US Physical Therapy Inc (USPH) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy Q1 2018 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to Mr. Chris Reading, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to U.S. Physical Therapy's First Quarter 2018 Earnings Call.

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

Before we begin our review and discussion of our results thus far in 2018, we need to cover a brief disclosure. Jon, if you would?

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.

Okay. Thanks, Jon. I'll start this morning by providing a little color on the quarter and then discuss as well the acquisition that we announced earlier this week.

First, the quarter. For starters, I think we built a pretty solid foundation upon which we can use to leverage our goals and objectives for the remainder of the year. To begin, if you recall, we added to our regional operations group earlier in the year, creating a new region, rebalancing the workload for a very important VP of Operations.

Similarly, starting in March this year, Graham joined us as we split the company into relative halves, Graham as COO East, Glenn McDowell as COO West. So for at least a portion of the first quarter, we were able to reset and rebalance the team and the workload. And begin [weather was] changed to establish new relationships at the partnership level. All that is going very well to date. Our partners have been receptive to the changes, and our officers have been traveling and working to establish their priorities for the coming year as well as to work on continued service to those new to their partnerships.

I'm pleased with how well everyone has worked together to make this happen as smoothly as has been done. And again, I think this bodes well as we work through what is traditionally a very busy spring quarter.

To move to the quarter itself, we saw visits build nicely in spite of the periods of extreme weather. And our -- not have the term -- not have had the term bomb cycle on my vocabulary previous to this winter. And as it played out, we had a few of them in the East as well as some prolonged crazy weather in what was normally -- what normally are pretty mild places. Even here in Houston where we saw snow twice. So despite all of this, we put together a solid quarter with operating results up 10.6% to $0.56 per diluted share. Net revenues grew about 11% on a 7.4% increase in net patient revenue from PT operations, a 20.4% increase from management contracts and a full quarter of revenue from our industrial injury prevention business, which originally started with us in March 1, 2017.

Net rate held up well for the quarter in spite of the 2% Medicare adjustment. We were up slightly from the prior year's quarter to $105.15.

Same-store volume was up modestly from -- for the quarter in spite of the weather, with a nice volume build through March, which ended up being our second most profitable month ever for the company.

Gross profit for our PT clinics improved by about 12% to $23.2 million or 21.4% of revenue, up about a 40 basis point improvement on margins.

Our industrial injury prevention business also ended the quarter on a very strong note, with a lot of good things for them on the horizon.

On the cost front, we made some progress late in the quarter in our PT business, especially at our mature facilities. We expect that progress to continue as the year unfolds now as the weather has improved across the country and volumes have further expanded as well as our team additions have the opportunity to effect change.

Our cash flow has been strong. In this quarter, we were able to pay down a substantial chunk of our outstanding credit facility, over $12 million worth in the quarter.

Relating to the earlier in the week announced acquisition, we are very pleased to be adding to our capable current industrial injury prevention team, with equally capable and passionate partners who, as part of this transaction, rolled their retained equity into our existing prevention partnership.

Now on a combined basis, we are on site in approximately 675 locations in 28 states, the vast majority of these being with large well-known brands, municipalities and Fortune 500 type companies.

We have been working on both the integration plan for these 2 groups as well as for further expansion, growth and we're enthusiastic about the possibilities in this segment as well as for the company in general.

As we exit our first quarter, we're ahead of our own internal budget, and we're building volumes and lots of focus from our clinics as well as our Houston team. We are looking forward to building on a good quarter as we work to make a difference in the lives of the patients and families with whom we are blessed to serve.

Now I'd like to turn things over to Larry to cover the financials in more detail before we open for questions. Thank you.

Thanks, Chris. Chris hit on a number of the financial items, so I'll make this brief. Specifically as it relates to PT operations, revenue increased 7.4% to just over $100 million as patient visits increased 7.2%. And as Chris mentioned, we actually saw a slight increase in the average net rate despite the Medicare rate reduction.

Revenue per management contracts was $2.2 million and from our industrial injury prevention business was $4.9 million.

