US Physical Therapy Inc (USPH) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy Fourth Quarter 2017 Year-end Earnings Call. (Operator Instructions)

It is now my pleasure to turn the call over to Chris Reading to begin. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy's Fourth Quarter and Year-end 2017 Earnings Call.

With me on the call today are Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, Chief Operating Officer, West; Graham Reeve, Chief Operating Officer, East, and newest member of our family; Rick Binstein, Vice President and General Counsel; Jon Bates, Vice President and Controller.

Before we begin to discuss our results as well as our plan for 2018, we need to read a brief disclosure.

Jon, if you would, please?

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.

Okay, I'll start this morning by covering some highlights for the quarter and the year and then moving into a discussion about some of the changes and the progress we made and are making, which we expect to have a beneficial impact on our year as well as our future.

First, a few highlights. For the fourth quarter, our operating results increased 16.9% compared to Q4 2016. We produced strong net revenue growth this past quarter, with a 20% increase when compared to the fourth quarter of 2016. Total operating costs for the quarter were 78% of net revenues, which represented 130 basis point improvement from the 2016 quarter. These operating costs included a onetime $400,000 goodwill write-off related to the loss of a rural facility, with a large component of its business tied to a management contract with a local hospital which had fallen on difficult financial circumstances. In spite of the noncash charge, we were able to make a good dent in our operating cost, while at the same time, adding some key operational support.

We continued our fourth quarter progress by adding some additional operations capabilities in the form of key people in this first quarter of 2018 as well. Notably among these are Graham Reeve, our Chief Operating Officer, East, who comes to us with a deep health care background, including as a licensed physical therapist. His career eventually progressed to include leading a large 6-hospital group, with 1,800-licensed beds, as their CEO. Graham will be sharing operational responsibilities with Glenn McDowell, who has capably served our company for more than 14 years and who will handle, as COO, the western half of our company -- who will handle the western half of our company as COO along with our industrial injury prevention business. Graham will oversee the eastern half of our company as well as any new or developing contracts or related ventures.

Additionally, we've added some key resources to our regional teams, along with an important promotion and the creation of a new region with a rebalancing of the partnerships across each of the regional VP's territory. These moves, which began last year and continued into the first quarter, will allow us to provide a greater measure of responsiveness, oversight, operational support as well as sales and marketing-focused training and support which will assist our company in driving volume while maintaining effective cost alignment.

We have grown very significantly over the years, and we expect to do many more good things into the future. These key additions will help us provide the necessary resources to get us there.

I also want to say that I'm very proud of our team for staying focused and pushing forward while embracing the changes that we needed to make last year and into the start of 2018.

We enjoyed record visits per-clinic per-day volumes in a number of months throughout 2017. We produced a very solid revenue and visit growth quarter to finish our year. And our partners and clinicians, along with our sales team, worked to deliver a same-store visit growth number for the year at 4%.

It was also an excellent year from a development perspective. We opened 22 de novo locations. We added a tuck-in acquisition and 5 larger ones, which added a total of 36 acquired locations alongside the 22 satellite offices that we opened in 2017. One of those acquisitions was our industrial services company, which serves clients in more than 180 locations around the country. They enjoyed a terrific first year with our company.

2017 was a little lumpy, a little bumpy at times; a little messy, very busy. And in the end, with a very positive finish and a number of very positive changes that I think position us well for the future.

That concludes my prepared comments. Since I touched only lightly on just a few of the financial highlights, I know Larry will cover that in more detail along with our guidance and dividend increase for 2018.

Larry?

I'll start with the review of the fourth quarter. As Chris mentioned, revenue increased 20.2% to $109.2 million. Patient revenues from physical therapy operations increased 14.3% due to an increase in patient visits of 15.3%, partially offset by a small decrease in the average net rate per visit.

Revenue per management contracts was $2.2 million as compared to $1.3 million a year earlier.

Revenue from the workforce performance solutions business was $4.7 million for the fourth quarter.

