U.S. Physical Therapy, Inc. (USPH) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Andrea, and I will be your 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 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 John Bates, our Vice President and Controller. Before we begin today’s call John will cover a brief disclosure statement. John 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.

Thanks, John. 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 not be able to get in for their – 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 costs remained nearly equivalent, actually slightly less than the quarter despite continued clinic growth and [won nine] clinic acquisitions. 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 a net rate per visit up from the prior quarter as well as the prior year. I believe this is due to several factors, including the exceptional growth to some of our larger, highly profitable partnerships, the excellent job our teams are doing across the board with collections and management, and our continued focus on our work comp related programs. The weather impacted volume and caused our margins to drop. However as expected as volume returned, which it has, that margins will rebound. Corporate office costs as a percent of revenue was a little under 10%, while we added some key leadership and service related positions in several departments to accommodate our continued growth into our system, 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% and 4.2% respectively. Last week we announced closing on a very nice acquisition. I am personally very excited about. The team there is excellent and the opportunity forward is significant. That is if you will recall 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 and service to our patients, referral sources and customers, great care and service to our partners with some recent adjustments that we have made to make sure 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 [Indiscernible]. We will continue to roll out and deploy our [Indiscernible] functional training system, which has been very well received. We will continue focusing on getting good deals done that 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, 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. Okay, now I will talk about the first quarter of ’15 versus the first quarter of ’14. 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 open 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. The 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 have noted in my comment in the press release, my mid-March after the winter storms finally subsided the company’s average daily visits picked up significantly such that 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. Same-store referrals grew a strong 4.6%. Our adjusted EBITDA for the first quarter of 2015 was approximately $10 million, which was a 5% increase compared to $9.5 million in the first quarter a year ago. For the trailing 12 months ended March 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] Your first question comes from the line of Brooks O'Neil with Dougherty & Company.

Hi, Brooks.

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

I know you do.

I just want to mention here, I am in Denver today, and the weather forecast here for Sunday is for a blizzard. So we may not be behind 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.

Here you go. Okay, so 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, it [Indiscernible] strong, can you give us any more color on it, 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?

Yes, we’re thinking about 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 phase looking out for next year?

Yes, I think it is safe to say that we expect this year to be up a little bit compared to where we were a year ago. I think that 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 would you just…

In the first quarter, our actual net rate was actually higher than we budgeted.

Okay.

We saw some rate pressure at the end of the year, but things are better than we expected,

Great. Just wanted two more quickies, Larry I know historically you have talked about G&A cost below 10% kind of the goal, you 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.

First-quarter is usually not a great quarter for us from a cost as a percent of revenue standpoint [Indiscernible] for the last…

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

Yes.

We are ahead of plan. So, yes, 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 there, 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, and just tell us how some of the recent partnerships are performing?

Yes. Generally speaking they have done very, very well. I mean we are real excited. Everybody is growing, everybody is opening new facilities. A group that we did in the upper part of the country and 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 and the one that was completed at the end of January opening a new location, and so…

The deal we closed last week is up over here.

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

[Operator Instructions] Your next question comes from the line of Brian Tanquilut of Jefferies.

Hi Brian.

Hi, good morning Chris, good morning Larry. Hi Chris, first question for you, as we think about the de novo pace that was obviously a big part of your strategy a few years back, as we look at the number of units you have at the end of the quarter or you had 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’re 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. 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. And so those in the recent period have been roughly equivalent, where openings on an organic basis have kind of offset some of the closures.

Yes, we actually haven’t had bad openings. Normally in 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 on.

When the [lease is], but I expect to grow organic here, and these organic openings that we are doing are all part of a very successful partnerships, and so they should perform well. And the clinics that we’re 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 it is not uncommon for us to buy a five or six clinic group, and they have got one or two underperformers. So we will work with them to try to turn those around, but at some point you 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 cap, therapy caps and if congress did not renew the cap this year or the cap exception this year?

Yes. So we are really not doing anything.

