U.S. Physical Therapy, Inc. (USPH) Q3 2012 Earnings Report, Transcript and Summary

Good morning, my name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Chris Reading, Chief Executive Officer. Please, go ahead.

Thank you. Good morning, everyone and welcome to U.S. Physical Therapy’s Third Quarter and Year-To-Date 2012 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, our Vice President and General Counsel; and Jon Bates, our Vice President and Controller. Before we begin our quarter and year-to-date review, I’ll ask Jon, to please cover our 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. Before I ask Larry to cover the financials in detail, I’d like to provide some color on our operational performance for the third quarter and year-to-date periods. One very nice trend we’ve seen this quarter is that visits have picked up, improving sequentially within the quarter. This helped move our same-store revenue numbers up from the 2.8% area where we reported in the second quarter to 4.3% for the third quarter, and now up to 5% on the year-to-date period. Our partners, sales staff, management team, all have been working very hard to improve our volumes and to move market share and these numbers are a reflection not only of that effort but also the resolve to deliver a significantly better end result. Also improving sequentially this year, has been our net rate, which has picked up slowly but steadily as the year has progressed, assisted by the continued growth within our Fit2WRK program which is signing up new companies continuously allowing our partners to provide a consistent product across our entire network of facilities making it very attractive for larger companies to tap into the resources and expertise of our Fit2WRK and our local clinical teams. As revenue has grown, as the result of the acquisitions and organic facility growth, along with the same-store sales efforts, we have worked to lever our corporate base which for the quarter and year-to-date periods, our corporate cost as a percent of our revenue has now dropped to under 10% on both the quarter and year-to-date time frames. Cost controls will also solved this quarter despite of having one less work day compared with the 2011 period. Our salary and operating cost as a percent of revenue declined compared to the third quarter of 2011. Shifting gears a little bit, we discussed an initiative earlier this year surrounding a training program for our top partners designed to assist them in identifying, prospecting, and reeling in smaller local tuck-in acquisitions and I’m pleased to say that we are getting good traction with that program which has resulted in a number of additional locations with many more in discussion. Further, it has assisted our partners in networking more deliberately and effectively and has seemed to fire up our top group who now understand and believe that they have another very successful way to grow in an otherwise turbulent economic time. In fact, I believe based upon the growing challenges of these smaller providers, that we will continue to see attrition particularly in that smaller group, along with the necessity of further consolidation within our industry. I continue to believe that our company will be seen as a great potential home for many of these small, as well as larger private practices. Younger therapist opportunities to start from scratch and successfully build a private practice, if not already established, will grow increasingly difficult and will be more and more rare without the help and assistance, at minimum, from a larger fully-resourced and experienced provider. I think that, that bodes very well for us. And over time, we will continue - as we continue to offer abundant resources, capital and shelter while staying true to the fundamental belief in our partner-centric clinician and care-driven culture that, that will result in continued success for us on the development front. On the physician services side, our team continues to make the necessary adjustments, and I’m pleased to say that a recent look by an outside research group regarding our outcomes and patient functional improvements scores were very, very encouraging. We have shifted our target sales focus to existing, successful, established medical practices where our programs can provide a very nice boost in patient volumes, margins and outcomes. We will continue to work on this area, although we expect it to improve going forward. As I wrap up my prepared comments, let me say that I’m very encouraged with the improvement and growth of our business in what has been a very tepid economic recovery to date. I’m proud of our team which has grown stronger and better resourced over time. With our cash flow resources, we continue to be well positioned to maneuver and grow, as well as expand into the future. With that, let me turn the call over to Larry to review our financial performance in more detail.

Thanks, Chris. I’ll start with the third quarter and then talk about the 9 months year-to-date. In the most recent quarter, net revenue increased 5.3% to $62.9 million, primarily due to an increase in patient visits of 4.7%. Our average net rate per visit for the recent quarter was $105.73, an increase of $1.30 as compared to a year ago. Total clinic operating costs were reduced to 75.5% of revenues in the third quarter as compared to 76.9% in Q3 2011. Provision for doubtful accounts was 2% for the 2012 period versus 2.4% in the 2011 quarter. And the gross margins in the company’s core physical therapy business increased by a $1.3 million or 9.1%. Our corporate office costs, as Chris alluded to, were 9.5% of revenue in the recent quarter. Our operating income was $9.4 million. Net income increased 11.3% to $4,563,000 and our earnings per share of $0.38 matched the consensus estimate. Same-store revenue increased 4.3% as a result of a combination of higher same-store visits and an increase in the net rate. I’ll now go through the 9 months results. Year-to-date, net revenue has increased 7.4% to $189.4 million due to an increase in patient visits of 8.5% coupled with an increase of $0.72 year-to-date in our net rate. Our total clinic operating costs thus far are 74.4%. Our allowance for doubtful accounts year-to-date is 1.9%, and the gross margin from the PT businesses increased by almost $5 million or 11.4%. Our corporate office costs year-to-date are 9.8% as compared to 10% a year ago. Our operating income has risen to just under $30 million. Net income has increased 9% year-to-date to $13.9 million and our earnings per share have increased from $1.06 to $1.17. As, Chris mentioned, same-store revenue has increased 5% year-to-date through a combination of the visits and rate. As I noted in the press release, our continued strong free cash flow from operations has enabled the company to reduce our debt by more than 30% thus far in 2012. As of September 30, the average age of our receivable was 42 days. That’s a record low. And also in the release, we announced that a regular dividend of $0.09 will be paid on December, 7th to shareholders of record as of November, 16.

