U.S. Physical Therapy, Inc. (USPH) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the U.S. Physical Therapy Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator instructions] I would now like to hand the conference over to your speaker today, Chris Reading, Chief Executive Officer. Please go ahead.

Thanks, Natasha. Good morning and welcome everyone to US Physical Therapy's Third Quarter 2020 earnings call. With me this morning include Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell and Graham Reeve, our Chief Operating Officers; Jon Bates, our Vice President and Controller; and Rick Binstein, our General Counsel. Before we begin our discussion today, I just wanted to remind everyone this will be Larry's last official earnings call with us prior to him kicking off his long scheduled retirement here very shortly. I've had the distinct pleasure working alongside Larry for the past 17 years, and we've enjoyed a great run with this company, although Larry will be metaphorically writing off into the sunset, we are not done yet with what we expect to further accomplish. We publically thank Larry for the significant contributions that he has made and I want him to know that I expect him to catch a lot of big beautiful fish in the coming months and years and to not be a stranger. Next week, Carey Hendrickson will start his new role as our CFO, and we will began working on the transition that we have planned for a long time now that we are back on terrific footing. So, before I begin to provide some color on the quarter and the year, I think we need to cover a brief disclosure. Jon, if you would please?

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. 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. So I'd like to start with some perspectives. So let's just back up a little bit prior to the quarter and look back to June when we were making substantial improvements with our pandemic affected volumes. The June volume had jumped materially from May to 21.8 visits per clinic per day that further progress into this third quarter with July coming in at 24.4, 25.9 in August, and 27.1 in September for a full-quarter average of 25.8. We finished the quarter within about one visit per clinic per day from where we were at the same point in 2019, huge recovery from where we started post-pandemic just a few months earlier. For the quarter, our net rate was $105.91, ahead of the same period in 2019. In the cost control area, our team of partners, our ops team, and our support group in Houston have worked tirelessly together to very effectively manage our costs through this difficult period. I want to take a minute to thank the many people, our people, who without complaint or blame very professionally worked with us to trim hours that caused in many cases to absorb personal furloughs or significant salary reductions during this period. Your commitment and sacrifice is not unnoticed and without it, we would not be in the very good shape that we are in today. Most sincerely, I want to tell you, thank you. For this third quarter, our operating costs as a percentage of revenue, excluding closure costs, were reduced 460 basis points. Total salaries and wages in our combined business were similarly reduced 410 basis points. In spite of the challenges this pandemic has produced, we were able to grow our gross profit this quarter by 11%, gross profit margin was 27.9%, an improvement of 460 basis points compared to the third quarter 2019. Our Physical Therapy Gross margin improved to what feels like a high point as far back as I can remember to 28%, which is a 410 basis point improvement over prior year. In our injury prevention business, we also grew this quarter with margins improving 870 basis points, 28.6 from a year-ago quarter of 19.9%. For complete view of financials in just a minute, I'll ask Larry to cover our financials in a little bit more detail. Prior to that, I do want to take a minute to recognize what a huge lift this has been for our entire team these past 7-8 months, nothing has been normal and this has been a battle the whole way and we are not through to the end of it yet. What we have gone through though as taught us a great deal about ourselves and our resiliency and tenacity and has given us the confidence that we can deal with whatever comes along at this point, and we believe we will still find a way to grow through any of those challenges. I am supremely proud of all of our team at every position and level in the company, across the entire country. Right now we're seeing community infection rates climb again. Our clinical services team along with our compliance leadership have worked tirelessly to ensure that our clinics have what they need to protect themselves and our patients as we care for those who need our services to work and to function. Until we return to fully normal, whatever version of normal we return to, I remain very confident that we have the right people and resources in place to get us to that point in the most efficient, safe, and effective way possible. Speaking of pushing towards normal, I'm pleased to convey that our development engine is again running and is beginning to bear fruit. Earlier this quarter, we announced our first deal since the pandemic began, and we have more balls in the air right now with a good deal of positive activity that we expect will help us to -- as we round the corner into the New Year here very shortly. That concludes my prepared remarks. Larry, a few words for us.