Other revenue was $700,000 in both the 2017 and 2016 periods.

Total operating costs were 77.9% of revenue in the fourth quarter as compared to 79.3% a year earlier. As Chris mentioned, we've made solid progress in reducing our operating costs.

Salaries and related costs, including those from new clinics, were 56.9% of revenue as compared to 57.2% a year earlier.

Rent, supplies, contract labor and other costs as a percent of revenue were 19.6% as compared to 20.8% a year earlier.

The provision for doubtful accounts in the recent period was 0.9% as compared to 1.2%.

The gross profit in the fourth quarter was 22.1% of revenue, an improvement of almost 150 basis points from 20.7% in 2016. The gross profit from the company's physical therapy clinics was 22.6% versus 20.8%. The gross profit on management contracts was 18.9% as compared to a loss a year earlier. And the gross profit on the recently acquired workforce performance solutions business was 10.6%.

Corporate costs ran at 9.3% of revenue, up from 8.6% a year earlier, where that was attributable to the staffing changes we made for the year where they were actually down.

Operating income increased 27.5% to $14 million from $11 million a year earlier.

Interest expense on debt was $500,000 versus $300,000 as we've carried a higher average borrowing amount during the period.

The income tax benefit for the fourth quarter was $2 million. The provision for 2016 was $3.2 million, but included in the fourth quarter is a tax benefit of $4.3 million due to the revaluation of deferred tax assets and liability due to the recent Tax Act.

The provision for income taxes prior to the $4.3 million tax benefit was 43.5% as compared to 37.5% in the 2016 fourth quarter. Included in the recent quarter was a charge of $300,000 related to a detailed tax reconciliation for 2016. Without the reconciliation charge, the provision for income taxes was 37.7%.

Net income attributable to noncontrolling interests was $1.2 million versus $1.3 million. Net income attributable to noncontrolling -- redeemable noncontrolling interest was $200,000.

Operating results increased 16.9% to $6.2 million. Earnings per share from operating results was $0.49. The analyst consensus estimate was $0.47. A year earlier, we reported $0.42.

For the quarter, GAAP income was $7.3 million or $0.57 per share as compared to $5.2 million or $0.42 in the fourth quarter of 2016.

Chris alluded to same-store revenue increased by 4.6%: visits increased by 3.8%; and the net rate was 0.8% higher.

I'll quickly run through 2017 now. Net revenue increased 16% to $414 million due to an 11.7% increase in patient visits, higher revenue per management contracts due to an increase in the number of facilities under management, and the revenue from the workforce performance business acquired in March.

Net patient revenue from physical therapy operations increased 11.6% due to an increase in total patient visits of 11.7%, offset by a small decline in net rate.

For the year 2017, revenues from management contracts were $7.4 million versus $5.5 million. The workforce performance solutions business contributed $14.9 million. Other revenue was $2.5 million versus $2.2 million in '16.

Total operating costs were 78.1% of revenue versus 77% a year earlier. The increase in operating costs, as detailed in the press release, was primarily attributable to new clinics either open or acquired in 2017 and 2016.

The gross profit for 2017 was $90.6 million or 21.9% of net revenue versus 23% a year earlier. The gross profit for the company's physical therapy operations was 22%. The gross profit on management contracts, 14.9%; and the workforce performance solutions business contributed 13.3%.

Corporate office costs for the full year were 8.7% of revenue versus 9.1% a year earlier.

Operating income rose 10.5% to $54.7 million. Interest expense was $2.1 million versus $1.3 million.

The provision for income taxes for the full year was $6 million in '17 versus $11.9 million in '16, the difference being the tax benefit we realized.

Net income attributable to noncontrolling interests was $5.2 million versus $5.7 million a year earlier. And net income attributable to redeemable noncontrolling interests was $200,000.

Operating results rose 7.5% to $26.1 million or $2.08 per share versus $1.94.

GAAP income was $1.76 versus $1.64.

In terms of other financial measures as we reported, adjusted EBITDA in the fourth quarter grew 19.2% to $15 million. For the year, adjusted EBITDA grew 8.3% to just under $58 million.

