U.S. Physical Therapy, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the U.S. Physical Therapy Q4 2020 Year-End Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to hand the conference over to Mr. Chris Reading. Please go ahead, sir.

[Christopher Reading:]

Thank you. Good morning and welcome, everyone, to U.S. Physical Therapy's fourth quarter and year-end 2020 earnings call. With me on the line today include Carey Hendrickson, our Chief Financial Officer; Graham Reeve and Glenn McDowell, our COOs; Jon Bates, our Vice President and Controller; and Rick Binstein, our General Counsel.

[Jon Bates:]

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.

[Christopher Reading:]

Thanks, Jon. Okay. I'm going to start this morning with some prepared comments and some color around select aspects of our year and our final quarter before turning it over to Carey to review the financials in a little bit more detail. First, let's talk about our finish to this crazy 2020 year. I am very proud of our team for the way that they led through this whole year. As we all know, we needed to make a lot of adjustments in the business early on. Those adjustments impacted people and those were hard decisions as a result. Our goal always is to help and we felt the best way to do that was to ensure that the company could get through this endemic in one piece and good shape, if that was possible. Our decisions were made. We gradually worked our way through the year, steadily picking up volume and maintaining very tight controls on the cost side of the business. As we entered the final quarter of this year, we continued to see a nice progression in volume recapture. October's visits per clinic per day increased to 27.7%. That further progressed in November at 28.2%, which was essentially the point at the point where we were back to pre-COVID levels. In early November, our country experienced a strong resurgence to the COVID-19 virus. And as a result, created largely out of work exposures, we ended up with over 300 people in quarantine just for the month of November, more in that month and in the cumulative prior 6.5 months leading up to that. Those high quarantine numbers continued into December, which is in part why cost increased slightly for the quarter. In spite of this impact, we had a strong operating finish to the year. Visits finished in December within 0.25 of a visit per clinic in spite of the bump in virus numbers in quarantines. All in, our gross profit for the fourth quarter, excluding closure costs, was $29.1 million, an increase of more than $2 million compared to the 2019 fourth quarter. Gross profit percentage for Physical Therapy, excluding closures, was 24.9%, 230 basis point improvement over prior year.

[Carey Hendrickson:]

Great. Thank you, Chris, and good morning, everyone. Today, we reported full year 2020 operating results of $38.4 million or $2.99 per share as compared to $36 million or $2.82 per share for the full year of 2019. Our 2020 operating results included $13.5 million of relief funds related to the CARES Act, which contributed $7.8 million to our operating results on a net basis or $0.60 per share. If you exclude those relief funds, our operating results per share for 2020 was $2.39. As Chris noted, our operations finished the year strong. For the fourth quarter of 2020, our operating results were $13.9 million or $1.08 per share, which did include $5.2 million of relief funds that we received in the fourth quarter. The fourth quarter relief funds contributed about $3 million or $0.23 per share to our operating results. If you exclude those relief funds, our fourth quarter 2020 operating results were $10.9 million or $0.85 per share, which is $0.21 per share greater than the $0.64 that we reported in the fourth quarter of 2019. Our adjusted EBITDA, including relief funds, was $23.5 million for the fourth quarter of 2020 and $70 million for full year 2020. Excluding relief funds in the fourth quarter, our adjusted EBITDA was $18.3 million, which is up $3 million or 19.4% from the adjusted EBITDA of $15.3 million that we reported in the fourth quarter of 2019. Our full year 2020 revenues were $423 million compared to $482 million for the full year of 2019, which was a decrease of 12.2%. Our revenues in the fourth quarter of 2020 were $117.5 million, a decrease of 3.8% from $122.1 million in the fourth quarter of 2019. Our Physical Therapy patient volumes per day per clinic dropped at the onset of COVID-19, but then they continually improved from May through December. Our patient volumes per day per clinic were 26.2 in the first quarter of 2020. They decreased to 18.9 in the second quarter. That was the trough. And then they increased to 25.8% in the third quarter and 27.7 in the fourth quarter of 2020.

