U.S. Physical Therapy, Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy’s First Quarter 2013 Earnings Release Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) I will now like to turn the call over to Chris Reading, Chief Executive Officer. Please go ahead.

[Christopher J. Reading:]

Thanks, Maria. Good morning, everyone, and welcome to U.S. Physical Therapy’s first quarter 2013 earnings call. With me here in Houstan are Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Jon Bates, our Vice President and Controller; and Rick Binstein, our Vice President and General Counsel. Before I provide some color on the quarter as well as the operating environment and the outlook for the year, I’ll ask Jon to cover a brief disclosure statement. Jon?

[Jon C. 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 J. Reading:]

Thanks, Jon. Over the past few months, our partners as well as our entire team have been working furiously to realign, navigate and hopefully put the company in a position to prosper in spite of a series of federal payer, payment reductions that were enacted earlier this year affecting our entire industry. To briefly recap those reductions, we started with an unexpected rate cut delivered to Congress and resulting in an increase in the multi-procedure payment reduction or what we call MPPR, which initially began for Medicare patients several years ago. That additional reduction, which goes into effect beginning in April, the second quarter of this year was earlier announced and estimated the cost of company $0.18 in earnings for 2013. Adding to that is an approximately $0.04 reduction attributable to the sequester, which also began in April. Additionally, and as we discussed earlier this year, we suffered a slower than normal start due to comparatively poor and prolonged winter weather topping an equally brutal flu season, and while poor physical therapy business has rebounded nicely, our physician services business remains a challenge that we continue to work on. It’s a rather long list, and while those challenges are and have been very real, we have, as a team, worked to overcome these headwinds with a series of initiatives both ongoing as well as new in order to best position us for continued success. We have worked to do in past months’ quarters and for that matter, for many years now. So let me shift gears a bit to discuss some of those things. First, we realigned our costs when needed across the company, and the effect of those adjustments has been figured into our earnings guidance as presented in our press release earlier this morning. Those cost adjustments are for the most part complete. Next, as we have discussed, we continue to work on getting good acquisitions done and I’m very pleased with the activity to-date with two very nice deals closed thus far this year and new markets with absolutely outstanding people, and with businesses that have upside growth opportunity and where the net rate is very good. In both of these deals, one which closed at the end of February, and the other, which closed just about a week ago now, we’ve already began to help on expansion related opportunities. Admit that work has played a role in the February deal with an improved pilot already in the works, with one of the largest deplorers in the area, and we believe we have much more to come. And while the environment and the regulatory complexity continues to ratchet up, we believe, as we have said here recently, that this will serve as a catalyst for some of these privately-held physical therapy companies to look to us to partner with them to assist them with their growth while supporting them robustly to allow for them a good life with continued economic opportunity as well as time and balance for them and their family. So with our continued fit to work rollout with our orthopedic home care program, and with other internal care and quality initiatives, we believe we are well positioned to work through this rather challenging time in healthcare today and continue to be a good home for the best clinicians and private practice owners in a very fragmented physical therapy world. Our net rate at start of the year has made some good progress over the same period last year, up $1.88 for the first quarter, cash flow continues to be strong, and we finished the quarter with DSOs in the low 40s. In short, we believe that we can still produce solid results this year and more importantly, position us for the future with continued execution of our plan and the realization of these opportunities both internal as well as external. So with those comments, Larry, would you please review the financials in more detail before we open it up to questions?

[Lawrance W. McAfee:]

Sure. Thanks, Chris. In the first quarter, net revenue increased slightly to $63,098,000, primarily due to an increase in average net patient revenue per visit, which Chris talked about. As described in the release due to severe weather and flu, total patient visits actually declined by 1,000 visits to 578,000 from 579,000 a year ago. Total clinic operating costs were $48.4 million during the quarter or 76.8% of revenue. Clinic salaries and related costs were 54.5% and the provision for doubtful accounts was 1.7%. Corporate costs came in at 10.3% of revenue for the quarter. Our operating income was $8,151,000. Net income was $3.7 million and earnings per share of $0.31. Same-store revenue was flat, while the net rate per visit increased 1.4%. Visits for de novo and acquired clinics opened for year or more decreased by 1.7%. As described in the release, because of the multiple storm systems and a worse than normal flu season, our patient volumes were off in January and February. However, we saw significant improvement and built up quite a bit of momentum during the period. Company’s average patient visits per day, per clinic improved from 20.1 in January to 22.1 in March. With the increased patient volume, monthly earnings rose from approximately $0.07 in January to $0.14 in March. This demonstrates just how profitable incremental patient volume can be and a 10% increase in average daily visits resulted in almost double the earnings level. In terms of development, Chris talked about through a combination of de novo and acquisitions. The company has now added 15 net clinics year-to-date. We declared our dividend for the second quarter. The dividend of $0.10 per share will be paid on June 7. And in the report we issued earnings guidance for the year. Management expects earnings in 2013 to be in the range of $18.1 million to $18.8 million in net income and $1.51 to $1.56 in earnings per share. By the way the analysts consensus current estimate is $1.51.

[Christopher J. Reading:]

Thanks, Larry. Maria that concludes our prepared comments. If you would, please open it up for questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Brian Tanquilut of Jefferies. Please go ahead.

[Brian Tanquilut:]

Hi, good morning, guys. Chris, just wanted to hear your thoughts on the increase in the average rate per visit, what’s driving that, is that just purely the rate increases from the payors or is there a mix shift that we’re seeing there?

