U.S. Physical Therapy, Inc. (USPH) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Hilary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2018 year-end earnings conference call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Chris Reading, Chief Executive Officer. Please go ahead.

Thanks, Hilary. Good morning, everyone, and welcome to U.S. Physical Therapy's Fourth Quarter and Year-end 2018 Earnings Call. With me on the call include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, our Chief Operating Officers of West and East; Rick Binstein, our General Counsel; Jon Bates, our Controller. Before we begin to discuss our results, we need to cover a brief disclosure statement. Jon, if you would, please?

Thanks, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. And these forward-looking statements are based on the company's current views and assumptions and the company's actual results can very materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.

Thanks, Jon. I'm going to start my comments today focused first on the year, as I think it will make it a little bit easier to understand the final quarter. For starters, our operating results grew this year by 28.1%, which for us is a really good number. Underpinning that result were some very good underlying operating metrics as well as progress in some key areas. Revenues for the year increased 9.6%. PT revenues grew 7.3% on what was a very strong same-store volume growth of 4.6% on the year, which for me at least is the best same-store volume that I can recall. Aiding that were smaller but important segments, which also demonstrated healthy improvement. PT management contracts revenue grew more than 12%, and we delivered excellent growth and progress in our industrial injury prevention business, with Briotix up approximately 71% in revenue for the year. Embedded in that Briotix growth was a strong combination of internal organic growth combined with an acquisition completed in May of last year. The integration of that deal into our Briotix platform has gone very well, albeit through a lot of hard work and great people pulling together to form a strong team. We're now better positioned in the marketplace to further scale and expand our business and service offerings to an even greater collection of large national as well as regional employers. In order to get where we are now, we spent some additional money on our team -- on getting our team integrated and added, and we'll continue to add, some needed additional resources in order to allow us to take advantage of the opportunity at hand. In spite of those costs and additional resource allocations, we saw big improvement in operating margins, up 710 basis points for the year. We're now serving employers at over 600 locations in more than 40 states. Shifting gears, as I mentioned earlier, same-store numbers for the year and the quarter were notable and helped us finish the year in a good place. Special thanks goes out to our partners, directors and our sales team in conjunction with our home office operations and sales support for another great year. Last year, we invested considerably in people and resources. And those investments have been paying off and should continue to bear good fruit into the future. On that note, we remain committed and excited about our physical therapy business, especially our continued ability to attract excellent partners and leaders who have helped to deliver strong visit per clinic per day growth over a many year period. In 2018, our visits per clinic per day hit the highest levels we have seen on average today. And despite a slight Medicare reimbursement decline, we were able to increase our operating margin slightly overall, while making continued progress in balancing out some of our acquired partnerships related to costs. Our pretax operating income for the year increased more than 10%. I want to briefly mention some of our industry focus work as I think it colors the environment a little bit and I think it's important to discuss. So we -- about 5 years ago, we put together an alliance that we refer to as APTQI, the Alliance of Physical Therapy Quality and Innovation. Over the past 5-plus years, we made a lot of progress, and I'm happy to say we've seen a cohesion and progress increase over that period as well. We've added a number of important member companies to APTQI. In doing so, and focusing our time, money and considerable talent within that group, we produced some meaningful results starting several years ago with heading off the coding reform initiative, which would have produced less measured consistency and reliability and more regulatory headache for no net gain. Last year, we commissioned a study which ultimately produced a paper using purchased identified CMS data to determine the efficacy of early intervention physical therapy in lower back pain patients as compared to other entry points in the health care system. We are pleased to have an independent [indiscernible] analytics group corroborate what we thought we knew, that early intervention PT for lower back pain not only resulted in efficient and effective results, but actually lowered those patients' entire health care spend for the year, including medicines, other MP visits and diagnostic testing by significantly -- by a statistically significant margin. Most recently, we have set our sights on working to reduce administrative burden, especially in our federal payer group. Also recently, our own Nick Patel, who serves as Executive Director for APTQI as well as splits his time with us here in clinical services, Nick had an op-ed published in The Wall Street Journal a couple of weeks ago relating to physical therapy as the primary alternative to opioids. So in closing, for me, seeing the good that we do as a profession is extremely rewarding. Several of us on the exec team are starting our 16th year here together, and for me finishing my 34th year in a profession I sincerely love. I remain enthusiastic and excited and particularly thankful that I get to wake up every day and work with tremendous people here and around the country who, through their fine work, make a lot healthier life for our patients, families and employers, so that they can realize their individual goals and aspirations. In doing so, I do believe that we make the world and the health care system a little better, a little friendlier and a little more efficient. And as we have done now over a pretty long period of time, and we hope, and we'll work to continue to do into the future, ultimately benefiting our shareholders as well. That concludes my prepared comments. Larry will cover the financials for the quarter as well as the year in more detail. Thank you. Larry?