An item of note is, in the fourth quarter, we extinguished all mandatory redeemable noncontrolling interests. Effective December 31, 2017, the company entered into amendments to its acquired limited partnership agreements replacing the mandatory redemption feature. We did this having paid no monetary consideration to the partners. The company removed the outstanding liability classified Seller Entity Interests at their carrying amounts and they're now recognized as an equity classification, and there was no gain or loss on the extinguishment.

As I noted in the release, despite making 5 acquisitions last year for a total consideration of $41.3 million and paying $10.1 million in dividends to shareholders, our net debt only increased by $7.1 million, as our cash flow from operations was very strong.

We also announced in the release that we are increasing our quarterly dividend by 15%. The company's first dividend this year of $0.23 will be paid on April 13. As you will recall, we began paying dividends back in 2011, and we've increased the dividend amount every year since.

We also provided earnings guidance in the release. For 2018, management currently expects the company's earnings from operating results for the year to be in the range of $29.5 million to $30.9 million or $2.34 to $2.44 in diluted earnings per share. That's based on an assumed tax rate of 28%. Please note that management's guidance range represents projected earnings from existing operations and excludes any potential future acquisitions.

Thank you, Larry. That concludes our prepared comments.

So operator, if you would please open up the lines for questions.

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

Chris, how about just a question for you, maybe just I'm starting a little higher level, just on your sort of the fine-tuning of the organization. I know on the last call you talked about adding new territory. And obviously, it looks like you've split up the COO position sort of regionally into 2. Do you think you're sort of complete with what you've done? And just how about a little bit more color on that?

Yes, so we obviously started working on this hard last year. Glenn and I worked on it together; came to the conclusion that we were all spread a little thin. So we rebalanced the regions. We promoted somebody internally, a very strong, long-term performer for us; created a new region, rebalanced those regions. And then within the regions, one of the other things that we've done that we think will be important to us going forward is we've added another director of operations who will be focused, especially focused on our sales and marketing team and on driving referral and growth opportunities. And so some of that began in 2017 final quarter. Some of that hiring has extended into this first quarter. But is -- I think we're approaching, relatively speaking, some completion.

Some of the other changes and additions we made last year include: we added a cost accountant, somebody who's helped us to come up with some really nice reporting for the ops team to be able to better stay on top of and see subtle adjustments and changes in efficiency and cost structure. And so we're still in process in getting those new people assimilated, getting everybody to the point where we're conversant with all of the new tools.

Obviously, Graham -- Graham is celebrating his 7-day anniversary with us today. So he's been with us all of a week. We started the week with busy, good, 2-day board meeting. And so he's been drinking from a fire hose, but very capable guy. And as noted, Glenn and Graham will split the country. We've done a lot of deals. We've had a lot of growth. We -- when we all got here, we had about 200 facilities; and we're up around 600 now. And the market's more complex from a regulatory environment than ever. And this gives us the resources that we need that will carry us into the future.

And so I'm very excited about the people; have some outstanding people. I'm very excited about the changes. We made some adjustments here and some other areas and trimmed a little bit in some areas that weren't producing so much fruit as we needed. Added some other key elements, which undoubtedly I believe will produce good fruit. And so a lot of that's done, Larry. But some of these folks are new, and we got to help them get up to speed. That's going to take us a little time, as you would expect. But it'll happen as we move through the year.

Okay, great. And just on, as mentioned, very good same-store growth especially on the volume side in the quarter and frankly, the year. I assume, and I know there's no industry data, but I -- I suppose you guys are likely outperforming and taking some share from competitors. Where do you see this in '18 and beyond? And what -- are you building in this similar type of an outlook into your guidance?

Yes, so we never really project or we don't talk about what we've done from a same-store perspective. But we think if you look at the -- what the economists are saying, the first half of '18 is supposed to be relatively the same as '17, essentially a little slowing in the economy on the latter half of '18. We've got our budget built into the guidance numbers that we've provided, so we expect same-store growth. I don't remember, to be honest, exactly what percentage it is.

