the very end. So your ability to flex is on the part-time labor. On your full-time therapists, they are still all on 100% salary, right?

Yes, exactly.

Okay, got it. Thank you so much.

Dana Hambly, Stephens.

Good morning. Thanks for the questions. Larry, do you have the patient visits per clinic per day for the quarter and maybe how that trended month to month?

Yes, it went up every month. Hang on just a second, I apologize. Average visits per day were 21.9 in January; they went up to 22.8 in February; and 23.8 in March and when we say 23.8, the first couple of weeks of March, weather was still bad so we must have ended the month and the quarter at over 24 visits per day per clinic.

Okay. So obviously weather had a huge impact. And then on -- I think Chris, you had mentioned in your prepared remarks about the corporate overhead and there were some key hires to fill some spots I think you said in Houston. Could you elaborate on what some of those key hires were and what we are expecting from them?

Yes. I don't have a list in front of me but we have made a number of additions in some of our support areas and AP area. We brought on an officer that will continue to help us grow in scale in our clinical services and compliance area. We continue to provide robust support in those areas as we grow and we find that is needed as things continue to evolve in the healthcare space, IT-related support and other things. Some of it is normal course but more recently, we added a number of people in Jon's area and then our key officer position which came late in the year, late in the fourth quarter.

But are these catch-up hires or are these hires in advance of something?

No, I think these are hires where opportunistically there were the right people available and we made the decision to go ahead and bring them on so that we could continue to do what we needed to do for the Company. And then as the Company grows, we from a service perspective, we've got to continue to do what we need to do here.

So I would tell you it is not in anticipation of some as yet to be announced massive thing that is going to happen. This was just was the right timing for us to go ahead with the right people available to go ahead and make the change.

In a couple of departments we had administrative people if you would where the amount of work had grow faster than what we had staffed to. So some of that was catch-up.

That is helpful. I guess that was, Chris, kind of leading into my next question. In the past I think you have talked about being comfortable with the debt getting to maybe 2 times levered and I just struggle with all the cash flow that you guys generate and just the nature of your acquisition strategy. I struggle to see how you would ever get to that 2 times levered. Is that unreasonable to think or would that still kind of in the plans at some point?

We are working on it but take down pretty quick too so it is a good problem.

Okay, great. That is it for me. Thanks.

(Operator Instructions). Michael Petusky, Barrington Research.

Good morning. On the momentum you ended the quarter with, willing to give any kind of characterization as to how April has come in?

I would rather not. To be honest, we certainly haven't seen financials for April but volume has continued to, as Larry mentioned, even at the end of the first quarter trend up. And so it is following the seasonal pattern that is pretty typical for us as the weather has improved. Beyond that I really can't say a whole lot.

We don't have a lot of data to be honest, Mike.

Okay. And then I guess also from time to time over the last several years you guys have looked at adjacent businesses or a little different initiatives. Are there, is there so much to do just being in your core outpatient rehab that you don't need to look at that kind of stuff or do you guys still kind from time to time take a look at ways to maybe diversify the business?

We have looked at other things. I don't know that diversify the business is the way to describe it because that would suggest maybe a really big transformative acquisition in a different area. But you will continue to see us look at things in and around the work comp space, to look at programs and services that enable us to provide a robust offering there. Occasionally we have looked at other things and you haven't seen us pull the trigger on anything because in many cases it wasn't a fit for one reason or another.

But I don't expect there is enough activity right now in our space, we don't need to do anything far afield right now just for diversification purposes. I feel like we are in pretty good shape to do what we do really well and there may be some collateral and adjacent things that we have all done but they are not going to be big massive transformational kind of deals. Not yet.

And then I guess in terms of M&A, either any trends in pricing that you are seeing that are noticeable? And then I guess also are there any particular geographies that you would really like to fill in and just have a bigger presence in?

Yes, there are certainly some geographies although I don't really want to give them on the call. They are areas with high net rate and areas where we feel like there is a good opportunity to expand. So our discussions have continued to be in those areas where population and rate intersect favorably with the right team of course.

I would say right now for those that have followed the Company for the last year or two, there is no new trends on pricing compared to four or five years ago. Pricing is up a little bit, there is more activity in the space across private equity groups. We continue to do very well in those transactions and so I would say over the last year or two, pricing is about the way that it has been.

And then the easiest one is for last. Pay or mix and then salesperson headcount?

I'm going to let the other guys handle those. I don't have it.

For payer mix, the traditional insurance related business was 50.3%; workers comp was just under 20% at 19.9%; Medicare and Medicaid were 24.8% combined; and then other was 5.1%.

And on the sales side we currently have 88 full-time sales reps covering around 357 locations and we continue to look to add where it makes sense from a sales standpoint.

Great. Thank you.

Thanks, Mike.

There are no further questions at this time.

Okay, everybody, thank you for your time this morning. We are available afterwards of course if you have additional calls or points of clarification. We hope you have a great day. Thanks again.

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