Thanks, Larry. With that, operator, we’d like to go ahead and open it up for questions.

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

So I was wondering I know you don’t like to give sort of the intra-quarter update, but just in terms of momentum through the quarter, it looks like you had a nice little pick up in quarter-over-quarter in same-store sales growth. And is that a function of just easier comps, timing, hard to say, or does your business look like it’s even doing better as you head into the stronger part of the fall season?

Yes. Well, in terms of comps, I mean, I think we had for the first quarter, just based on the good weather that certainly was a quarter where, to the benefit of the weather, it was an easier comp. Through the summer, we typically slow down, and we did a little bit this summer, but sequentially August was better than July and September was better than August. We’ll speak to it here on the call. October started out very strong through most of the month until we got hit with the storm the last 2 or 3 days of the month, and so we’ll discuss that here in a little bit. But I guess, Larry, why don’t you go ahead and do it now.

Yes, we had over 50 clinics affected by the storm. If you look on our website at the map of our locations, obviously, we have a lot that were in the path of Sandy. We expect that it’s going to impact earnings for the fourth quarter, net of business discontinuance insurance of about $0.01 to $0.02. But we’re not revising our guidance, but we’ll probably be at the lower end of that range as a result of the storm.

Otherwise, volume has been very, very good, net of that one incident. So business is strong. The economy’s still, I think, tepid although better maybe than a year ago by a little bit. Teams are working very hard, and I think one of the things we’re seeing right now in the market place is its smaller providers based on the rate of calls into our company with interest. Smaller providers are struggling, and so we’re able to move market share. In some cases we’re able to do these tuck-in deals for very cheap right now.

Right. Great. And then just the second one, can you just remind us the -update on sort of your pricing outlook on the government side, Medicare side as you look out into 2013. I know there was, I guess the CMS had made an adjustment already. Has that officially gone through for next year, or where do we stand there?

Medicare, released their guidance or their physician fee schedule rates for 2013 on November, 1. From a therapy cap standpoint, therapy cap will increase from $1,880 to $1,900 for PT and speech combined and $1,900 for OT. The [indiscernible] process will expire at the end of this year unless Congress passes legislation as it needs to every year to extend it. With the November fee schedule, they also said that there’s going to be a 26.5% physician fee schedule reduction related to the SGR unless they again kick the can down the road. If they do that and they keep the physician fee schedule rates flat, then Medicare rates will probably go up anywhere between 3% to 4% based upon your geographic index.

Your next question comes from the line of Brooks O’Neil with Dougherty & Company.

Obviously with the storm and the soft economy, those are a couple of things that aren’t going well, but it sure sounds like you’re executing very well. Is there anything else that stands out that you’d say is not going well? Because it sure sounds like things are going pretty darn good.

No. If we get to the point where we control the weather, we’d be really happy. But that being out of our control, the things that are right now within our control, I’m pleased to say are either doing well or definitely moving in the right direction.

That’s great. And I know that Larry would probably get mad if you said anything about M&A pipeline, but if I’m reading through the lines a little bit, it sounds like there’s plenty of M&A opportunity at very good prices right now.

Well, there are 2 - let me make a distinction. There are 2 different initiatives that we have. One’s rather new, and one has been ongoing and established. The tuck-in initiative, there we’ve done a number of those. We don’t even announce those. They’re small. You might as well think of those as a jump start on organic expansion. Those are very cheap. We could talk about some examples, but typically cheaper than what it takes for us to start one from scratch. They already generally have volume, most are at a breakeven point or better and we’re tucking those into existing, strong practices, and converting those. So...

Those are typically single locations, so it’s not...

Single therapists too, Larry?

I’m sorry?

Single therapists too?

It varies, the size of the clinics, yes. Sometimes it’s a solo therapist, sometimes it might have 1 or 2 additional clinicians, but they’re typically small practices.

Yes. So that’s cheap and that will continue to increase in opportunity as the market is difficult. On the other side we think the market continues about like it has been will be a little lumpy from time to time. We’re talking to a number of folks, but that pricing in that market continues to be what it has been the last year or 2. And so they’re really 2 different subsets. We focused on deals of size, but as an opportunistic situation, we’re able to take advantage of these little tuck-ins very cheaply and pretty easily right now with the team that we have here. So we’ll do both.