It's at a more modest rate. It's more -- it's at historical, which is closer to like 2%. But that's the same figure we used last year and we did better than that. So I don't think we're being conservative; we just went with historical averages.

Okay. Okay. And -- okay, because on the guidance outlook, if I -- if sort of we take away the lower tax rate, the benefit from the tax, it's not -- it's only little pretty modest growth on the bottom line.

Well, the reason is with the Medicare rate cut, which we announced when it came out, that affects not only Medicare but some of our commercial payers. That rate reduction, which is about $2 a visit, works out across our company to be $0.65 per visit. And if you take that times the number of visits we expect, that's actually a $0.15 swing. So I know, well, most of the analysts now include acquisitions in their estimates, which we don't, so that's part of the difference. But there's (multiple speakers) a major swing with that Medicare rate reduction, that mainly won't move to mitigate that. But we did (multiple speakers) we budgeted out a $0.15 effect.

Our next question comes from the line of Mitra Ramgopal of Sidoti.

First, just wanted to follow up a little on the last question, Larry, regarding the reimbursement cut. If you can give us a sense what the peer mix was at the end of '17?

Yes, so at the -- for the fourth quarter, private and managed care, really our commercial insurance companies, was 52.5%. Workers' comp was 13.3%. But keep in mind, that excludes the workforce performance solutions business, which we report as other revenue. Medicare and Medicaid combined were 26.5%. And then other was 7.7%.

Okay. And again, I guess, the slight dip in terms of average net revenue visit in the quarter was really due to mix.

Yes.

Okay. And Chris, I just wonder if you could share a little in terms of your expectations for the workforce performance solutions business going forward?

Yes, we like that business a lot. It's new for us, but the guys are doing very well. We have more activity planned in that space. We have more growth planned. One of the reasons we like it, Mitra, is because it enables us to go directly to these large self-insured companies and focus on things that we know and can do well. So we focus on prevention. We're embedded in these businesses. We have people that become known, and who develop deep relationships within these businesses and industries. They help keep the workforce safe. They do advanced ergonomic work. We have ergonomists that do ergonomic projects. So a lot of it is really based around prevention. And CEOs and CFOs understand that, that's an important element to their continued growth -- keeping a healthy and engaged workforce -- in their profitability.

On the other side of the equation, they employ a huge number of people who have commercial insurance plans. And they have the ability to influence who the providers are on that side. So we think -- and we're just scratching the surface, and we're just getting started -- but we think there's opportunity, certainly, in the space. Many of these -- there are many, many companies, many more companies that don't have these kind of services within their facilities as compared to the ones who do. We think there's some good companies out there that we can acquire and partner with, as we've done in the PT space. We understand the business model. We understand the care delivery. And we think it's going to be a growing -- small now, but we think, over time, it will grow steadily -- modestly, potentially but steadily, to be a decent part of our company and our offering.

Okay, that's great. And again, as you look at acquisitions, obviously, I know the folks will still be on core clinic -- expanding the clinic network, but you mentioned some potential opportunities on the workforce side, too. I'm just wondering if you could comment a little on the overall environment for acquisitions in terms of any change in -- more competitors coming in or pricing.

We're not seeing any change on pricing. I'm hopeful that some of these tax changes ultimately help to put a lid on some of the pricing changes that have occurred. It's still a very competitive environment. There are plenty of competitors out there. A lot of people are active. We try to continue to differentiate ourselves because of how we handle life after with brand continuation, with continued equity, significant equity ownership by the founders and partners and without major disruption in the culture of the business.

So we're a little lumpy and bumpy. We had a great year last year. We expect to continue to be active this year. And I don't want to say a whole lot more than that. But we're continuing to have good discussions, and we'll see what kind of fruit that produces for the year.

And to elaborate on Chris's tax changes comment, obviously, with the lower tax rate, we'll produce more cash flow to swing. We said our tax rate would go down. We estimate it down to 28% from what had been 38%, so that's more free cash flow.