Total operating costs were 78.6% of revenue versus 78.7% a year earlier.

In terms of the dollar increase, $5.5 million was attributable to operating costs of new clinics. There was an increase of $2.8 million related to the industrial injury prevention business due to a full quarter of operations and an increase of $0.3 million related to management contracts, while we were able to reduce costs at our Mature Clinics by $300,000.

The company's gross profit for the first quarter grew by $2.5 million or 11.9%.

Chris mentioned the improvement in the margin percentages as it relates to the PT operations. As to the industrial injury prevention business, those margins improved from 14.3% to 15.8%.

Corporate costs were 9.4% of revenue in the first quarter versus 8.8% a year earlier. Part of that is the result of the changes in the management structure, where there was a significantly more incentive comp accrued in the first quarter this year than a year ago.

Operating income from the recent quarter increased 7% to $13.1 million.

Our income tax rate was 25.8% in the first quarter this year versus 27.3% a year ago. Earnings from operating results increased 10.6% to $7.1 million.

Same-store revenues for de novo and acquired clinics open for a year or more increased 1.9% as visits increased 1.4% and the net rate increased by 0.5%.

For the first quarter this year, our adjusted EBITDA was $14 million.

We declared our second dividend of the year -- the second quarterly dividend for 2018 of $0.23 per share will be paid on June 8 to shareholders of record as of May 11.

Thanks, Larry. With that, operator, let's go ahead and open it up for questions.

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

Just quickly -- just touching back on the cost alignment initiatives. I know you -- maybe talk about that for the last couple of quarters. Just -- it sounds like you're certainly starting to make some headway. I think you said $300,000, $400,000 cost reductions and your margins improved. I know prior history, you had put some numbers on. I'm not looking for that necessarily. But this is sort of the early stages and do you still see a lot of -- a lot more or some material more actions that you have to take over the next few quarters, I suppose, before you, sort of, wind that down?

Yes. We still have some opportunity for sure. We have a portfolio, as you would expect. But with -- a decent chunk of our team, portions of each of the regional support group, with Graham, the division that we made, it's going to take a little bit longer. But we're making some progress. We saw some of that in the quarter. And we expect, particularly, as volumes build that, that will kind of make its way through as the year progresses. I don't have a number yet, and we have to see how the second quarter begins to play out. But the guys are focused on it, and I expect we'll make continued progress.

Okay. And obviously, the volumes seem [starting] to recover after a sort of slow start. You got a great year last year of 4% same-store for the full year. Without giving us an exact number, do you think you can get close to that again? Any reason to believe -- unemployment still remains low, the economy still remains pretty good. Any reason macro level to think things should really change?

I don't think there's any reason on the macro side that is going to affect same-store. Last year was a great year. We had a good March with weather, and April has continued to improve. So we'll have to see whether we get back to the 4% or we end up in kind of a more normal range. But there isn't anything on the macro side that should influence it.

Okay. And just lastly, and I realize pricing sort of moves around on a quarterly basis, sometimes skewed by acquisitions. But anything unusual that would sort of -- and again, it wasn't -- it was only -- I think -- I assume you go down 0.5% to 1%, you actually went up 0.5%. But anything in the quarter that sort of offset the Medicare cut and actually gave you a lift?

Nothing unusual. I think the portfolio, the deals that we've done and the fact that we're making sure from a clinical services perspective that everybody understands precisely what to do. We're a company that hires a lot of new grads. And these new grads come out and they don't know how to code. In fact, they're kind of taught less is more, and coding less and doing it incorrectly is just as bad as coding high and doing it incorrectly. And so we've been very focused on that, particularly, with the Medicare cut to be precise. I think that had some effect. But as you mentioned, it's not a big change.

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

Chris, just wanted to talk about the industrial injury business. Obviously, you did an acquisition earlier this week -- this month. So how should we be thinking about the opportunity sizing there? And if you don't mind -- maybe, Larry, just walk us through kind of like the economics that we should be thinking about in that kind of business.