They renewed the caps. Maybe the exception process for two years.

Okay, for two years, okay.

Through the end of 2018.

So, where they are today 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 have got a couple of year period now where things are pretty steady. It – it is kind of the same as it has been for us.

I mean there was a proposal or a separate bill to waive the cap. That got defeated, but the cap itself did change.

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

And that was two votes shy of eliminating the cap totally, but then [Indiscernible] to basically approve the cap and the exception process through December of 2018.

Got it, and then last question from 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, and I know in the past you have talked about doing more variable comp, whether it is in PTAs or inside your PTs, so just wanted to get a little bit visibility into that?

Yes, fixed costs are typically going to be 15% or less because the thing that is – there are only two things that are fixed are utilities and phones. Pretty much everything above that is either payroll costs or you have some softness, but that is a function of – the vast majority of our costs are people costs.

Yes, but I look at some of our people cost as almost relatively fixed. I mean, we have to somebody at the front desk, we got to have a certain ratio of therapists, some of whom, many of whom are full-time, some of them are part time. So it really depends on how you look at I’m not sure of 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 cost.

Yes, 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.

Thanks Brian.

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

Good morning Dana.

Hi, 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, went up every month. Hang on just a second, I apologize. The average business per day were 21 – I need my glasses, 21.9 or I need Chris’ [cheaters] so I can read this. Business were 21.9 in January, they went up to 22.8 in February, and 23.8 in March. When we say 23.8, the first couple of weeks in March the weather was still bad. So we must have ended the month and the quarter at over 24 visits per day per clinic.

Okay, all right. 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’re expecting from them?

Yes, and I don’t have a list in front of me. But we have made a number of additions in some of our support areas, in 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 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 John’s area, and then a key officer position, which came late in the year – late in the fourth quarter.

Okay. Are these kind of catch up hires or these hires in advance of something?

Well, now I think these are hires where opportunistically they were the right people available, and we made the decision to go ahead and bring them on so that we can continue to do what we needed to do for the company, and then as the company grows at least from a service perspective you 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 is just – it 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 put administrative people, if you would, where the amount of work had grown faster than what we have staffed it. So some of that was catch up.

Okay, and that is helpful. And I guess that Chris kind of leading into my next question, in the past I think you talked about being comfortable with the debt getting to maybe 2 times levered and I just – I 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 understand at some point?

We are working on it, but it is [safe down] pretty quick too. So it is a good problem.

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

Thanks Dana.

[Operator Instructions] Your next question comes from the line of Michael Petusky with Barrington Research.

Hi Mike.

Hi, good morning. I just look on the momentum that the quarter went, are you willing to give any kind of characterization as to how April has come in?

Yes. I would rather not. You know, to be honest I haven’t seen – we certainly haven’t seen financials for April. But volume has continued to as Larry mentioned, even at the end of the first quarter trends up, and so it is following the seasonal pattern. It is pretty typical far 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. Okay, and then I guess also from time to time over the last several years you guys have looked at adjacent businesses, a little different initiatives, I mean are there, is there so much to do just in your core outpatient rehab that you don’t need to look at that kind of stuff, or do you guys still kind of from time to time take a look at ways to maybe diversify the business?

We have looked at other things. I don’t know to 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 an around the work comp space to look at programs, 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 your 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 – we do really well and there maybe some collateral adjacent things that we built on, but they are not going to be big massive transformational kind of deals, not yet.

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

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. And so, our discussions have continued to be in those areas where population and rate intersect favorably with the right team of course. I wouldn’t say right now for those that are following the company for the last year or two there is no new trends on pricing compared to 4 or 5 years ago pricing is up a little bit. There is more activity in this space across common 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 ones for last, payer mix and then sales person headcount?

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

Okay. 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 then on the sales side we currently had 88 full time sales reps coming around to 357 locations and continue to look to add where things stand from a sales standpoint.

All right, great. Thank you.

Thanks Mike.

There are no further questions at this time.