Thanks, Chris. I'm going to start with the quarter and then move to the year. In the fourth quarter, revenue increased $8.1 million or 7.5% to $117 million. Patient revenues from physical therapy operations increased 6.1%. Revenue from our industrial injury prevention business increased almost 52%. Total operating costs were 78.5% for the quarter as compared to 77.9% a year earlier. The gross profit in the fourth quarter of '18 grew by $1.1 million to $25.2 million. Our corporate office costs were 8.9% of revenue in the quarter versus 9.3% a year earlier. Operating income for the recent quarter increased by 6% to $14.8 million. As Chris alluded to, we had good same-store growth in 2018, and such was the case in the fourth quarter. Same-store revenue for de novo and acquired clinics open for a year or more increased 3.9%, while visits increased 3.2%. And bottom line, our operating results in the quarter increased 45.5% to $9 million or $0.71 per diluted share as compared to $0.49 in the fourth quarter 2017. I'll now talk about some of the highlights for the full year. For the year, our revenue increased 9.6% to $454 million. Revenue from physical therapy operations increased 7.3% to $417.7 million. Of the increase, noteworthy is $23.8 million came from Mature Clinics, while $4.7 million came from New Clinics. Revenue from physical therapy management contracts, as Chris said earlier, increased 12.1% to $8.3 million. Revenue from our industrial injury prevention business for the full year increased almost 71% to $25.5 million. Our total operating costs for the company were 77.6% of revenues as compared to 78.1% in 2017. That's a reduction of 50 basis points for the full year. The gross profit in 2018 increased by 12.2% or $11.1 million. The gross profit percentage grew to 22.4% as compared to 21.9% in the previous year. That's an increase of 50 basis points. The gross profit for the physical therapy operations was 22.7% in '18 as compared to 22.5% in '17. The gross profit percentage for the industrial injury prevention business grew to 20.4% as compared to 13.3%. Corporate costs for the full year ran at 9.1% of revenue versus 8.7% a year earlier. Our operating income for the full year 2018 increased 10.2% to $60.3 million. Chris mentioned the same-store growth which, I agree, I think it's the highest I can ever remember. Same-store revenue growth was 4.6%, visits increased 4.6%, while the rate was flat. For the full year 2018, operating results increased by 28.1% to $33.5 million or $2.65 per share as compared to $2.08 the year earlier. In terms of other financial measures for the fourth quarter, the company's adjusted EBITDA grew by 3.1% to $15.5 million. For the full year, adjusted EBITDA increased by 7.1% to $62.1 million. In the release, we gave earnings guidance for 2019. Keep in mind, this guidance is only for existing operations and excludes any potential future acquisitions. Management currently expect the company's operating results for this year to be in the range of $35.1 million to $36.4 million or $2.76 to $2.85 per share. As I noted in the press release, our cash flow in 2018 was actually pretty amazing. Cash flow from operations ran at a record level, which fully funded both our de novo clinic development and acquisitions. While at the same time, net debt, that is debt less cash, was reduced by $22.4 million or 58%. We are increasing our dividend. We announced we are raising it in 2019 by 17.4%. The first quarterly dividend for the year of $0.27 per share will be paid in April.

Great. Thanks, Larry. That concludes our prepared comments. And so we'd like to go ahead and open the lines up for questions.

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

Larry, I guess the first question's for you. As I think about guidance for 2019, the implied organic growth that I'm seeing, I understand that it excludes the acquisition, so I'm seeing 5% organic fee -- earnings growth. How are you thinking about volume and rate assumptions for 2019? As I consider Medicare, I think it's putting in a 1% rate hike for this year.

So it's a fraction of a percent. We actually assumed our net rate would remain flat. And then we've put the tax rate in the call it 26.5%. And what was the other question? I'm sorry.

Volume.

Just the drivers of the guidance, I mean, just can you talk about volume and then kind of like what margin expansion opportunities you're expecting.