[Christopher Reading:]

Yeah, I think it’s a combination of things. We have some of the acquisitions that we’ve done over the past year or so are in strong net rate markets and so that’s a partial factor. I don’t know that I would attribute it to renegotiated contracts although we continue to have solid traction which fit to work. And so I think that’s a partial contributor and we’re working on some things internally here just to make sure that both from a quality and care perspective, we’re doing everything that we need to do and I think that’s a partial factor. I would put that in a programmatic category.

[Brian Tanquilut:]

Okay. And then you and Larry both talked about how things improved over the course of Q1. Just wanted to hear an update, I mean how is the second quarter shaking out as we’ve got one month behind us now?

[Christopher Reading:]

Yeah, I think, I looked at this just yesterday or the day before. April, on a per day basis, was better, modestly better than March. And I don’t have a good perspective yet on where we are in May.

[Lawrance McAfee:]

May is running pretty well relative to April. And I think we’ll continue to ramp.

[Brian Tanquilut:]

Okay. And then Chris, last question for you, in terms of market share gains and where the industry stands today, I mean do you feel like the trouble or the pressures on the industry and the different providers is increasing with the MPPR, are you starting to see that yet, and are you starting to see market share gains as a result of that?

[Christopher Reading:]

I think it’s too early to demonstrate whether we see market share gains, MPPR just really went through the modified MPPR just went into effect this last month. And so I think it’s too early for that. I will tell you that it’s not MPPR is probably the minor thing right now. We’ve got there’s quality initiatives that are referred to as PQRS which, resulted into some reporting requirements. There is a July pending initiative which relates to a whole new disability basically coding and reporting requirement in order just to be paid and that’s effective in July. Honestly, I think that’s probably the biggest pending thing that’s out there that’s going to give some people a fit, and maybe some physician on practice as well. You know, it’s not without some considerable work and complexity to do it and do it right. So the environment is just getting more difficult and more complicated. Thankfully, we have the resources here to deal with it. We have a lot of great people that spend their entire days on these things individually. And I can imagine and I see from looking at chat lines and other things throughout the private practice world that there’s some providers that are well enough resourced to be able to deal with all of these things but there are many providers who aren’t. And so I think, you know, that bodes well for us, to continue and track good people that are in position to grow but want some more resources.

[Brian Tanquilut:]

Got it. Thanks, guys.

[Operator:]

Our next question comes from the line of Mitra Ramgopal of Sidoti and Company.

[Mitra Ramgopal:]

Yes. Hi. Good morning. Just couple of questions. First, Larry, is it possible to give us a sense as to the EPS impact due to the storms and the above average flu season for the first quarter?

[Lawrence W. McAfee:]

I don’t know. I mean, not exactly. Earnings in January were probably impacted by at least $0.04 or $0.05 for the month and February was partially impacted, so it was a pretty severe effect, I would say, just guessing it was $0.08 to $0.10.

[Mitra Ramgopal:]

Okay, thanks. And Chris, I missed the numbers on the reimbursement side that you said. The impact for this year in terms of the sequester and MPPR.

[Christopher J. Reading:]

Yes. We had announced those earlier, I think when we did our year end. MPPR was around $0.18. The sequester was around $0.04, so $0.22 in combination.

[Mitra Ramgopal:]

Okay, thanks. And I believe you mentioned that at one point, that based on the reimbursement concept probably might sort of weed out some of the weaker players, et cetera and potentially could help your acquisition strategy. Are you seeing any of that yet or is it too early?

[Lawrence W. McAfee:]

They just haven’t really started getting paid yet. I think a lot of them are going to wake up when they start getting short paid and these things kick in, probably later in the year before they feel the impact.

[Christopher J. Reading:]

We’re in some good discussions right now though and I think part of that is due to extraordinary effort. I have to believe that some of it, at least, is due to you know, the market and the world today. So, you know, I expect that to continue.

[Mitra Ramgopal:]

And again, if you can, given the two acquisitions you’ve done, what you’re looking at, is it fair to assume similar size acquisitions, or are you attempted to do something larger?

[Christopher J. Reading:]

We want to partner with the best people and we’re in dialogue with large ones and larger ones and smaller ones. We’re not targeting a particular subset per se. The reality is in our business, 5 to 10 facility group is a pretty good size grouping. And there aren’t that many that are, considerably above that, certainly a few. I think recall too; that we tend not to be getting these deals through a bid process that goes out to everybody and every private equity group in the world. These tend to be sourced independently based on trust and relationships that develop over time and resulted in good, long-lived partnerships. So I would say more than likely, they probably will look and feel not just like the ones we’ve done this year but the ones we’ve done in the past.

[Mitra Ramgopal:]

Okay, thanks. And Larry, I don’t know if you have the payer mix handy.

[Lawrence W. McAfee:]

Yes. Insurance was 52.8%. Worker’s comp was 17.7. Medicare and Medicaid was 24.1 and other was 5.4.

[Mitra Ramgopal:]

Okay, thanks.

[Operator:]

(Operator Instructions) I’m showing there are no further questions at this time, sir.

[Christopher J. Reading:]

Okay. All right, guys. Thank you. We’re around today, if you have any additional questions. We appreciate you being on the call today, and we hope you have a great rest of your week. Thank you.

[Operator:]

Thank you. This concludes today’s first quarter 2013 earnings call. You may now disconnect.