U.S. Physical Therapy, Inc.
Q3 2013 Earnings Call Transcript

Published: 9 Nov 2013

[Operator:]

Good morning, my name is Jackie. And I will be your conference operator today. At this time I would like to welcome everyone to the U.S. Physical Therapy Third Quarter 2013 Earnings 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). Thank you. I would now like to turn the call over to Chris Reading, Chief Executive Officer. Please go ahead.

[Chris Reading:]

Thank you. Good morning everyone, and welcome to U.S. Physical Therapy's third quarter 2013 earnings call. With me here are physician group on our management team including 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 open with some color on the results for the quarter and also possibly some comments and forward looking, I'd like to ask Jon to cover a brief disclosure. Jon?

[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.

[Chris Reading:]

Thanks Jon. What I intend to do here is to provide color primarily on our continuing operations, our core physical therapy business including our fit to work program and then Larry will cover in some greater details the actual results including the fact for discontinued operations mainly the osteoarthritis business that we early on the quarter sold to our existing partners. Hopefully the combination of these discussions as well as the clarity provided in the release will eliminate any noise in these quarterly numbers. For the quarter, business grew approximately 6.3% and net revenues increased 6% compared to the year prior quarter, in the quarter we realized slight decrease in our net rate per visit versus the year prior quarter. And remember that earlier this year beginning in April our industry got ahead with two concurrent reimbursement reductions impacting a federal with some of our commercial payers. First the MPPR reduction was announced and subsequently the impact from the budget sequester. We believe the combined impact to the company for this year again starting in April through year end is approximately a $0.22 impact to earnings in 2013. So this year for us has been a flurry of activity designed to position the company for 2014 and forward and despite what we believe will appear to be a slightly downward earnings year in 2013 when it all fix out we think we have positioned the company well for the coming period. This year we have had to focus a lot of different things and we’ve asked the partners to do a great many of these on a short runway and rebuild and refocus so that we can be positioned solidly in the future. One of the things that has taken up a lot of our time this year has been the osteoarthritis business and as you know we sold that business to our partner earlier in the quarter as we have earlier announced. This has freed up our operation team in fact has allowed us to create another region for the company geographically. What this means for us is that our operations VPs and their team has slightly smaller and more focused are geographically in order to really be able to dig in our existing opportunity in the form of growth in volume, program developments, cost controls and future development of their territories. These changes will allow some of our states and partnerships had a fresh set of hires from the experienced and capable team in order to further our growth and positions in those markets. This year has been and will be by the end of the year one of the best development years this company has ever produced. And while some of that will follow later in the year, which should help position us well for the future. This week in Houston we are enjoying of having large group of partners from around the country end up of acquisitions completed earlier in the year provide with partners and directors from existing groups who’ve been with us for a long period of time. Last night we were here late for viewing some new what I think is some very exciting and innovative equipment as I look forward to deploying around the country which I believe will further add to our ability to effectively care to a broad range of customers and very effective cost point inject some excitement and enthusiasm into our facilities. Right now on our industry, we are seeing and feeling what I believe at the beginning of what with both very challenging and very exciting times. It’s challenging because consumer confidence has been tepid and best and overly with that has been a period of significant change and regulatory complexity that will continue in my view to push on markets towards further consolidation. I believe very firmly that this environment, while difficult will actually help to spur our further growth, we are seeing that happen regularly as we network with and attract some very talented existing companies, who like us believe at the best future results in joining forces and combining talent that are complimentary and supportive allowing their talented clinical partners, significant opportunity to grow with the sweet type feeling that comes to knowing that they have a committed and capable financial partner run by clinical people who have a passion for this business and who are here for the long term. Now we could see that have plenty to work; opportunities on growth which will be evident as well as improving our core business. With all that we have had to do this year in a pretty short runway, we have made progress in many areas, but we have more work to do on the cost side of our business. In retrospect, I think we probably through too many adjustments and project set of partners at the outset of the year in an effort to overcome the drag of that $0.22 expected MPPR and sequester impact. We need to and I expect that we will continue to make progress in these areas with continued time and focused efforts. In this third quarter, we saw little softness in early part of the summer but strong pickup in September in volume making it the best average daily visit month of the year and all indications are that volume remains very solid as we move into this fourth quarter. In closing, let me say that, we are excited about this final push to complete our year, we have a strong financial position with respect to our balance sheet and we expect to use that to advantage to position us well for the near term. I am personally very appreciative of our partners and appreciative of the leadership and support teams here and around the country. It’s been a challenging year with a lot to do. I remain excited and confident in our long-term ability to execute on our plans. With that I would invite Larry to cover the financials in a more granular fashion as well as to speak to our guidance for the remainder of the year. Thank you.