We had some volume, but we didn't assume the same level of same-store growth that we experienced in '18.

Got it. Okay. And then in the quarter, we saw the uptick in the bad debt expense even excluding the PG&E bankruptcy, so is there anything to call out in that? Or is that sort of a new normal that we should be modeling on bad debt?

Well, now the bad debt, I think, for the PT operations ran at 0.9%.

1%.

Yes, just about 1%. It was -- really, the difference in bad debt was attributable to PG&E, which we may actually eventually recapture that. But considering how long everybody thinks this bankruptcy is going to last, we went out and just wrote it off.

Got it. And then last question for me, also during the quarter, we saw sort of an uptick in the salaries and wages line. I mean, are you seeing any incremental wage pressure to call out right now? Or is it a planned increase that you put through? I mean, anything to just give us some color on the uptick in salaries for the quarter.

Yes, I think we're seeing a little wage pressure. We had a good early quarter and we had a little bit of a soft end of December, with some weather and some other things. But in general, I'll tell you, Brian, one of the things we did this last year for a good chunk of the year, particularly in a few of the regions, we got some really good cost reduction. We have though some areas where we've made some changes. We have some big legacy partnerships that actually had record year for us this year, and we actually loosened cost a little bit and went out and brought in some key people who we thought would move some market share. And that had the desired effect. And so I think we traded a little cost for a pretty good pickup in volume, but we did that kind of surgically in key areas where we needed some legacy support and where we thought we could take advantage of it. And I think it worked out okay. I expect that we'll see a little wage pressure. Kids are coming out of school with much more debt than ever before just with these DPT programs, and I think we'll offset that reasonably well. But that's our continued challenge.

Yes. If you look at the numbers for the bullet points for the year versus the quarter in terms of PT clinic costs -- I'm talking about salaries here -- for the year, our New Clinics added $5.3 million in salary-related costs. Well $2.7 million of that was in the fourth quarter because we had a lot of openings.

Yes, we did have a lot of openings late in the year.

So that skewed the number. We actually made good progress for the year, but the fourth quarter was a little bit of an anomaly because of the timing of the New Clinics.

Your next question comes from the line of Larry Solow with CJS Securities.

So I guess just a quick follow-up to Brian's question, and I think you probably kind of answered it. But yes, there was also the uptick sort of in -- just not in salaries, but I think that it was probably driven by salaries, but just the overall rise at Mature Clinics. And you mentioned, I guess, you're investing a little bit more on the legacy side. So should we expect that independent of a little bit higher wages, but overall, should that start to ease as we look out to '19?

Yes, I think we'll be pretty steady in '19. I don't expect big changes up or down.

Yes, I mean again, if you look at year versus quarter, for the year, the increase in operating costs of the Mature Clinics was $15.1 million. But it was only $2.7 million in the fourth quarter so it definitely leveled out.

Okay. And how about just the outlook for a couple of things on the -- it looks like net, you opened 9 more clinics than you closed, which actually is a little bit of a higher number than maybe it's been running on average for the last few years. Less closures, more openings. And then also just on the acquisition front, a little bit of a slowdown in sort -- I mean, at least on the PT side going up and [indiscernible] acquired 3 to 4 clinics. So any thoughts on those two?

Yes, we had one deal that we had done. We had another one that went away pretty much at the end due to a bad, unfortunate prior experience that one of the key staff had in an unrelated deal that just caused the owners to take a pause. And so we had more activity last year. We got the one deal done. It was a little bit smaller. We're seeing good activity right now. We're going to continue to invest in the PT business. We did close a few more centers last year. Some of our early, early company legacy centers that are single locations have been winding down over a period of time. But even with that, we're able to produce some really strong earnings growth. And so I think that will balance out as we go forward. We're currently talking about some ways to kind of pick up organic growth. I know that Glenn and Graham are focused on that. We've had a good start to the year in that regard. And so we'll see how the year plays out. All this stuff is factored into our guidance right now, but we expect another good year.

And did you open up about 20 clinics on de novo? Is that about, plus or minus, in the ballpark?

We opened 23.

I think with 20, we had a few tuck-ins, and then we had our deal, so it was somewhere in the upper 20s I think when you look at all of the -- everything rolled together.

Okay, great. And then just lastly, Chris, you mentioned I think 2018 on an annual basis, visits per day hit a record. Do you happen to have either the Q4-versus-Q4 or the year-versus-year for the visits and units per visit?

