U.S. Physical Therapy, Inc. (USPH) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy 2018 Second Quarter Earnings Conference Call. At this time, all lines have been place into a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to Chris Reading, Chief Executive Officer.

Thank you. Good morning, and welcome everyone to U.S. Physical Therapy's second quarter 2018 earnings call. Right now, I'm located in one of our largest and also very successful facilities near Richmond, Virginia, right around the corner where I started my career, and my associates are on the line in various places around the country. They include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer, West; Graham Reeve, our Chief Operating Officer, East; Rick Binstein, our Vice President and General Counsel; Jon Bates, our Vice President and Controller. Before we begin discussing our results for the quarter and the year, Jon will 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.

Good. Thanks, Jon. Last year, as everyone knows, we had an up year, but we didn't quite perform up to our own standards. Late in the year, we announced that we would be working to add to our operations team to allow for more time and attention to key elements within our partnerships. Many of those changes came at the start of the year. Graham's arrival occurred in March. And for the past few months, everyone has been working hard to establish and strengthen relationships and accountabilities with and within our partnerships. That I am pleased to say has gone very well, in my opinion. Our therapy business continues to grow, with revenues increasing this quarter 8.5% versus a strong revenue quarter a year earlier. Same-store revenues were up this quarter, increasing 3.7%. Net revenues from all of our operations grew 10.4%, including strong increases in our managed therapy business of 33.6% and excellent growth from our industrial injury prevention business of 43.2%. A quick note about our prevention business, which as I've just mentioned, is doing very, very well, and I'm proud of that team in the way they are making a difference for workers in over 600 businesses and industry locations around the country and growing. Earlier this quarter, we announced an acquisition in the same space, performing very similar services to an also growing highly-satisfied and diversified client base. We combined those companies and early integration work, which has been ongoing for a number of months now, is going very well. I recently had the opportunity to spend a few days with about 30 members across what was formerly two different teams, now all on the same squad. And I was very impressed with the talent, commitment and passion we have in this growing business. I continue to be encouraged, enthusiastic about their opportunity and our ability to continue to grow by making a real difference preventing injuries to those industrial athletes when we have the opportunity to serve. Shifting gears a bit. I just want to take a minute to thank our partners and our very talented teams of clinicians and support staff, thank our marketing folks who continue to do an excellent job opening doors to new physician and industry opportunities, and to thank our team of very talented and commitment members in Houston and around the country, many of whom have been with us now approaching 15 years, some more. It is not easy to make all of the necessary elements come together in such a consistent manner over a long period of time. It doesn't happen by accident. It takes a lot of hard work and fortitude to keep grinding out forward progress and good work, not just good work, but excellent work and record results. But our guys have done that and I want them to know how much I appreciate it. We will do more than a few million patient visits this year in our core therapy business. That's a lot of families and lives impacted. That's a lot of folks getting better through exercise and technically skilled hands-on care, which alleviates or eliminates the need for opioids and other medicines with significant side effects. We're making a difference in the healthcare world, which has increasing cost. Yet our cost to get someone back to their life in a fully productive way is still only about $1,100 to $1,200 on an all-in average. That's an amazing bargain, and one we need to continue to champion with our insurance providers as well as our government officials. That advocacy continues in large part with APTQI, which is the Alliance for Physical Therapy Quality and Innovation. And we were one of the founding members, along with a couple of very good friends from around the country. And it includes a majority of the top physical therapy companies in the country, along with a large and growing number of large and small private practices. Our collective leadership in this group is strong. We're committed to ensuring our rightful place in the healthcare continuum, so that we can continue to be at the forefront of creating a low-cost value in the healthcare world that, quite frankly, is in need of some good therapy to get it back on track. Finally, as with any performance, there are great things like record earnings, which come as a result of a job well done, starting in our many clinics and sites around the country. And then, there are continued opportunities, things that we still need to work on hard to make a continued difference and improvement, because the good news is that we still have a lot of opportunity to mine out. We've been working on cost. And while we have some progress, we still have some pockets where growth is very good, but cost is still on the high side. That is an opportunity for us over time. We continue to attract very high-quality people and partners, who wish to join us through acquisition in our partner-focused way. And our continued quest to make a difference and to grow on the right way that remains a big opportunity in a fragmented industry. And a big differentiator for us is that over the past 27 or 28 years, we are still focused on people and doing the right thing and on creating lasting relationships. We plan to continue to do that long into the future. We have significant opportunity in the industrial injury prevention space, where revenue is growing at a great pace. And as we expected, we're getting very good margin expansion, up from around 15% when we started to well over 20% now on the year and even better on the most recent quarter. And I believe we're just now starting to see the opportunity ahead of us. So thank you for listening. That concludes my prepared comments and color on the company in the quarter. Since I glossed over a lot of the detail, I will hand it over to Larry to cover the financials with more granularity. Thank you.