Thanks. Chris covered a lot of margin items. So, I'm just going to give some highlights rather than go line by line through the release. Earnings per share from Operating Results excluding relief funds were $0.85, the most profitable quarter in the company's history. The analyst consensus estimate for the quarter was $0.51. Thus, the company beat expectations by $0.34 or 67%. With regards to revenue in the third quarter of 2020, $108.9 million recorded topped the analysts' consensus estimate by $5.4 million. Operating income for the third quarter was $19.9 million and an increase of 18.5% as compared to the third quarter a year ago. Operating income as a percentage of revenue increased by 400 basis points to 18.3% in the most recent period. By comparison, in the second quarter of 2020, operating income in the third quarter increased by $9.6 million or 94%. In terms of other financial measures, in the third quarter, adjusted EBITDA was $19.9 million versus $17 million a year ago. Excluding relief funds, adjusted EBITDA was $19.5 million. This is not in the release, but if you look at the balance sheet, debt has been reduced significantly this year. If you included Medicare advanced payments and deferred payroll taxes of $17.7 million, debt -- our third-party debt obligations have been reduced by $20.8 million or 41% from $51.1 million at year-end 2019 to $30.3 million at September 30 this year.

Okay. That concludes our prepared comments. Operator, if you would open the line for questions.

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

Good morning, guys. Hey, just real quick, Larry, congratulations. Best of luck in your future and it's been -- we've covered for 12 years, I think, so I appreciate all your assistance and congratulate you on your -- totally have a great future. Just a few questions, at high level, obviously really great margin performance this quarter, and I realize revenue -- obviously trends are improving, probably a little faster than planned, come back of some of these costs, but you're -- your EBITDA margin, I think over 18% this quarter, I think it's a couple of hundred bits better than I think any other quarter in the last 10 years, so I'm just trying to grapple with or maybe that's a high-class problem, but just figure out is there some of this sustainable, maybe you can give us a little more color on that.

Yeah, you know, we haven't really hit a steady state, Larry, and so we're trying to sort through that ourselves. For the most part, we've gotten, I would say probably the majority of the people that are coming back at the clinical level at this point, we're within a visit per clinic per day of where we were before and that's not where we want to be, we want -- we want to grow and we want to have same-store growth again, but we've held costs down and the ops team has done a great job along with our partners, keeping their finger on that pulse, so I'm hoping we can keep a good percentage of what we've gotten. I will tell you, through the quarter, we had some cost increases in the quarter as we reloaded people, and we get people back in positions where we've really stretched folks pretty far including here in Houston. I'd give us another quarter to see how we settle in, volume has started to level off, so in the past few weeks, we've leveled out a little bit -- up a little bit, you know and maybe down a percent here or there, but pretty steady still, so we'll just have to, we'll have to see. Our goal is to keep as much cost out as we reasonably can to provide service that we need to provide both to our patients and to our partners.

And you didn't give -- I know you didn't give a same-store sale number last quarter. Can you maybe just share a little bit this quarter, just -- just to give us a rough idea, it sounds like sales on a same-store basis were down I guess single digits and some mid-single digits or even less maybe.

Honestly, we didn't generate it for the second and third quarter because it really doesn't mean a lot. Yes, yes, they're down, I mean we've been focusing on trends and it's been marching upwards, so I'm sure in the fourth quarter we will give that data again, but, as I said, we didn't even generate it this quarter, it's almost doesn't really mean anything.

Right, what about visits? Just so -- I know you mentioned visits, I think they improved to 27 a day on average in September. I think you mentioned, the year-over-year, it was down 1, was it up for the full quarter or was it up for September?

A month. That was for the month of September --

So it's still down a little bit. Okay, so just looking at volume, is it still down probably somewhere in the 5 percentish range, plus or minus to keep sort of...

That's about right.

Right, okay. Great, thank you, I appreciate it.

And in September this year, it was 27.2 visits per day per clinic; in September 2019, it was 28.2, so it was down 1 visit.

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

Hey, good morning, this is Jack Slevin on for Brian. Congrats on a great quarter guys. I guess, right now, I just want to kind of project out a little further, get your thoughts on 2021 and how we should be thinking about that particularly as it relates to further M&A opportunities from some of the announcements you've made recently.