I don't have it in front of me right now. I don't...

Units per visit for the year, well, for fourth quarter, it was 4.46 on a unit per visit basis. Yes, per day, I don't remember.

Honestly, I can get it after the call.

Yes that's fine. We can get it after the call. I can speak to Larry later, too. That's fine. No problem. Great. I appreciate it.

Thank you.

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

If you can remind us or give us what the payer mix was either for the quarter or for the year. And then I know you talked about a slight decline in the Medicare reimbursement. How do you see the other payers right now, any potential pressures there?

Medicare had a modest increase for this year, but it's like a fraction of a percent.

Yes, '18 was a 0.5% decline. Don't remember exactly what the increase is this year, but it's up slightly.

But in terms of reimbursement, our mix in the fourth quarter: insurance was just under 50%; workers' comp was 14.4%; Medicare and Medicaid combined were 28%; and then other was around 8%.

Okay. That's great. And then if you look at the industrial side of the business, the gross margin improved pretty significantly in '18 versus the year ago. And I was just curious as you look out to '19, if you see pretty meaningful upside there? Or is this likely to be -- flatten out from what we've seen this past year?

Yes, it's going to flatten out for the time being. We did make really, really significant progress this last year. We also needed to make some investments in people, particularly with the merger in some infrastructure investments. But over a long period of time, we expect margins to be really solid. But I wouldn't model anything on a trajectory that's forward of where we've been.

Okay. And then on the acquisition pipeline, I know you're always looking at potential opportunities. I was just curious in terms of the industrial prevention side of things, if you're also seeing a good pipeline there.

Yes. I don't like to use the pipeline word because I think you can get the wrong -- people get the wrong connotation. But you'll see us continue to work to be active. I'm not going to make any promises, but I think we'll have a good M&A year. And where we have opportunity, we'll add to our industrial injury prevention business. And where we have opportunity, and we will, we'll add to our PT business with the right people and the right fit.

Okay. No, that's great. And then finally, Chris, on the sales force, I don't know where you stand today. And do you need to make any significant investment on that front?

No. I think we'll continue to add people where we feel like we can take advantage of additional volume and take advantage of those resources. We'll gradually add people over time with our industrial injury prevention business. Well, I got to just give those guys a shout out. They're doing a great job with the pipeline right now. That pipeline refers to the number of leads that we have with companies who are interested in our services right now, and that pipeline is very, very strong, and they've done a great job. But we'll add to that business over time in order to continue the forward progress that we've started last year.

And overall, from a company standpoint, the total number of sales reps stayed the same as it was in the last quarter. We're Still at 87 reps, but we're covering about 487 locations.

For the PT business.

For the PT business.

Okay. And then again, just on the sales force, do you need two separate sales forces? Or can you cross-sell?

For the most part, we need -- we have two separate sales forces. The product specificity, particularly in the industrial injury prevention business and there are some technical elements around that, that are important to understand. And so they are separate. I will say that there's -- we introduced effectively the 2 parts of the company last summer. And there's been some good back and forth between our PT partners and our Briotix partners in taking advantage of local opportunities. Those are really coming from our partners in the local market. But then the Briotix salespeople, our team there picks those up. So that's how we've done it thus far, and I think that's how we'll continue to.

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

Just out of curiosity, do you have the number of reps that are covering the industrial injury side?

I think there's about 7 from a business development standpoint that we have in total.

Okay. Will that figure stay about the same? Or are you looking to add?

Yes, it's a long-term training program, so I don't expect that to change significantly this year.

Okay. All right. And then, Larry, I guess going to just assumptions undergirding guidance. I mean, is there -- is it fair to say -- I know you said that your volume estimate is below last year, which certainly makes sense given how successfully you guys were last year. But I mean, are you kind of in the 2%, 2.5% range, somewhere in that ballpark? Is that fair to say?

Jon's nodding, so I guess it was. I don't have it in front of me, but we just didn't -- we assumed volume growth. We just didn't assume the same 4.5%-plus same-store volume growth. But I mean, as you know, it's not unusual for us to raise guidance so. Early in the year and the weather's been kind of bad if you have noticed. So we remain a little conservative, but we'll see how that goes. What volumes are going to be in March because if weather continues to be bad, but...