All right. Thanks, Chris. First, I'll start with the quarter results and then talk about the first half of the year. In the second quarter, net revenue increased 10.4% to $115.1 million due to an increase in net patient revenues from physical therapy operations from both internal growth and acquisitions and increased revenue from management contracts, primarily due to some acquisitions we made, and an increase in revenue in the industrial injury prevention business, as Chris discussed. Revenue from our physical therapy operations increased 8.5%, patient visits increased 8.1% and our average net rate per visit rose to $106.16 from $105.73. I guess noteworthy that of the $8.3 million increase in PT revenue, more than half of that came from an increase in business in our Mature Clinics. Revenue from physical therapy management contracts increased a third. As Chris noted, revenue from the industrial injury prevention business increased 43%. Total operating costs were 76.4% of revenue in the second quarter as compared to 76.5% a year earlier. Total salaries and related costs were 56.1%, down slightly from 56.4% in the 2017 second quarter. The gross profit for the 2018 second quarter grew by 10.7% to $27.1 million. The gross profit percentage was 23.6% versus 23.5% a year earlier. The gross profit for the company's PT clinics was 23.7% versus 24.2%. The gross profit on management contracts more than doubled to 16.3% from 7.4%. And as Chris mentioned, the gross profit for the industrial injury prevention business increased nicely. I guess noteworthy that the actual margin dollars from the industrial injury prevention business more than doubled from approximately $700,000 to $1.5 million. Corporate costs were 8.8% of revenue for the 2018 quarter compared to 8.5% in the 2017 quarter. Operating income for the most recent quarter increased 8.6% to $17 million. Income tax for the 2018 second quarter was $3.3 million versus $3.1 million a year earlier. The income tax rates were 26.1% and 38.4%, respectively. USPH operating results increased 24.4% to $9.2 million or $0.73 per diluted share as compared to $7.4 million or $0.59 per diluted share. The analyst consensus estimate was $0.68, so we beat it by $0.05. Chris mentioned the same store growth, so I'll skip that and go on to the results for the first half of the year. Net revenue increased 10.7% to $223 million. Patient revenues from PT operations increased 8% due to an increase of 7.7% in visits and a slight increase of the net rate to $105.67 from $105.39. Revenue from physical therapy management contracts increased 26%, and revenue from the industrial injury prevention business increased 89%. Remember, the first acquisition was made in the first quarter last year. Total operating costs were 77.5% of revenue in the first six months of this year versus 77.6%. Total salaries and related costs, including PT and industrial injury prevention business, et cetera, were 56.8% in both periods. The gross profit for the first six months of this year grew by 11.2%. The gross profit percentage was 22.5% versus 22.4% a year earlier. The gross profit for the company's PT operations for that six-month period was 22.8% as compared to 22.9%. Gross profit on management contracts increased to 15.1% from 11.3%, and the gross profit for the industrial injury prevention business was 20.6% in the first half of the year versus 14.8% last year. Corporate office costs year-to-date were 9.1% of revenue versus 8.6% in the first half of 2017. Operating income for the six months increased 7.9% to $30.1 million. Income taxes were $5.7 million and $4.9 million. The rates were 26% and 33.4%, respectively. For the six months, our operating results increased 17.3% to $16.4 million or $1.29 per diluted share. Same store revenues year-to-date have increased 3% as visits have increased 2.3% and the same store net rate increased by approximately 0.6%. In terms of other financial measures for the second quarter, the company's adjusted EBITDA grew by 6.6% to $17 million, and for the six months, it's grown by 5.8% to $31 million. In today's release, we announced that we're increasing earnings guidance. The company is raising earnings guidance for the year 2018. Management currently expects the company's operating results for the year to be in the range of $31.1 million to $32.3 million or $2.45 to $2.55 per share. Our previous 2018 earnings guidance had been for operating results of $29.5 million to $30.9 million or $2.34 to $2.44. Finally, we are declaring our third dividend of the year of $0.23 will be paid to shareholders of record per share on September 7, 2018.