[Larry McAfee:]

Thanks, Chris. As reported today USPH’s net income from continuing operations for the quarter ended September $4.7 million or $0.38 per share. As Chris discussed we sold the remaining piece of our former physician services business, which is treated as a discontinued operation for financial reporting purposes. Our EPS from continuing operations for the nine months ended September were $1.12. I'll now talk about the quarter and then after that the nine month period. For the quarter, net revenue increased 6% to $65.8 million as our patient visits increased by 6.3% which was partially offset by about $0.41 reduction in our average net rate per visit. Our total clinic operating costs were 75.5% of revenue, as compared to 75.1% a year earlier. This increase is attributable to have a $4 million in operating costs from new clinics, offset partially by reduction in operating costs of clinics that were year or older by about million dollars. That our provision for doubtful accounts was 1.7% for the recent quarters compared to 2% a year ago. The gross margin for the third quarter increased to $16.1 from $15.4 million. The gross margin percentage was 24.5%. Our corporate office costs were 9.5% of revenue in both the 2013 and 2012 quarters. Our operating income for the recent quarter was $9.9 million compared to $9.5 million in the 2012 third quarter. Our diluted earnings per share of $0.38 were the same for both of the quarters. Our same store revenue for de novo and acquired clinics opened for the year or more decreased 2%, as business increased by 1%, the average net rate was down slightly. Now I will discuss the nine months results, our net revenue increased 4.4% to $195.5 million due to a 3.6% increase in visits and an increase in our average net rate of $0.73. Our total clinical operating costs were 75.2% of net revenue for the period as compared to 74.1%, again the increase was primarily attributable to operating costs of new clinics. The revision for doubtful accounts for the first nine months of this year is 1.7% versus 1.9% same time last year. Our gross margin for the nine month period was $48.6 million or 24.8%. Our corporate office costs continue to run at 9.8% same as the percentage this time last year our operating income for the first nine months was $29.4 million, our diluted earnings per share were $1.12 as compared to $1.18 for the same period last year. Our same-store revenue and net rate, same-store revenues business and net rate for clinics opened for a year or more were flat. We issued revived earnings guidance today. We now expect the company’s earnings from continuing operations for 2013 to be in the range of $17.2 million to $17.8 million or $1.42 to $1.47 in earnings per share. We also announced today our dividend for the fourth quarter. $0.10 per share will be paid on December 6, to shareholders of record as of November 15.

[Chris Reading:]

Thanks Larry. With that I’m sure we have some questions. So we would like to ask operator to open up the line. And we would be happy to provide some additional discussion.

[Operator:]

(Operator Instructions) Our first question comes from the line of Larry Solow with CJS Securities.

[Larry Solow:]

Hi. Good morning guys. Chris, you’ve mentioned sounds like volume at least was little bit weak in July and August was it seasonally slow months and the sequential recovery in September and it sounds like continuing to October. Is that year-over-year is at least back to sort of flat or is it still sort of down a little bit? And the reason I asked that is that what’s driving your cut in the outlook or is it more on the cost side as well?

[Larry McAfee:]

Yeah. I don’t have, we hope that July and August is seasonally slower and September is normally a pick-up month, it still starts back, but July and August was a little slower than we even expected. And then the revised earnings guidance is a couple of factors one of which is volume is a little lower, though it’s picked back up. And on the cost side as Chris mentioned we were probably too aggressive and thinking where we can get cost reductions to be.

[Larry Solow:]

Right. Now the second question I know you have had implemented some cost cutting in I guess in Q2 and I was going to ask have you completed that or maybe not quite did what you expected to and was there more opportunities going forward?

[Chris Reading:]

There continues to be more opportunities for us in the cost cutting side and we’re continuing to take a look at that.

[Larry McAfee:]

If you look at the results in the earnings release today cost per [credit] you’re a holder insurance credits were actually down $1 million. So it’s not that we haven’t cut cost, but we have not cut as much as we vote.

[Larry Solow:]

Got it. Okay. Great, thanks.

[Operator:]

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

[Brian Tanquilut:]

Hey, good morning, guys. Larry just a quick question on the revenue per visit, is there an explanation why it’s down on a sequential basis. I understand the year-over-year because of sequester and MPPR, but on a sequential basis what’s the reason for that?

[Larry McAfee:]

Well, I mean it’s as Chris kind of alluded to there were couple of commercial insurance contracts that have followed MPPR not lot of them. And we can -- from that the net rate per visit moves around quarter-to-quarter no matter what. So frankly at this point the reduction in net rate is lower than we anticipated, is less than we anticipated. We have some other programs to say we worked on we’ve been able to keep that rate up.