In terms of our capacity to do deals, the balance sheet is literally in the best place I've ever seen it in 17 years, we have over $100 million in unused availability under our credit line and so I don't think there's anybody in this sector that is positioned better from a capital standpoint to do M&A.

Got it. I guess as a quick follow-up, any color on what valuations have been looking like recently in some of the discussions you've been having?

Yeah, it's too early to tell on the new stuff, I expect good valuations will be sub-peak, peaking late 2019, not enough data yet to give you any worthwhile color on exactly how that's going to look as we go forward.

Got it, okay and one last one for me. You guys have talked about kind of how there would be challenges getting maybe that last couple of points off of your pre-COVID levels back with some of that related to activities in schools and sports, could you just provide an update on what you're seeing on that front and maybe how it is different across geographies?

It is different across geographies. So we have some markets that are back, fully back, and a little bit better than fully back; we have other markets that are still off somewhere between 5% and 10%; again, kind of following the pattern we had originally, with the Northeast being more greatly affected, the West being maybe in a little better shape, some parts in the middle of the country, the south central portion of the country also in pretty good shape. So varies literally state by state, market by market, almost the aggregation gets us to within about 5% right now and we're still hopeful we can move market share and get the rest of the way there.

Got it. That's it from me. Thanks guys.

Your next question comes from the line of Matt Larew with William Blair.

Hey, Matt.

Hi, good morning. This is Dan Lawler on for Matt Larew. Thanks for taking my questions. One of the first, it looks like you sold your interest in one closed clinic in the 3rd quarter, so can you give us a sense for how many of your close clinics you've reopened todate and then maybe how we should be thinking about the recovery ramp in these reopened clinics.

[Multiple Speakers] I think we've reopened 30, and we've permanently closed 40 of which [indiscernible].

We've sold about to 15 of those 40, and that is a top of my head number, but the reopenings -- most of the reopenings have occurred months ago and so, those are -- they're all open and they're returning during the portfolio with our aggregate numbers, but they're returning toward normal like the other facilities.

Okay, great. Thank you. And then just a quick follow-up, do you expect maybe any additional clinic closures in the 4th quarter with the ongoing case surge?

I don't think what we'll have in the 4th quarter will be related to any case necessarily as we have leases that come due and other things. Well, I don't want to get stuck into this -- into this perspective that because we closed more than average that we won't ever have closures again, we're going to have closures periodically as it makes sense to do that and I don't know yet whether will have any in the fourth quarter. We're not worried about the case -- let me say it differently, I don't like the case, the virus numbers increasing, but we're dealing with that and we've dealt with it so far pretty effectively and so I don't expect -- I don't expect a major announcement of any sort out.

We have 550 clinics open today. We might close a few because we -- pretty much every quarter we close a few, but we're also opening new de novo clinics again and really had a pretty good pace, so yeah, I don't see the clinic count changing significantly other than for acquisitions.

And that'll take [Multiple Speakers].

Thank you. And then just, just lastly shifting over to the IIP segment, you noted that it's currently running slightly below pre-COVID levels compared to around 90% in July. So can you give us a sense for as employees are returning to work and maybe the case surge this summer, how that impacted recovery, and then how you're looking at a return to pre-COVID levels and margin performance in the fourth quarter.

Yeah, so IIP has held up really well. We didn't [indiscernible] nearly as much as the PT business and at the same time, the recovery has been just rather flat through the period. So what happened early on was a couple of large customers, our largest in fact, got busier and we're willing to shift people into more of their facilities, so that helped us through that early period, things have returned to normal for the most part in that regard meaning those people have been redeployed into the original customers and things have settled back down the normal. Our opportunity and our challenge is going to be to continue to add new contracts as we go forward in this still not yet normal period of time. We're going to -- like we did in PT, got some pretty significant cost reductions, margins in that business are going to return I think more toward where they have normally been. This is a company that is still a young company, we're growing, we still need to add some resources, particularly on the technology side for infrastructure. I see margins getting pretty close back to where they were before, maybe a little better, but close to where they were. I think in the PT business, we will have a little bit more margin gap there, because we're much bigger in scale, just allows for a little bit more effectively on that side.

[Operator Instructions] your next question is from the line of Mitra Ramgopal with Sidoti.