Thanks, Larry. So that concludes our prepared comments. Operator, we're happy to take any questions if you want to open up the lines.

Certainly. [Operator Instructions] Your first question comes from the line of Brian Tanquilut with Jefferies.

Hey, guys. This is Bryan Ross on for Brian Tanquilut. I just had a couple of questions about the - kind of diving into the injury prevention business. I know you had really good sales growth there. I was just wondering maybe if you could parse out how much of that was from the acquisition earlier this year and how much was organic within what you gave out last year, and then, kind of what are your expectations around the organic run rate in that business going forward?

So, Jon, I know we talked about this before the call. I don't know if you had those numbers available. It was a pretty good balance. But do you have that at your fingertips?

Sure, yeah. For the second quarter, you're looking at the standalone, pre-acquisition, so for the last year was $760,000 for the second quarter and then year-to-date of $1.9 million related to the previous full year same store.

So if you round the figures, $800,000 was internal growth for the quarter and [$1 million] [ph] was from the acquisition.

Got it.

And then, I don't know that we're prepared to give a run rate on the organic side. Again, we just combined these two companies. We're not going to segregate this in terms of a projection, but those numbers are built into our guidance numbers. But it's growing at a nice pace.

Okay. And then on the gross margin, obviously, it grew substantially year over year. And just maybe provide a little more detail into how that occurred. And [how you seen] [ph] the majority of it is, and maybe the margin profile of the business that you acquired earlier this year, and maybe some of the integration work, but any color there would be appreciated.

Yes. So it doesn't really relate to the integration work. There is certainly some impact for the company that we acquired, but our original company expanded their margins quite significantly through the year and into this year. Some of that, quite honestly when we bought that company, they had a much bigger corporate office and support infrastructure than, really probably, they needed at the time. We felt like we could grow into that. So rather than let people go, we kept everybody intact and we continue to focus on sales and opportunity growth. And that growth has come, and so we're a little better right-sized than we were. And we expected to get that margin expansion that's come nicely. The new company has really good margins. And as we go forward, we think there's probably still a little opportunity there as we continue to grow in scale. So it's coming together about like we expected.

Got it. And then one more question on the guidance, I know you beat by $0.05 and raised by a good margin there. What's driving that additional back half improvement? Is it strong same store sales, dividends and rate there? Or is that really leveraging some of the team additions that you got this year and just getting greater productivity? Any additional detail there would be appreciated.

Well, the business is seasonal, and absent acquisitions, normally, your second quarter would be your strongest quarter, so you have to take that into consideration. Our run rate is such that we think the second half will be better than what we originally expected. Probably, the biggest swing factor year-to-date has been their net rate. Their average net rate has been better than we expected and visits have been…

Got it.

So it's a continuation of what we've done, the improvements that we have made to the team and the business. The focus that's there. And we're going to work hard to continue to do as well as we can do.

Great. Thanks for the questions.

Thank you.

Your next question comes from the line of Mike Petusky with Barrington Research.

Hey, Mike.

Hi, good morning, guys. Outstanding quarter. So, Larry, I guess one question. On the last conference call, you had said, hey, even though the first quarter tax rate, effective tax rate was relatively low, we still think 28% is the number for the year. Does your current guidance assume 28% effective tax rate for the full year? Or might that be more like 26%, 27%?

Well, we assume 28% for the last two quarters. It could be a little lower. It was 26% this quarter. [What do you think] [ph], Jon?

It was.

So it could be a little - but in our forecast we used 28%.

28% for the full year, not just for the back-half?

So, for the back-half, because I think year-to-date, we're below 28%.

Right. Okay. So essentially, you're assuming sort of 27% for the full year at this point in your guidance? I'm…

That sounds right, yes.