[Christopher Reading:]

Okay. Thanks, Carey. Good job. Operator, let's go ahead and open the line for questions or comments.

[Operator:]

The first question will come from the line of Brian Tanquilut with Jefferies.

[Brian Tanquilut:]

Hey. Good morning, guys.

[Christopher Reading:]

Hey, Brian.

[Brian Tanquilut:]

Thanks for addressing the guidance right off the bat. As we think about what goes into that, I mean, we get the fact that you're facing Medicare headwinds and obviously, the weather has been tough in Texas and here in Tennessee as well. But how should we be thinking about cost offsets and the underlying organic growth assumption that you're expecting, obviously COVID in the background maybe drive some conservatism there? Just some thoughts on how we should be thinking about the moving parts.

[Christopher Reading:]

Yes. So, as we dissect it and Brian, I appreciate the question. When we look at our budget for 2021, we get back to actually a little bit ahead for the full year on a visits per clinic per day basis, ahead of where we were in '19. And we have a few less clinics, obviously. We expect to have a good clinic opening year in terms of de novos. We also expect to have a good development year, frankly. We have a number of things that we're working on that we expect to get done. When we look at the underlying fundamentals of visits per clinic per day, we expect to be back and a little bit ahead of where we were pre-pandemic. I can tell you, we started the year, January, a little slow, but January picked up sequentially. And while it wasn't fully back to pre-pandemic levels, it was low single digits within on a visit per clinic per day basis. And so the challenge for us is we took out so much cost in 2020, and not all of that was sustainable. Some of that we've had to bring back. Quite honestly, we have people running on less than fumes. And so we'll see I expect that we'll see some of that margin pickup as we go forward into this year. We know that 2021, it sounds like a little thing, has one less business day. So, that's $0.06 or $0.07 of volume we expect to get back. And that is even considering the slow start that we've had in January; January and February we're going to have to crawl out of that hole. But the Medicare impact is real. And we're going to do our best to work our way through it and to come up with some offsets. But this is our best guess right now on a look-forward basis.

[Brian Tanquilut:]

And Chris, I know in the past, you've talked about -- especially when you're facing the steep Medicare rate cuts, you've talked about potentially ramping up M&A this year as a way to offset, right? So, where do you stand in that, I mean, with Medicare cuts being mitigated a little bit? And then I know you don't like to talk about pipelines, but how does how are the conversations going with potential targets?

[Christopher Reading:]

It's good. I mean, I'm pleased that we got look, we always seek out the best folks. We've tried to. And we've done the deals that we've closed were just with phenomenal folks. The deals that we will close also with phenomenal people and the discussions we're having really, really good opportunities and good people. So, I expect this is going to be a really busy year. We always have things in development. Sometimes they don't work out. Most of the time they do. But I expect this will be a busy year for us. And you will see us in the not-too-distant future.

[Brian Tanquilut:]

Okay. And then Chris, last question for me. I know you kind of slowed down the de novo strategy a few years back, but you just mentioned de novos again. So, how should we be thinking about your commitment to de novos and the pace of development on that front?

[ChristopherReading:]

Yes. We've always been committed to de novos. Most of the de novos that we open are within our top-20 or top-30 partnerships, and we'll get back to kind of what our average pace has been more recently, excluding the 2020 year where we just pressed pause on just about everything. We've -- the de novo opportunity, though, I guess I'm a little different than some of the other companies out there. We when we got here 18 years ago, we were throwing open de novos, picking a target city and just blitzing that city with openings. And quite honestly, it didn't work and it's hard to work. And so we're selective with what we'll open, but I expect somewhere in the mid-20s this year in terms of de novo openings, which kind of gets us back to where we were before. Maybe we'll be a little better than that, maybe a little lighter, but that's what I expect at this point.

[Brian Tanquilut:]

Awesome sounds good, thanks for that. And congrats, thanks.