But on the flip side, as most investors know, 8 out of the 10 largest companies now in the sector are owned by private equity groups who obviously, normally leverage these deals up. So to the extent that interest rates rise or and/or that the deductibility of interest is limited by the Tax Act, those things are probably favorable to us from a competitive standpoint with regards to acquisitions.

I would tell you, don't expect to see any major changes in the near term. Interest rates are still pretty benign. But they're going to go up, and so we'll see what happens over time.

Our next question comes from the line of Rich Sokol of Legacy Capital.

Actually, I just need some clarification and some help on the math. Given your new put call relationship, does that mean in 2018 there's no mandatory redeemable changes on the interest expense? Does that all go away and become 0s?

Yes. Well, I mean, we have the revaluation, but yes, it does. And so it goes back to actually how we used to account for stuff, to put it in simple terms.

Okay. So none of those funky interest expense. Both the earnings allocable to noncontrolling interest and the redemption value, those will both be 0s going forward?

Yes, it will be a small piece of the allocable (inaudible) all those in equity.

Yes, yes it moves over to the equity line from the liability line, so there's not any more interest expense.

On the P&L?

Yes, the revaluation. When we buy them out or change in value, and then you have obviously their earnings, their minority interest earnings that are attributable to them, but no more the interest.

Got you. Okay, that's what I thought. So maybe you could just help me with the math because I'm trying to back out into an operating number in comparing 2018 based on your guidance versus 2017. I know one of the previous callers asked about this. But if we're looking around $30 million of net income to get to your $2.33, $2.40 number for the year, there's about $5 million of net income through others, so that's $35 million from the entity?

Rich, you're getting into too much detail. Our guidance is to operating results, which takes those figures out of there, the redeemable noncontrolling interest. And so the apples-to-apples is what all the analysts use, so I would suggest you work from those figures.

Okay, that so -- so maybe -- let me just simplify that. I'm trying to just get -- so pre-interest operating income number for the company, 2018 versus 2017; because when I'm doing it, I'm actually seeing a down number for 2018 versus 2017. Is that correct?

No, it is not down. I'll be happy to talk to you with -- about it offline, but again, we only give guidance to the operating results figure. We don't go into revenues or any of the other line items.

Okay. Okay, that's fine. And just last question, just same-store sales, maybe I have something wrong, but I think you reported patient visits up 4% for the year. And just looking at my notes, it doesn't appear that we had a 4% increase in patient visit same-store sales for any quarter of the year. Am I missing something?

I'd have to go back and check, but we've double- and triple-checked these numbers. They're correct.

It's the way (inaudible).

Yes, go ahead, Jon.

No, it's just -- in the calculation of same-store when you do it, you have to pull out the components of it that -- you'll see numbers within your revenue certainly in the financials of the reported. But if you're looking at it over a comparative time period, you're pulling some of that current period out because it's not comparative as the same-store. So on the definition of same-store, that's why when you report it in some cases, it might be higher; some cases it might be lower. Because you are trying to look at a comparable period whether it's a quarter or a year. So that's the long answer to the question.

So in the quarterly, once you're comparing quarter-over-quarter, and you'll get a different answer when you do year-over-year.

And we can walk him through offline if he'd like to.

(Operator Instructions) Our next question comes from the line of Brian Tanquilut of Jefferies.

Chris, just a first question for you. As I think about the cost structure and margins, I know we've been talking about this for the last couple of quarters, but are there other levers left to pull to drive the margin higher given that the corporate expense line is optimized at this point? Or is it just a matter of waiting for all the initiatives and the efforts that you've put into work through the P&L over the next 2 quarters?