Yes, hi, good morning. Thanks for taking the questions for us. Congratulations on a great quarter. Just wanted to follow up a little on some of the benefits you're seeing as a result of COVID, I think last time you had talked about a Telehealth platform as something you could really able to start taking little advantage off and I was wondering if some of the business is going to be transitioned there more on a permanent basis and kind of drive some efficiencies going forward for you.

Yes. So, Mitra, Telehealth has been important for us, particularly early in the pandemic, and it's going to continue to be an offering that is available to our patients, we do not have a perspective of where we want to transition in current business to Telehealth, that's not something that we're interested in doing and want I mean by that is, I would rather see the patients in the clinic if they can come. Now, the reality is with or without pandemic, there are times and instances when patients can't get there and would normally cancel an unemployment and for those times, Telehealth will become an important way to -- to get a visit and maybe somebody has -- the kids are stuck at school, and they can't -- they're not going to be able to make a time, but we can connect with them on a Telehealth basis. So it's going to be another service offering as we're piloting an in-home or at-work solution. We're getting ready to kick that off in the Houston market place and so we'll see how that goes. We're trying to afford patients and the most flexible opportunity, our preference is going to continue to be to serve people in the clinic, but when we can't, we'll have other venues and ways to do that.

Okay. Now, that's great. I don't know if you talked about some of the cost coming back, obviously, especially, I would expect them, things like salaries, et cetera, but on the rent side, I noticed a significant reduction there relative to 1Q and even a year ago, and I was wondering if some of the benefits you're seeing there, if they are really more short term in nature or you think you can sustain that going forward?

It's closed clinics.

Okay. That's changed.

And as a percentage, it is coming down because the clinics you closed are running at lower revenue levels. So, their rent and utilities as a percentage of their revenue was higher.

Okay, okay. No, that's great, thanks. And then I was wondering if you have any update for us on the reimbursement front, obviously with a proposed cut for next year. I don't know if anything new on that front for you?

Yes, we do -- well, first of all, I don't think there is anything that's certain at this point, we do have a bill that's a good vehicle that has a decent amount of support, we've created a coalition among and across a variety of different specialties, including a variety of different specialties that are doctor based. We've got good support from the hospital association and other groups like that. So we have a vehicle, the vehicle would provide for a 2-year stay in terms of no payment reduction at all, but with the election, we're kind of in a holding period probably for at least another week until we see what comes out of the election and we're able to get -- see if we can get final traction before we kick off the year shortly in another couple of months.

Okay. No, that's fair. And I think Chris, on the M&A front, you sounded a little more bullish in terms of maybe some opportunities, especially near term, et cetera. Just wondering if that is a result of maybe COVID having an impact in terms of some of your competitors out there and you're finding more opportunities than normal or anything else. Maybe just the due diligence you've have been doing?

Yeah, I would say Larry's earlier comments, you know I think should resonate with everybody, just the fact that we are -- we're so under-levered and others potentially maybe not in as good a shape, but we're different, we're a different solution for people or place where people can come in and stay for the next decade and really invest in their company with a lot of resources. The people that we're attracting aren't afraid, they've done well through COVID. The people that we're having conversations with expect that they will see in their market some opportunities to pickup some small providers, single site, maybe onesie, twosie kind of clinics. So we continue to attract those folks and I don't think this is going to be a run from scenario, although I have talked to plenty and people who say if this were to happen again, it sure rather have a big partner to carry some of the load and so I do you think it'll move people directionally toward considering a different solution or partner and potentially, and I think we're the company that people look to when they think about partnership, so I think we'll have plenty of opportunities.

Okay. Now it sounds good and again, that's it from me on questions. But again, Larry. I'd like to wish you all the best in retirement, it has been a great 15 plus years working with you and you've done a tremendous job, you and Chris, in terms of but in the company and growing it, so, wishing you all the best again.

Thank you.

Thanks, Mitra.

And your next question is from the line of Mike Petusky with Barrington Research.

Good morning.

Good morning.

Good morning, guys. Yeah, First of all let me join everybody else, Larry, thank you so much. Met you guys first in 2003 down in Houston and it's been -- it's been a great ride Larry. You're truly one of the just class guys and classy [indiscernible] I've ever met, so thank you for that.

Thanks.