[Christopher Reading:]

Thank, Brian.

[Operator:]

The next question will come from the line of Larry Solow with CGS Securities.

[Lawrence Solow:]

Carey welcome, I guess, a public welcome to U.S. Physical in a couple of months but first public call. I know you don't guide yes, my pleasure. I know you don't guide seats quarters. And clearly, cadence-wise, I assume we're going to start a much lower volume with the weather impact and the rising incidence of COVID. So, just trying to get a better feel for the volumes. You said you sort of expect it to be we recovered the pre-pandemic levels at the end of the year, but it sounds like we're going to get a little bit of swoon here, at least in the first half of the year. So, my first question is sort of what do you -- the cadence do you expect to be sort of above pre-pandemic levels in the back half of the year? And then as we look out over the next few years, can you just give us any idea of your thoughts on what the high unemployment rates and whatnot? How you sort of -- same-store lines have been great for the last five years. How do you view that in a post-COVID world, but relatively high unemployment? You think that will be a challenge?

[Christopher Reading:]

Yes. So, good questions. Appreciate that. So, I personally expect us to be back or a little ahead of pre-COVID levels sometime in Q2. We're not that far off. Had the last week's apocalypse not happened here in Texas and a few other places, sub-0 temperatures with literally everything shut down, we would have had a decent February, but having I mean, knowing where we are right now, first quarter is certainly going to be light. I think second quarter and usually beginning in March, we begin to pick up steam. I expect that to happen this year. The team's very, very focused. We've got to know we have some ground to make up for the weather and for the rate, and they're working very hard. So, we'll be a little bit back-end loaded. I won't say that we'll be fully back-end loaded. I think Q2 and forward should while we'll still have the pandemic, I think things should be steadier. In terms of the workforce, look, we have put up really good same-store numbers the last few years. I expect to get back to same-store positive once we get on the other side of this pandemic. I think we can move market share. This period of time, we've been through, has been hard on everybody, and we've come through it really in good shape. So, again, I think it's about moving market share. Certainly, a full workforce and a robust economy helps everybody. But we've been through recession periods before, we've been able to grow. And I don't expect us to be in a recession. I expect us to be able to move market share and grow same-store like we have been, to be honest.

[Lawrence Solow:]

Right. How about costs? I know you brought back some of your costs. You haven't brought back all of it. And you mentioned you started it feels like you're getting pinched a little bit, you kind of have to bring back some more staffing. So, I suppose we'll see a rise in cost or at least the first half of the year. But my other question is, how does that interplay sort of with -- I think you mentioned you have 300 or so employees. I don't know what the number is today, but it sounds like some certainly some inefficiencies. And is that causing you to hire more temporary help and sort of temporary elevating costs even more?

[Carey Hendrickson:]

Yes. A little bit, a little bit early on. And we expect as the year progresses that these folks in quarantine -- number one, we're getting our people vaccinated. And we're in 39 states. And so there's a state by state bit of a patchwork for how efficient and effective that is. But early results are good and people are getting vaccinated. And so we -- because of that, we expect our quarantine numbers to begin to decline as that number increases and people have second level vaccine under our belt, a greater percentage of those. So, I think we'll make progress there. I think from a corporate perspective, we've got the group back that we need to operate the company. And as we grow and add new partnership deals, we may have some slight changes in addition there. I think in the field, we're also pretty well staffed right now other than for the redundancy that happens because of the people and quarantine. And once that is alleviated, I think things will settle in and we'll be in a little better shape.

[Lawrence Solow:]

And then just lastly, the industrial injury prevention business held up relatively well in 2020, I think it was actually flat or peaked out a small even revenue gain. What's your outlook as we head to '21 for that business?