So the opportunity -- we're just on, kind of, the front end of this. We did the deal back in -- I guess, we closed at the end of February our first partnership of '17 -- end of February in '17, we did this deal, effectively beginning May. Those 2 partnerships now become 1. And so we're in process of knitting that altogether. We've been working on that actually for a couple of months, and that's going well. We think there's a bigger opportunity to deploy some additional sales. It's going to take us a little while to digest this, just as it did -- the deal we did last year. But we're scratching the surface. We'll continue to look at -- look for other opportunities in addition to the organic opportunities, I think, that exist. And one of the things about this deal that we just did is they have -- they are in the same business. They are largely -- their business is largely core prevention. Whereas in our earlier acquisition, we do some other things as well that are a little bit more peripheral, but still add to the company. In our new acquisition, they do it all with athletic trainers. And there's a price point differential as you would expect there would be between athletic trainers and licensed physical therapists. Trainers actually are very, very capable, very competent. Because it's really what they do on the field, which is work on injury prevention and quick assessment and response. And so we think there's a little bit more margin opportunity over a period of time, not immediately, but over some time to move our existing partnership gradually in the direction of being more ATC centric where it's appropriate to do that. So I don't know, if Larry, you want to add anything.

In terms of size, I mean, our run rate now in the PT business is over $100 million a quarter. The industrial injury prevention you're talking about with the combined operation is closer to $8 million or $9 million a quarter. So obviously, it's much smaller. I do think there's -- whereas the margins in PT business run 21% to 25%, that business we just bought had better margins in the business we acquired a year ago, partially because of use of ATCs versus PTs. So what has been a 15% margin business can be better, but I'm not sure it will be as high as the physical therapy business.

Larry, is this a PMPM model or is this a per visit model? Or is this -- what's the reimbursement model for this kind of business?

Yes, it's not PMPM. I guess, it could be, but it's not. It's based on a contracted number of hours for a given service typically over a calendar year period. So these are -- while we have some one-off contracts that are shorter term, most of these contracts are for a calendar year. Begin with service like prevention, which can involve a number of different things. And then gradually, our goal is to demonstrate the effectiveness of that and to grow in terms of the number of contracted hours. But it's all -- mostly all on an hourly basis, Brian.

Got it. And then my last question, Chris. As I think about the M&A environment, not to ask you about pipeline or that, but what are you seeing in terms of changing interest or increasing interest from sellers at this point in the non-platform space?

I think it's similar to what it's been for the last couple of years. And as I've mentioned before, as I go to the private practice meeting every year, which is end of October or beginning of November, that group -- just like when I look in the mirror, I'm seeing more gray hair on my own head, that group becoming a little grayer and a little thinner on top. And so those people have to figure out what's next for them in terms of how to monetize their largest asset. And many of the folks, particularly the folks we're interested in, they build a business that's too big for their employees to buy. And so I think the interest is going to continue to be high. Not everybody's is ready at the same time or for the same reason, but there certainly isn't any change in the environment from an interest perspective that I can tell.

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

Just wanted to follow up on little on the industrial injury business. And Chris, I was wondering, as you expand further in this field, are there any opportunities or investments you have to make regarding the sales force? Is it different calling points?

It's a different type of sale, and so there will be some investments. But -- and the sales cycle's a little bit longer than it is -- much longer, in fact, than it is for a salesperson that goes out, can have an impact on our PT business month 1. It's unlikely that a salesperson is going to have a month 1 impact on the industrial business. But the quantity and the volume and the pricing in that business is generally significant enough that we think with the progressive add over time, not a huge investment out of the gate, but just thoughtfully adding to the sales side will help us grow this business in what we think will be a material meaningful way as we look forward.

Okay. No, that's great. And again, are there any other adjacent areas you are considering?

Right now, we're looking to grow the business that we have and knit it together well and to continue to expand. Because this new acquisition offers primarily the -- just the 1 service, I think there's an opportunity to cross-sell some of the things that we do in the original business. But there isn't anything that we're chasing right now that is what I would consider to be a separate untended market right now, adjacency.