I guess just sort of circling back in terms of the proposed Medicare cut. Chris, do you have any view that either just sort of the prolonged difficulties with COVID and particularly the elevation of infections now, I mean does any of that make it more likely that you guys may get some relief as an industry or you know either a delayed implementation or gradual implementation, I mean do you feel like any of that matters or not really?

I think it does matter, I think everybody we've talked to who has become aware of this issue -- this big reduction issue and when I talk about everybody, I mean the folks in Congress, nobody has said "that makes sense, why are you bothering me with this cut, it makes perfect sense." Nobody has said that, everybody has this is crazy, it shouldn't be happening. Number 1, we're a low cost solution that helps prevent a lot of more expensive care; number 2, it's in the middle of a massive pandemic, we've stayed open throughout to get people back to work and back to the economy. So thankfully our congressmen and women, they understand that, it's a matter of giving time and attention to aggregate the resources now that hopefully the election will conclude shortly, that we can get this done between now and year-end.

I mean neither side is focused on a balanced budget and in the midst of a recession, do you want to do a rate cut that's going to force you to have to lay off people.

Yes, it's in the swings that have occurred with CMS minus 9 to plus 14 and 15 in any given year. It's just -- it doesn't make operational or logistical or even fiscal sense to swing that high and that low. There's got to be a rationalization of that at some point in time others. I just can't absorb that year in and year out.

Got you, okay, great. And then I got -- somehow I got bumped off the call for 5 minutes, it was disconnected, so this may have been covered, forgive if it has. And if you covered it expansively, I can just read your answer in the transcript, but did you speak at all to what you feel is the sustain -- I mean 400 basis point gross margin improvement is tremendous and just, I guess, any commentary around how sustainable that is, what percentage of that you might think is sustainable over time. If you've spoken expansively, forgive me, I was off 5 minutes. Thanks.

Mike, look at the transcript that Chris spoke to both PT margins and the industrial injury prevention and after this call, if you want to talk about some more, you're welcome to phone me.

Yes, Mike, you can give one of us a call. We can catch up.

Okay. Thank you very much.

[Operator Instructions] Your next question is from the line of Richard Sokol with Legacy Capital.

Hey, guys. Thank you and a great quarter. I hate to beat a dead horse, but just want to go back to the Medicare cuts and I just want to know if the law is not changed between now and year-end, any way you can quantify for us what that would do to revenues and earnings. And my second question is, is it just Medicare or are your commercial insurance policies also tied to the Medicare reimbursement rate, so they would be affected as well? Thanks.

So the easy question first. Most of our insurance commercial insurances are not tied to a percent of Medicare, they're negotiated separately and individually, some not tied on that front.

On the revenue and earnings, I mean we withdrew guidance. We wouldn't normally give guidance for next year until we release earnings in the first quarter, which would be March, I can tell you were doing the budgets with and without the cut. Obviously, your staffing would be different with the cut and you do other things to mitigate its impact, but I mean, it would be purely speculative now and again, you don't know what's going to happen with patient volumes related to COVID, so I think it's too early to tell you what next year is going to look like.

I think we do have a good chance of getting this [indiscernible] back, I'm still optimistic. I'm also practically speaking, we've managed the business in a way this year that's gotten us some margin expansion and gotten us to a more efficient place and that will help to offset some of the reduction if it does in fact come. So we'll continue to do what we can to, to look for opportunities, maybe leasing rate opportunities and other things as the markets a little disconnected right now, but it's -- as Larry said, I think it's a little too early yet for us to begin to speculate.

I think it was in 2013, was that when we had the 10% Medicare rate cut. What year was it, do you remember Chris?

It was '13 or '14.

Yes, so in '13, there was a surprise 10% rate cut that came out in January and so it took us a few quarters to offset that, but I think by -- certainly by the 4th and I believe the 3rd quarter, we were up again year-over-year. So this isn't the first time we've seen something like this. Hopefully, it won't come to pass, but if it does, the company has dealt with it in the past.

Okay. Thank you.

[Operator Instructions] At this time sir, there are no further questions.

Okay. Well, listen, thank you everybody for your time and attention today. If you have additional questions, please feel free to reach out to Larry or I. We hope you have a great day. Stay safe. Thank you. Bye now.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.