[Christopher Reading:]

Yes. I think we have a forward outlook. I mean, we expect a good year. I think our rate of change, one of the things will slow a little bit this year, and we're going to have to rebuild our and the group has been working on it. We're going to have to rebuild our opportunities pipeline. We've just had a lot of people kind of on pause, so to speak, during a lot of 2020. Our sales cycle for the IIP business is a bit longer. It takes up to about a year in discussion with some of these companies. But it's coming back and we made some good progress of late. So, I expect that group I have tremendous confidence in that group. It starts the year, started the year well for us this year in 2021. It's now our largest single partnership and ranking in terms of total contribution, and I expect them to put down a good year this year. But we're a little bit more flat-footed maybe than we have been in the past just because of COVID, but they'll pick it up.

[Lawrence Solow:]

Got it, okay, great. I Appreciate that. Thanks, guys.

[Christopher Reading:]

Thanks, Larry.

[Operator:]

The next question will come from the line of Matt Larew with William Blair.

[Unidentified Analyst:]

This is Dan Lawler on for Matt Larew this morning. But just wanted to ask with the PT cut reduced to around 3.5% for '21, are you seeing anything to maybe having the remainder of the cuts come back in '22? And then quickly on the 15% cuts for PTAs and OTAs in '22, what levers are you guys pulling in your staffing model? And how should we be thinking about maybe the net impact to rate in '22?

[Carey Hendrickson:]

Yes. So, the first part of your question is, do we see the remaining part of that cut coming in '21? I'm not sure. I'd be giving a total wild guess at this point, which I'm not inclined to do. So, I hope not. I think they've gotten their pound of flesh. But we're going to be working hard within our APTQI alliance, as we did throughout the entirety of last year, to keep that at bay. On the 15% PTA reduction, we made a number of changes in staffing. It's been a couple of years ago, pre-COVID, where we actually we shed in a lot of our facilities, some of our PTAS. I don't want that to sound bad. Those are good folks. But we rebalanced our staffing somewhat. And I think the key for us is just going to be scheduling and making sure that our PTAs are connecting with other nonfederal patients. And I think we're at a level where we can do that pretty effectively. We may have pockets where we have to be a little bit more creative and we'll certainly work on that as the year progresses. But I think right now, we should be, generally speaking, OK, with respect to federal patients.

[Unidentified Analyst:]

Great. Thanks a lot.

[Operator:]

The next question will come from the line of Mitra Ramgopal with Sidoti.

[Mitra Ramgopal:]

First, Chris, you talked about being able to grow market share organically. And I was just curious if you could give us some color in terms of, as a result of the pandemic, what you saw this past year in terms of a lot of maybe your mom and pop competitors?

[Christopher Reading:]

Yes. It's a good question, Mitra, and good to hear your voice. It's mixed. We have on the mom-and-pop side some really good competitors. And I think PPP money helped a lot of them, the ones that applied for it and got it, and that was kind of the bridge to the other side. But we've also seen a huge increase in the number of small practices that aren't probably going to make it or need a home, and didn't fare so well and don't want ever to go through this again, what they went through in 2020. So, I still think we're -- the big companies are much better resourced to move market share than the smallest of the group. So, that doesn't mean there aren't a lot of really strong small groups out there. And a lot of those are people we end up connecting with and talking to about a deal at some point in time. But the other thing, Mitra, I think that 2020 did was for hospitals, which is also a big competitor of ours. Physical Therapy has probably been the 51st priority of a hospital here this last year. It's not high on the list. And so I think we've been able to move some business from the hospitals. I think we can keep that. And we're going to fight to do that. And we've put more emphasis in terms of looking for creative opportunities with hospitals. And it's early yet, but I think we'll see that play out as the year unfolds with us managing and having more creative opportunities with hospitals, because it's really not a strong focus of theirs right now.

[Mitra Ramgopal:]

And kind of a related question, I guess, as it relates to de novos. Do you think the pandemic has maybe accelerated or maybe changed the mindset of some of the potential partners who are now more interested in joining with you maybe pre-pandemic?