That’s good, and then I confess, I might have been a little distracted during your prepared remarks, but did you give us an update on osteoarthritis and Fit2WRK, and how those are going in the marketplace now?

Yes. Fit2WRKs going great. We talked to our Fit2WRK head last night who called from a major national com conference and he had meetings scheduled literally through practically midnight last night. There are very, very strong demand for Fit2WRK. On the physician services side, we’re retooling that. That continues to underperform where we were a year ago, but we have confidence that we can get that back, refocused and dropped in. We recently went to a few large physician based national conferences. Traffic was an interest, very solid. It’s going to take a little time. It’s still small. We’re feeling our way through and making some adjustments and right now it’s not helping us a lot, but I think as that improves, certainly if we can continue to keep everything else moving forward, that would be a pick-up compared to where we are now.

And that’s likely to be maybe early in 2013? Or what are you thinking?

Yes. I think that’s a 2013 opportunity more than anything. I don’t know whether it’s early, mid or at some point. We’re - it’s small and we’re marching forward and I think it’s going to take a while to get this to the point where it’s anything of significant size, but I think we’ll definitely make progress.

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

So just hitting on the cost side of your business, so when we started talking about the corporate overhead years back, the goal was 10% and now that you’re under that do you feel like this is where we bottom out on corporate overhead? Or do you feel like you still have enough room in your staffing to support the growth going forward?

Understand as we grow, we do occasionally have to add some physicians. But typically the physicians that we’re adding are more support-level folks. Now we’ve added some to the management team over time and over a period of years. But it will slowly move down over time. It’s going to move around a little bit quarter-to-quarter based upon our seasonal trend. But if you look out over a period of a few years as we grow and add more deals, yes, it’s going to continue to go down a little bit over time.

If you look and go back and look at the dollars, the dollars have increased. They just haven’t increased at the same rate as the top line. So I mean there’s no reason we won’t continue to add locations both de novo and acquisitions and spread the corporate costs over a bigger and bigger revenue base.

Okay. And then Larry - Thanks for the comment on Hurricane Sandy. But just wanted to see if you still have locations that are closed as of today?

Yes.

You still do. Okay. And then, Chris, in the past I know you and I have talked about some of the challenges the industry is facing in terms of staffing with physical therapy now being a doctorate-requirement based. I mean how does that impact you guys good or bad?

Now let me understand, when you say a doctorate requirement - okay. So, yes, that phased in a number of years ago for the most part. So initially, when there was a transition from a masters-level program to a DPT or a doctorate-level program, yes, there were some initial reduction in capacity. I would tell you, I think the market is back to a reasonable supply-and-demand market. Long-term care and home health and some areas where people gravitated to 5,6,8 years ago when they were blowing and going, that’s gotten a little bit more tepid. And I think that’s changed some supply and demand. And in individual markets, sometimes it still takes us a little while to find the right person. But it’s not as bad as it was a few years ago.

Okay. And then last question, you’ve talked about gaining market share. So is there anything that you guys are doing differently from, let’s just say a year ago, to drive market share at this point?

Yes, we’re doing...

It’s all Fit2WRK? Okay

It has helped. We’re not ready to talk about it but we’re going to be working on some marketing opportunities to get that into even more places, and we’ll talk about that in a quarter or 2 down the road after we have some of those things in place. But right now it’s just we’re well resourced. We’re not afraid. We compete largely with hospitals and smaller private practices, and some well-resourced private practices in that regard, but generally speaking we’re very well resourced. Our folks are able to go out and make things happen, and when there’s challenges in the market, I hate to say it, but sometimes we benefit from those. So I don’t see the market getting easier as we go forward from a regulatory perspective particularly, and I think that bodes well for us, long term.

Hey, Chris. If you don’t mind me talking one last question, just because of that comment you made. Regulatory environment, I now MedPAC has talked about adjusting their therapy caps. How are you guys thinking about strategically preparing for that possibility? Thanks.

Yes. It’s been a couple of days' worth of disappointment with respect to the election and trying to predict what the government is going to do. I don’t know that I want that job right now. We’re trying to be as efficient as we can, trying to make sure we’re making a difference in peoples’ lives and being effective with what we do. We’re using our cash to grow and to gain market size, and we’ll deal with what the government does along with everybody else, many of whom will not be as well-resourced as we are to deal with that. But I don’t expect anything draconian at this point.

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

A couple of questions, first, if we had to look at same-store numbers thus far this year it looks like the best year perhaps since maybe 2008. And I know you talked about the easier comps maybe benefiting a little from the weather, maybe an improvement in economy. But is there anything specific you’re doing on your end as it relates to I don’t know, maybe expanded sales coverage et cetera that’s driving some of these numbers?