Okay. And then just on the effective tax rate, I've had a devil of a time getting my arms around this, for not just you guys but others. You think if there's any bias in your guidance there that that's down, given that this year was lower than I think you had initially anticipated? And again, it's not just you guys. It's a bunch of companies that are still getting their arms around all the implications of the changes there.

Yes, a part of that was because of deductions we get for our shares and that's just as part of our compensation system if the share price [indiscernible]. The price is set on the date they're granted, and we had to get the appreciation of the stock price so that we're able to deduct what's higher than we had expected. For this year, we assumed -- we didn't assume the stock was going to increase by a huge percentage again. So again, depending on what the stock does the deductions may be bigger and the tax rate may be lower.

Okay. So if there's any bias, it sounds like you're saying it's probably down, but you're certainly not making any promises around that?

Well, I think -- I don't think -- so the guidance range we gave, our budget is in that range. Now can we do better than budget? Yes, we frequently do better than budget.

But we just don't -- we don't control the tax rate. I mean, that's going to be what it is based on where the business is and based on, to a certain extent, where the share price is.

Okay. All right. And then just last question. If you said this, I didn't catch it. Did you give any sense of CapEx for '19?

No, but I mean...

Around the same.

Yes, normally -- I think we had $6 million in the budget. Normally, it's $5 million to $6 million. It's normally pretty close to the same amount as depreciation and amortization.

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

A couple of questions on the injury prevention business. I think you said you're in 600 different facilities. But just curious, is there any significant customer concentration in that business?

Yes, there is. I mean, we're big in utilities, we're being in the distributing side of the business. PG&E is -- was, is, the big customer. So you understand what the bankruptcy in the fourth quarter. Although they've affirmed, based upon some analysis that they've done in the savings and the ROI that they've gotten, that they definitely want to continue that program as they go forward. So we're watching that closely. Obviously, Costco's been a long-standing big customer. Obviously, a big company, and we Continue to grow with them, by the way. But we're -- also, we've gotten much better diversified over the last 2 years. And so while we have a couple concentrated positions, it's definitely improved.

Okay. Generally speaking, you consider that a real sticky business, is that right?

It's been an amazingly sticky business.

Okay. All right. And just -- I know it's still a small piece of your overall business but just thinking about the organic growth in that injury prevention business. Is that -- would you characterize that as similar to the PT business, much different? And just curious, too, with the organic growth, is it a high margin on that organic growth that comes in? Or is it comparable to kind of just as you grow the business?

Yes, it's comparable margin that I think the embedded organic elements are better on a percentage basis and partly because it's so much smaller, too. We're just unable to grow the core PT business at the level that this business is going to grow at organically I think for a good while. But the margins are about the same. So you don't have -- we don't have a lot of fixed costs. We do have some corporate costs, but you have gross pricing and you have some on-the-ground people costs and that's about it.

Okay. Chris, appreciate the comments on -- the prepared comments on the alliance. Curious, I don't believe you've really talked about the alliance much before in your prepared comments. So just a question, why did you take this opportunity today to talk about that? And then just on the innovation in the industry, is there any real new innovations that have the industry really excited about the PT business?

Yes. So on the alliance, I have talked about it a few times, maybe a little bit more times spent here because we've had some good wins recently, a few I didn't mention with some regional payers just around some regulatory issues, coding changes and things like that, that we're able to work with them on. But the group's doing great work and we want to represent the profession well. We think we do. We've gotten bigger, where we just hired a really strong marketing group who is helping us get the word out, not only about physical therapy and the efficacy of it, but some solutions in the marketplace like the opioid thing, helping us to move our initiatives forward. Going to get more focused in having -- and we've always been focused and we've met with CMS every year, and we're going to continue to do that. We think there's some regulatory burden opportunity to try to facilitate there. So I think it's important that you guys care about those things just in order to understand kind of the broader macro environment. I mean, we're -- one of our challenges is efficiency. We can be a lot more efficient if we could get rid of some of the regulatory burden. And so as health care moves in a certain direction, we want to take APTQI and be a strong voice for the profession particularly for our part of it on the outpatient side. And we've done a good job, we've grown it. We've added a number of member companies. And again, whether it's very important to you or not, it's important to us and we're going to continue to work at it.

I think of it's important to you, it should be important to us. Appreciate it, Chris.

Thank you.

And there are no other questions at this time.

All right. Guys, thank you. Thanks, everyone, for your interest. Thank you for your questions. We're available if you have some offline questions as well, and have a great day.

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