[Christopher Reading:]

Well, I'm not exactly sure if I'm hearing your question right. But I think when you look at the partners that we've acquired, the partners we're talking to about creating a partnership together, they're very bullish on the future and they're very bullish on growth, and they're very bullish on development. That's organic development as well as tuck-in opportunities and full-on further acquisitions within their partner groups. And so we have a lot of people working on those things locally, along with our development team. But yes, our strong partners are not afraid and they see a lot of opportunity out there and so do we. So, we just need to make it happen.

[Mitra Ramgopal:]

That's very good. I was just also curious if, say, you're seeing in terms of your de novos pipeline, more interested parties as a result of realizing how difficult it is to sort of deal with the environment solo as opposed to partnering with you?

[Christopher Reading:]

Yes. I got you. So, our de novos are solely and exclusively satellites now of existing partnerships. We're not doing and haven't for many, many years any one-off, stand-alone, single site partnerships. And so when we have somebody that comes to us like that and is interested, most typically they're being referred into or tucked into an existing partnership somewhere. We're not doing any sole single site one-off partnerships from the ground up. All the things that we're doing, de novos, are all satellites at this point.

[Mitra Ramgopal:]

That's great. And then I know in terms of the Medicare reduction, I was just curious in terms of, if you might have the peer mix handy, Carey, as it relates to maybe what percentage of the business is Medicare exiting 2020?

[Carey Hendrickson:]

Sure, you bet, yes. So, in 2020, our Medicare was 27.2%. There are some contracts that are also kind of tied to that Medicare rate. So, we estimate about 31% of our business is tied to the Medicare rate in some way. Overall, there wasn't a whole lot of change in 2019 to 2020 in the payer mix. Commercial insurance was 47.6% in 2020. Medicare, like I said, was 27.2%. Medicaid was 4.4%. Our workers' comp was 13%, and then our personal injury and self-pay combined was 7.8%.

[Mitra Ramgopal:]

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

[Christopher Reading:]

Thanks, Mitra.

[Operator:]

The next question will come from the line of Mark Juvenile with Copeland.

[Mark Juvenile:]

I guess my question is around the dividend. Great to see it reinstated, and I noted at a higher level than you had before, even though earnings, the payout ratio looks significantly higher than you probably had, given the earnings at a lower level than would have been expected last time you had the div. I'm curious if that says anything about kind of the recommitment Or long-term commitment to dividend growth? What the flexibility you've got in your credit agreement means that maybe you wouldn't have to cut outside of maybe a pandemic coming again, right? Can you speak to a little bit to the payout ratio or goals for dividend growth?

[Christopher Reading:]

Carey, you want to take a run at that first?

[Carey Hendrickson:]

Sure, you bet, yes. So, when we look at the dividend, obviously we have a strong balance sheet. So, we feel great going into 2021. We feel good about the health of the business and where we're headed. We'll take some of these things and stride related to the Medicare reduction, those kinds of things and work hard to mitigate them. But we're very committed to the dividend. We wanted to increase it in the normal progression. So, it was $0.32 last time we did it. We generally increase it 9% to 10% per year, and we did that with this increase from -- going from $0.32 to $0.35. But I would say, as a company, we're very committed to it. And we have increased it like that. Really, I think we started the dividend in 2011, and we've increased it every year since then, absent the suspension we had in the first quarter of 2020, but we've resumed it at the higher rate.

[Mark Juvenile:]

You did mention a number of headwinds to cash flow in 2021 as well as the earnings. What type of cash flow kind of call was that do you see based on your projections? What percentage of free cash?

[Carey Hendrickson:]

From a dividend standpoint?

[Mark Juvenile:]

Correct.

[Carey Hendrickson:]

Yes. So, well, we really -- I don't want to speak too much to the cash because there's uncertainty. We have this range of $240 million to $252 million. Obviously, it would be -- it's a higher percentage than it would have been in 2020 or 2019, but we feel very comfortable with it.

[Mark Juvenile:]

Okay. Thank you.