[Brian Tanquilut:]

So to that point Larry or Chris, I mean should we, do you guys think that the commercial guys following the MPPR cuts are done, meaning we shouldn’t see any more commercial plants doing that?

[Chris Reading:]

I honestly, I mean I’ve been telling us a mistruth I think as I said that I have certainty on that, I don’t know. I mean a couple of these guys came right out of the gate and said they were going to do it and then it settled down. But my crystal ball on that is have best on certain. I think where we are right now is in that rate that’s in the near-term, it’s about probably where we’re going to be. We continue to make progress with Fit2WRK. As Larry mentioned we’ve offset, we expected $0.22 impact to run MPPR and a pretty good impact at the net rate, we’ve been able to offset some of that, not all of it. But I think with all that we've got with this year, when we end the year, I think we'll be well positioned for what things look like going forward.

[Brian Tanquilut:]

Thanks for that color, Chris and actually it's a good segue to my next question. In Fit2WRK, I know in the past few quarters you've given us some anecdotal information on the gains that you're seeing there. I just wanted to hear in terms of the new client wins that we're seeing from Fit2WRK if there are any?

[Chris Reading:]

Yeah. So we've been recently in some new markets, a little reticent to me in companies, because some of these are pretty new and we usually like to get full releases from the companies before we make announcement. And I personally, I don't have it at my finger tips, but I know for instance in one of the markets where we completed really nice acquisition earlier in the year, we've got a couple of nice companies on board in that market in a pretty short period of time. Larry continues to travel and speak at national conferences every week and meet with large companies. We've got new pilots and new contracts that are happening each and every week. And so that continues to roll forward. We need to call in a few more of our existing people and we're looking at that. And we're also looking, Brian at a company and some other opportunities to broaden our offering in this area that would continue to be complimentary. And so some of our focus currently and for the coming year are going to be with how can we continue to grow at an even more accelerated pace because it’s done very well for us.

[Brian Tanquilut:]

I think Chris in your prepared remarks you said that this is your best development year so far. If you don’t mind just giving us more details on what you’re seeing I mean is that a pipeline view in terms of M&A and also I just wanted to hear your thoughts on your appetite for doing larger deals considering that I think there are one or two assets out there for sale today?

[Chris Reading:]

Yeah. So far this year you’re going to see a couple of things. You’re going to see an organic development year which looks similar to what we've done in the past most of those will be strong satellites with existing large partnership groups. And you will see by year-end a very, what has been a very active acquisition year. We've talked to need to be careful exactly what I say, but it will have been a good year when it all settles both in deploying capital and bringing on some additional talent and growth as we look forward. And I think as we're participating in the pilot practice convention in New Orleans this week with people on the ground we're having a lot of active discussions. And I think the environment just bodes well for us not only the environment externally, but the environment here in the company where people are continuing to keep their culture intact and the brand and get a lot of support from a company like ours. And so with our balance sheet we have a lot of room and we expect to use up some of that in the near-term.

[Larry McAfee:]

It’s Larry. Brian as you know, we are under labored we’re not capital and net debt of less than $5 million at the end of the quarter. We have a nice large credit facility that we can use for acquisitions with Bank of America. The Bank has been unbelievably supporting us. So if there are opportunities out there, we are not afraid to spend the money and leverage up a little.

[Brian Tanquilut:]

Okay. And then Larry last question for you, just housekeeping. That other revenue line now that you’ve divested a physician practice or the physician business, does that go away going forward?

[Larry McAfee:]

We still have, we have some other revenues to come in.

[Chris Reading:]

It’s just a management compound.

[Larry McAfee:]

Yeah. And then we have others [as well], but it will be smaller for sure.

[Brian Tanquilut:]

Okay, got it. All right thanks guys.

[Chris Reading:]

Thanks Brian.

[Operator:]

Our next question comes from the line of [Dan Brown with Financial Management].

[Unidentified Analyst:]

Hi guys, good morning. I wanted to clarify the $0.22 drag this year, if I heard you right, Chris is relating to the April through December periods. So should we, we should assume then there is a further drag in the first quarter of next year before we are apples-to-apples?

[Chris Reading:]

Before we will be apples-to-apples through, I think we are starting in April so the first quarter will be impacted on a comparative basis, that's correct and for both sequester and MPPR, assuming all us remains the same, which is what we expect right now.

[Unidentified Analyst:]

And is there any way that you can talk to the impact of Obamacare on the business in general?

[Chris Reading:]

Yeah. That's probably a long discussion maybe longer than we have for this call. Without ejecting too much personal color, I think at the end of the day assuming that they can get people signed up and that more people are insured that there is some mild net positive in there. Pulling against that there is some payment the next step the company is not just ours, but all companies have to do. Later on top of that is the big tax bill, while that doesn’t necessarily affect us as a company, in fact individuals. But I think at the end of the day assuming that millions more people get coverage and some of those are working folks and people who are self-employed that maybe couldn’t afford it before, small businesses and other things. I think at the end of the day it’s net positive of which they have gone about it in a more rational way, but it is what it is at this point.