Right. Okay. That's great. And Larry, just 2 questions. First is, wondering how we should think about the tax rate going forward. And also, if you have the payer mix handy.

In terms of the tax rate, I think, in our guidance, we spoke to -- what 28%, Jon? So -- around 28% is what we estimate it would be. In -- with regards to the payer mix, insurance-related managed care type payer was 49.2%, workers comp was 14.6%. Now that excludes the industrial injury prevention business. That's just fee per service. Medicare, Medicaid combined were 27.7% and then other was 8.5%.

Your next question comes from the line of Dana Hambly with Stephens.

Just on the injury prevention business. Is this similar to the PT business where it's -- there's hundreds of small independent companies out there? And is the growth opportunity more organic or acquisition driven? And I'm just trying to -- are you the biggest now with these 2 acquisitions?

I can't say for sure, whether we're -- Dana, whether we're the biggest or not. There's -- we're certainly, I think, one of the -- with this acquisition, one of the biggest. I can't, off the top of my head, name somebody that's bigger. But honestly, I don't know. I don't get to see the financials on some of these companies. So I'd be guessing. There aren't hundreds and hundreds we've identified what we think are the biggest players. There's a smaller number, as you would expect, in this business than we see in the PT side of things, where there are literally thousands and thousands. There aren't that many on the prevention side. And a lot of it's mom-and-pop, which doesn't even make our radar screen. But we think we can grow organically in a very significant way, and then we think over time, there may be some attachments that we can make with people that do a great job that have established either vertical niches in certain industries that are a little different than ours potentially or key areas, which are strengths that may be in more peripheral area for us. So we'll see.

Okay. And would it be fair to think that the multiples you would be paying would be comparable to the PT multiples? And it sounds like you're going to look to structure these much like PT where you do these partnership deals.

We'll continue to do the partnership deals. We have done 2 deals, and so I don't know that I have enough of a pattern yet to tell you what the multiples are going to look like or how that's going to compare. But I'm not going to lead you to believe that it's going to be materially different either. It's just a little early to tell.

Okay. And does this fit in well with your Fit2WRK business?

It does. It fits in real well. So there were aspects of Fit2WRK, which are really better delivered at a clinical level. And by that, I mean, in our facilities, there are certain aspects within Fit2WRK that we were able to do out of our facilities that were outside the clinic. But frankly, those were a stretch for us. And so this kind of meshes the 2 together, so we continue to do both. And I think it's a good puzzle piece type fit between all the products and services.

(Operator Instructions) You do have a follow-up question from Brian Tanquilut with Jefferies.

Larry, just wanted to ask, on same-store visits, is there any callout in terms of what you estimated, say, the flu impact was on the downside or the weather?

Well, we don't -- Glenn would tell you it's a huge number, I think. But no -- but I think it certainly impacted us. So...

The flu was bad this year, and then the weather was...

And the weather was bad. But I mean -- actually -- honestly, I didn't expect us to have 2% same-store growth. If you had asked me that in February, I would have told you no way, because there was -- it was bad. But it certainly had an impact. I can't tell you what the percentage was.

Okay. I guess, my question really is, based on the 1.4% same-store performance in visits against an easy comp from last year, how does that translate into your view and guidance or the assumptions you had baked in for same-store in your guidance range?

Well, I don't know that was necessarily (inaudible).

I don't know -- I don't remember, I don't know that it was.

It was flat last year. That's the comment you guys made.

Anyway, I don't know.

We're ahead of budget for the quarter in terms -- and that budget baked into the guidance that we gave you. So I think full steam ahead without any changes right now.

And as you know, as is common, either when we do a material acquisition or after we get a quarter or 2 in the year, we frequently revise guidance. So it's something we'll look at, at the end of the second quarter.

At this time, we do not have any further questions. I would like to turn the floor back over to the presenters.

Okay. Well, listen, thank you everybody. We appreciate the questions. We appreciate the time this morning. If you have any follow-up, we're here in the office. Have a great day. Thank you. Bye now.

This concludes today's call. You may now disconnect.