[Operator:]

The next question will come from the line of Mike Petusky with Barrington Research.

[ChristopherReading:]

Hi, Mike.

[Mike Petusky:]

So, I wanted to ask a little bit about salaries and related lines. So, I think it was 59 -- I'm sorry, 55.9% of overall revs in the fourth quarter. And I was just wondering with the quarantine, the employees and all the rest, did you guys sort of try to assess -- and maybe I missed it, maybe you've said this, but I missed it if you did. Have you guys tried to assess essentially what that number would have been sort of in a non-COVID environment? I know you're essentially working at times with two therapists to deliver care to one patient due to the quarantine stuff.

[Christopher Reading:]

Right. I haven't. Mike, and we probably need to, and we can probably offline pull that together. I don't know that I have that at my fingertips at this point. I'm not sure Carey does either. Most of those 300, they weren't all clinical folks, but a high percentage were. And you're right, there's a redundancy that gets created there with having replacement staff in a lot of cases. But it's going to be an estimate if we do it, because I don't have the ability on a pieces parts basis to tell exactly who we brought in and replaced or whether somebody just worked more or what the iteration was in each and every example of that, but we can probably do a back of the envelope estimate offline.

[Mike Petusky:]

Okay. So, you said that there were 300 people, employees, quarantined in November and then I think you characterized as that issue continued into December. Do you have any sense like currently or in January, what the upper end of quarantined employees was?

[ChristopherReading:]

Yes. It's less than it was. It's going down. I wouldn't characterize it as low yet, but it's better. It's certainly better than November. December was better than November by margin. Decent margin in January and forward, have gradually gotten better, but it's still a high number right now. I don't remember. I just don't have it with me, and we're coming off of a few days with the Board meetings and budget and a lot of numbers. I just don't remember what that number is. But I can get to it. So, if you want to check afterwards, I know where it is, I just don't have it at the tip of my tongue.

[Mike Petusky:]

Okay. And then -- so where I'm going with all this is, I'm sort of wondering, are you guys assuming sort of COVID continues to be an issue for your employees in terms of some redundancies and that sort of thing? Is that sort of baked into the guidance?

[Christopher Reading:]

Absolutely. Yes, we're I mean, we're in a COVID environment right now. And I expect we will be fully for a pretty good chunk of this year, to be honest. So, now I said earlier, I don't expect to have as many people in quarantine as we do right now just because of vaccinations. But we know just statistically, both from talking to hospital friends and looking at our surveys of our own employees, we know there's a certain percentage of employees who aren't going to get this vaccination. That's true of local hospitals here in Houston as well as in our subgroup. And if you follow the science, with the variance and the other things that are happening, we're expected to kind of be in a COVID environment at least for the next few quarters, so, if not for the year. So, yes, it's baked in.

[Carey Hendrickson:]

And Mike, I have the quarantine numbers in front of me for January. And Chris noted they were highest in November. They came down in December, and they're at a pretty similar level in January, slightly higher in January than they were in December.

[Mike Petusky:]

Can you give us number?

[Carey Hendrickson:]

Yes, it's in the mid-200s.

[Mike Petusky:]

Okay, that's still pretty high. Okay.

[Carey Hendrickson:]

It's still pretty high. Yes, no doubt, it's definitely high. Yes.

[Mike Petusky:]

And I'm assuming the majority of those folks are clinical?

[Christopher Reading:]

Yes. I don't think we have a breakout exactly by position, but I think the majority of those folks are clinical, yes.

[Carey Hendrickson:]

Yes.

[Operator:]

We show no further audio questions at this time.

[Christopher Reading:]

Listen, thank you, everyone. I appreciate your time and attention. We appreciate your questions and your interest. Carey and I are available after the call if you have further follow-up. And again, thank you. Stay safe and stay well. Take care. Bye now.

[Operator:]

This concludes today's conference call. We thank you for participation. And I ask that you please disconnect your lines.