[Unidentified Analyst:]

Great. Thanks very much. I appreciate it.

[Chris Reading:]

Thanks, Dan.

[Operator:]

Our next question comes from the line of Max Pinto with -- Group.

[Unidentified Analyst:]

Good morning guys. Larry I guess this is kind of building on the last question a little bit. One of the things that we wonder about is how the payer mix might change with an increase of volume do the more people and to the marketplace. Can you talk little bit about your expectation for whether you see a payer mix change for the business and what that might be to revenue?

[Larry McAfee:]

I don’t think we’ll see much of a payer mix near-term, I will give you, I’ll go ahead and give everybody what the mix was for the most recent quarter. We had about 53% from private or insurance, workers’ comp was about 18%, Medicare and Medicaid combined was about 23%. So those statistics have moved out more than a percent or two. As people get join these exchanges or what not that will be reported as insurance, but in terms of how much that incremental run will be, I think it’s anybody’s guess.

[Unidentified Analyst:]

And just one more, we’re little interested in taking about how future or how pricing level might be used to increase net patient revenue per visit. Can you talk a little bit about where you guys see, if you guys see at all, there might be gains or I think that you are worried about on pricing?

[Chris Reading:]

So I am not sure on the question relative to lever as related to the Obama -- with Obamacare, but, I mean, I think right now there are a variety of different discussions, Congress has said that they want (inaudible) to come up with on a long-term basis. Prior to pricing proposal that would be good for the industry, it eliminates gaming and it’s more focused on outcomes and functions, I think those are longer-term multiyear objectives. I can’t receive the current environment as being relatively stable. I don’t see they are massive downward pressure, I don’t see they are being massive upward opportunity. So I think we did pricing change if we can enact some through very subtle changes in our payor mix and continued focus on Fit2Work and other things and potentially geographic representation as we do deals in certain areas which have a little higher pricing elements built in from the beginning. So those kind of things we move us around a little bit environmentally I think near term at least, I think it's pretty steady over a really long-term period be anybody's guess.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

(Operator Instructions). Our next question comes from the line of Mitra Ramgopal with Sidoti.

[Mitra Ramgopal:]

Just a couple of questions. First, Chris, you sounded pretty upbeat regarding the opportunities on the acquisition front and I was just wondering if you've started to see some fallout in terms of providers aren't able to cope with a more difficult reimbursement environment?

[Chris Reading:]

Yeah. I don't want to say that the guys that we are talking to and we expect to transact with, that it's a result of fallout, I think they are still optimistic and very capable people, we're very excited about the deals that we've already done this year. These aren't guys that are running scared and I think they are people who recognized that in the current environment, it's actually a benefit and an opportunity remembering that they are keeping a decent stake in the business to partnering with somebody who can help them yet enact their vision get to get where they want to be. And so for really small providers and those we are seeing our tuck-in activity pick up as well. I think that they are somewhat impacted by what you would consider the fallout. The bigger providers that the ones that form true acquisitions I think this is an opportunity with everything going on in the market to shore up the team and then to hit the gas again and so that’s really kind of the difference between those two groups.

[Mitra Ramgopal:]

And then quickly I think you mentioned a little in terms of looking at some new technology or equipment, should we be expecting you to make some significant investments on that front in light of what you’re seeing on your reimbursement?

[Chris Reading:]

No, actually this stuff is, it’s very, very interesting, but it’s decidedly not particularly expensive. And if you’re seeing, if you would think if it’s low tech, I think it’s got some cool elements to it, we previewed it a few weeks ago. We did a demo here for our partners last night and get some feedback from them. Personally I like it a lot, but it is you will not even register on our spend sheet, when at the end of the day you will not notice a difference.

[Larry McAfee:]

And we spent about a $1 million in CapEx a year and we should continue to do that, that when I say $1 million in CapEx that’s excluding new clinics and refurbishment of older clinics. So we're not, the business is not capital intensive.

[Chris Reading:]

Yeah, that’s a quarter right?

[Larry McAfee:]

No, for the year we take out all of the developments only about a $1 million in CapEx.

[Mitra Ramgopal:]

Okay. No, that’s very helpful. Thanks.

[Operator:]

At this time we have no further questions.

[Chris Reading:]

We're here for the rest of the day. I know some of you have to jump into other calls, but if you have existing questions, I think we can answer. If Larry or I shall, we’re happy to spend some time with you on the phone. We appreciate your time and attention this morning on our call. Thank you, and have a great day.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.