Okay, all right. And then, I guess, Chris, on the industrial services business, you guys, obviously, you closed the deal a few months ago. I mean, is there - as you look forward in terms of how you guys spend your time looking at M&A, I mean, is there more of a bias now towards that part of your business or sort of you just see what presents itself and you push your energies in that direction? How do you think about that?

Yes, it's a good question. So, no, the answer would be we're not shifting away from the physical therapy business, to just work on the industrial business. There's really, Mike, there's opportunities on both sides. There are a lot more physical therapy opportunities probably in total than there are industrial injury prevention opportunities. But we have - we're having productive discussions on both sides. Our whole thing is to find the right people, right, that fit with our vision and values and kind of how we do business. And so, when we find those right people, we spend time and we dig in, and we try to create relationships that will bear fruit at some point in time, so. But it continues to be both. And I wouldn't say it's - our activity and our discussions will be greater on the PT side, but there'll be opportunity, I expect, on the industrial side as well.

Okay, terrific. And then, just one more, I've been surprised at the pricing. The net rate has been as good as it's been. I guess can you guys speak to what's - I mean, I'm assuming that's mix. I think you actually have a little bit of a cut in Medicare this year. But can you just speak to that? And then, Larry, if you do have the payer mix stats available I'd love to have that. Thanks.

Yeah, we did have a little bit of a Medicare cut. Some of it - I don't know if it's mix as much, Mike, I mean, as it is geography. We've gotten some deals done in some high net rate areas that continue to be well above our average, and good margins, and things like that. So I think that's part of it. The other thing that we did was we really worked hard. We've been in the past, particularly with newly acquired companies, historically, a little bit slower to get in and really push on some of the things that we felt like we could wring out maybe historically over a longer period of time. And so, we've been more upfront about identifying opportunities with companies that we're in discussions with. We've been a little quicker to move, and I think that's helped move the needle some this year. Larry, you want to hit mix?

Yeah, Mike, the mix really hasn't changed all that much. The traditional insurance business in the second quarter was 49.7% of revenue. Medicare and Medicaid combined were 28.3%. Medicare really had moved. A couple of the acquisitions we've done in those states, they take Medicaid, and so that moved the needle a little there. Workers comp was 14.3%. Now remember that excludes the industrial injury prevention business. And then self-pay and other was 7.6%.

All right. Well, guys, heck of a quarter. Great job. Thanks.

Thanks, Mike.

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

Hi, Dana.

Hey, thanks. This is actually Jacob Johnson on for Dana. I guess first question on the M&A front. Obviously, your multiple has expanded some this year. We've also seen some private portfolios change hands. In the deals you're looking at, where are multiples today? Have these changed at all? And then has the change in your own multiple changed your willingness to pay up for deals at all?

So I would say the multiples in the marketplace right now are about where they have been the last year or two. And our willingness to pay up - I think, we've been willing to pay a fair price always. And so, I don't look at our multiple, and say, okay, we can go up two turns now, because we're trading at a higher multiple. I think, we're able to attract good people and pay very competitive price and create a great life after and a great long-term home for them. And so that strategy hasn't changed, and I don't think we look at it any differently now than we always have.

If you look at the deals we've done recently, we paid within the relevant range of what we've been paying for several years. And the deals we're looking at now in terms of what we're offering are within that same range.

Got it. Makes sense. And then you guys talked about the change in your operating team, and I think we've talked a lot about the margin expansion this quarter and the progress there. But you also had a good tick up in same store revenue growth. Is that also evidence of sort of the reorganization you did? And should we expect to continue to see some evidence on the same store line?

Our same store runs somewhere in the 2% to 4% range, typically. Last year, arguably, was an excellent year on the same store side, not such a good year on the margin side maybe. This is kind of an average pace year for us. I'd love to see it pick up a little bit. But I think from an execution standpoint, some of the changes we've made certainly are bearing fruit, expect that to continue, and it's competitive market. We've got to go out and do our work and do a great job, and our team's done that. And so I expect the rest of the year will be similar to what you've seen thus far, at least that's our expectation that's built into the results with the targets that we've given you earlier today.