Yes, I mean, I think it's to work through the next few quarters with the team and the resources that we have. We talk about levers to pull. It really comes down to, do we have, on a fairly precise basis, the right number of people handling the patient volume that we have on any given day or week or month, and staying on top of that? And we now have some fairly involved sophisticated reporting that people are -- again, we have some new people still getting their arms around. But that's where it comes down to. And then, over time, can we get some increment of small productivity increases? Maybe. We've been working on that for a while. I think that's partly offset by the continued burden and complexity of documentation and some of the regulatory framework that just, unfortunately, slows everybody down in health care.

And then on the corporate side, we have trimmed some costs in some areas. We've added some costs in some other areas that's reflective of our guidance. But we'll get our corporate overhead as a percent of revenue. It will drop over time. And so there's still some room there because we're going to continue to grow and add deals and other things. And so -- but those are the key areas.

And Brian, again, we've talked a lot about margin percentages actually over the last 1.5 years. The gross margin percentage has declined some on an annual basis, but it was actually up in the fourth quarter. That said, at the end of the day, you spend dollars, not percentages; and our gross profit increased 10.5% for the year. Now the margin rate was slightly lower, but again, in the fourth quarter that will start to turn around. At the end of the day, you really got to look at how many dollars you are getting to the bottom line.

No, I appreciate that. But to follow up, Chris, to your point, I mean, as I think about wage inflation in PT and your ability to flex, you talked about scheduling and having the systems in place for that. I mean, how do we put all that together? Like what is the wage inflation picture right now? And what is your ability to flex? Is it -- are you able to reduce man-hours? Or does it have to be headcount?

So let me explain, because if I say headcount, people get maybe the wrong idea. A lot of this is done with part-time folks whose hours flex up and down according to volume. And so it's not that somebody's going away. It's that we might literally be trimming an hour here or there across what has grown to be a pretty large portfolio of facilities. And so it's not dramatic. Occasionally -- not often, but occasionally -- we'll have somebody that we brought on with the expectation that they would fill up a schedule; and for whatever reason, it doesn't happen. And over time, either through attrition or through action, we part with that person.

I think the key is, is we now have more folks to stay dialed in on that. And I'm not going to tell you it's going to be always perfect. But we've been working on it. We're focused. We're going to continue to work on it. And we'll see what happens.

Got it. And then last question for me. Oh sorry, the inflation, Chris, what are your thoughts on wage inflation for PT?

Yes, I mean we'll see. Obviously, it's a good employment market. When you look at unemployment numbers, there's the lowest they've been in a really, really long time. PT has always been a good employment market. But we're an attractive segment in that market. We're an attractive area within the physical therapy part, orthopedic outpatient. I mean, we have great facilities and good reputation. So there's undoubtedly some wage inflation. I think it's probably a couple of percent. And we'll see how that plays out over time.

Other areas within the health care sector which are influenced -- or where PT is involved, gotten hit over the years: home health and skilled nursing facilities and other areas, LTACs. And so that's created a little bit of a buffer for us potentially. But yes, there's a little pressure for sure.

I appreciate that. Last question for me. As I think about the flu, is that a factor that could provide a short-term headwind in Q1, just given how prevalent the flu was this past -- this quarter?

Yes. So, yes; the flu in January and for a good part of February, in addition to the weather, was hard. People -- some people go out when the weather is bad but nobody goes out when they have the flu. And so this was a pretty tough flu season. That said, at least for the start of the year, we ended up -- volume was a little bit lighter. But I think we ended up about where we expected to be. So we'll see how the rest of the quarter plays out. I think the flu is starting to ramp down. Although the guys in the Northeast are getting hit the last couple of weeks pretty hard with weather. So hopefully, that will pass soon.

But first quarter is a challenge always between weather and flu and other things. And so March is always a big month for us, an important month than -- I mean, that's not baked yet, so we'll just have to wait and see.

(Operator Instructions) At this time, I'm showing no further questions. I'd like to turn the floor back over to management for any additional or closing remarks.

Okay, everybody, thank you for your time and attention today. We really appreciate it. We're available if you have any offline questions, and we hope you have a wonderful day. Bye now.

Thank you, ladies and gentlemen, this does conclude today's conference call. You may now disconnect.