Again, I think that the market is a challenged market. Most of our big markets we have multiple sales people, or at least one full-time sales person across our big partnerships. Our competition for the most part does not. We have Fit2WRK which continues to gain more and more traction, for good reason, because we’re saving companies a lot of money, and we have a great network of facilities that are now fully trained. So I think those are enough small difference makers to add up to a decent difference when you look at it. Now our comp was definitely helped in the first quarter and it was difficult to tell where that was. But it’s gotten stronger since then, and we’ve had no benefit of weather. So it’s good right now.

Yes, third quarter there was no weather benefit year-over-year.

Yes. I knew in the first quarter it’s helped in terms of the year numbers. And again, Larry, if you look at the balance sheet again, simply it’s pretty under levered in terms of where you are. Are you more likely to be aggressive or is this a question of just waiting for the right opportunity as you look at expansion?

Nobody’s waiting on anything. I just went to the Private Practice Convention meeting last week where one of the biggest brokers in the industry did a very nice - it was for his business but we got a very nice commercial out of it in terms of our company being a very, very good home, based upon their experience in the deals they’ve transacted with us. We’re going to continue to be picky. We’re talking to a number of folks right now who are very good providers, some of whom won’t do anything yet, but we’ll continue to be engaged over time. And we’ll get more than our fair share of those deals. So - but we’re not waiting on anything.

Okay, thanks. And, Larry, quickly on the tax rate, I notice it ticked up a little. Going forward, what should be sort of a normalized rate, you think?

Well I think it was 39.3, yes, 39.3. If it moves, it doesn’t move much. We actually may have a little tax benefit in the fourth quarter. But, I don’t know, 39.3 is what I normally use when I’m doing analysis.

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

Larry, I am bedeviled by your bad debt expense. I keep modeling a lot lower than it comes in. It’s kind of 1.92%, is that a better range rather than maybe the traditional 1.6%, 1.7%?

Gee, are we talking fractions of a percent?

I know. But $1,000 for you guys...

I don’t know, it typically runs 1.5% to 2%. It was a little lower this quarter than the same quarter last year. Maybe if you want to use 2%, that’s fine. I think it’ll be a little less than that. But I mean I don’t know what it’s going to be until we incur it.

Yes.

Yes. And we’re not doing business that we expect to be bad down the steam. So we’re being pretty aggressive on the collection side and also being realistic on the things that we’re not going to get to, and it’s not a very high percentage of our business.

I mean for a healthcare provider to have a bad debt expense of 2% or less is pretty phenomenal. And as I mentioned, our average age of our receivables is down to 42 days which is the lowest in the company’s 23 year history. So it’s not like we got a bunch of bad receivables.

And on the operations side, we have really focused a great deal on over 120 accounts and bringing that down, and it’s had an impact.

Okay, yes, and I understand that thinking. Let me nitpick slightly more. Is the fact that it’s maybe up a little, and again I know it’s fractional, but up a little, is that related to the fact that the physician services business is bigger than it used to be maybe a year or 2 ago?

Yes. Some of its physician services. We had one contract - for a management contract that we took a decent reserve against. The core PT operations do not move very much.

Okay. All right. Do you guys have some of this kind of housekeeping stuff, I guess, payer mix, sales reps and productivity visits, FTE, et cetera?

Yes. I have the payer mix and Glenn can give you the rest. And I rounded these to whole percents, but private and managed care in the recent quarter was 53%. Worker’s comp for the first time averaged up to 18%. Medicare and Medicaid was 24%, and other was 5%.

And the Medicare, Medicaid is largely Medicare. The only place we have Medicaid as taxes.

Medicaid is 1.5% of that 24%, so it’s not significant.

On the other metric side from a sales rep standpoint, we’re at 69 sales reps covering 294 locations. Productivity visit for FTE was at 10.99 at the end of the third quarter which was up from 10.55 from third quarter a year ago. And we are at 4.2 units for the third quarter. Our durations or visit per referral was at 10.77 up from 10.58 in third quarter a year ago. So all our metrics look very good.

Okay. And in your guys’ view, is there much more you can do? I know you’re always striving to do more, but I mean realistically speaking, are you hitting it fairly close to optimal at this point in your view? Or is there actually a material amount more that you can do in terms of some of the productivity metric?

I think on the productivity side, there’s still room for us to increase that up into that mid-11 range which is really the goal that we’re looking to get to. So there’s still opportunity there.

Yes. So in the recent quarter, the visits for FTE were under 11.

At this time you have no further questions.

Okay. Well, listen, those were great questions. Thank you for your attention. Thank you, operator. We’re here if you have any follow-up questions the rest of the day. Have a great day.

Thank you. This concludes today’s conference call. You may now disconnect.