Yeah. I mean, the gross margin percentage didn't move much. What's happened, though, is we've increased patient volume, especially in terms of visits per day per clinic. So this quarter, they were 26.9%; a year ago, they were 25.7%; with that extra 1.1% visit. The margin dollars are significant, even if the margin percentage doesn't change, so that was a good driver in the earnings growth.

Yeah, good point.

Got it. And then last question for me. To see margins get back to maybe where they were a couple of years ago, one, is there any reason that can't happen? And then, two, with the industrial business having a little bit better gross margins than the consolidated company, one day, if things get well, is there any reason you could maybe exceed some of the margins you saw a couple of years ago?

No, I'm not going to go predict what - whether we're going to get margins back to where we were a number of years ago, particularly in the PT business. We do the best we can. Part of our margin situation is due to where we do - the geography of the deals that we get done. And so we're going to continue to try to do the best we can for our patients, staff properly, be effective with that staffing. I think sometimes last year, particularly, we got a little bit out of shape. I think we're getting it done a little bit better. But I'm not going to make any bold predictions that margins are going to dramatically be different than they are right now. I think on the industrial business, we'll see a progression. Again, for year-to-date, we're a little over 20%. In the quarter, we're better than that. I expect to see some expansion there on the PT side. It depends on where we do deals and how we do the rest of the year on this cost control.

Great. Thanks for taking the questions.

Thank you.

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

Hi, Mitra.

Yes, hi. Good morning, Chris. I guess, I'll follow-up first in terms of the last comments on the gross margin regarding the industrial prevention business. I know, it had a big uptick here recently, and I was just curious in terms of, obviously, it's still early in the game on this side, how you see that business playing out on the margin side relative to the corporate average over the next few years or if you have a sense of how high that could go?

Yeah. You guys - I don't know, I don't know. I think we're just in the process of combining those two companies, we have really, really good people. We have a growth plan that we're going have to execute on, but I think we can. And so as we scale, yeah, I think we'll get some margin expansion, but I'm not going to predict where that ends up. We'll have to see it play out over the next few quarters and just see. But I think it will be a healthy margin and maybe a little bit ahead of PT, maybe around PT. We'll see how we end up. We're still a little bit early, guys.

Right, right. Okay. No, that's fair. And again, as you look at the side of the business in terms of the growth opportunities. Do you have to have any investments in terms of expanding the sales force through the year, which can help in terms of like different call points or anything you might have to do differently as you look to grow this side of the business?

Yeah. The nice thing about this business is it's not capital intensive at all. It doesn't require facilities. For the most part, it doesn't require a lot of equipment. For the most part, it just requires good people. And so it's scalable. Sales, yeah, we'll hire more salespeople over time, but that's kind of just an incremental cost in the business. It's not anything dramatic, where there's going to be a big inflection point. So again, it's not capital intensive at all.

Right. Okay, great. And then finally, just on the labor side, obviously, it's a tight market out there. And I was just wondering, if you're seeing any changes or any pressures on the recruitment side.

I think recruitment generally has been good. Larry, you can talk a little bit about HR, but yeah, we see a little wage pressure. We see kids coming out of school with a doctorate that they spent a lot of money to get and with net rates, generally speaking, being relatively flat. While ours is up a little bit, most people are flat. And so yes, there's a little pressure out there, and that's something we have to - a tide we have to fight against a little bit.

We measure internally with our staff recruiters' average days to fill open positions. It's a little higher than it was last year on average but not a lot. Now there are individual markets that are certainly higher.

Okay. That's great. Thanks again for taking the questions. Great quarter.

Thanks, Mitra.

[Operator Instructions] And you do have a follow-up question from the line of Brian Tanquilut with Jefferies. Brian, your line is open. Brian, your line is open.

Brian has left the building, I think.

Yeah, if Brian or anybody from his office wants to follow-up, I know Larry's in the office. I'm going to be on the road, but you can get me on my cell. We're happy to take any more questions here on the line, but if not, feel free to call us in the office.

And at this time, there are no further audio questions.

Okay. Listen. Thank you everybody for your time and attention this morning. We greatly appreciate it. And as I mentioned, we're available if you have any follow-ups. Have a blessed day. Thank you. Bye now.

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