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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2016 - Q3
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Operator

Good morning and welcome to the 2016 U.S. Physical Therapy Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Chris Reading, President and CEO.

Please go ahead..

Christopher Reading Chairman & Chief Executive Officer

Thanks Stephanie. Good morning and thanks everyone for joining us this morning for U.S. Physical Therapy's third quarter earnings call.

With me this morning are Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Jon Bates, our Vice President and Controller; Rick Binstein, our Vice President and General Counsel. Before we begin today's call and information review we need to cover a brief disclosure.

Jon, Would you please?.

Jon Bates Vice President & Corporate Controller

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 Chairman & Chief Executive Officer

Thank you. Okay, I'll start this morning by walking through some facets of our third quarter as well as year-to-date progress and results. First the quarter, net revenues grew by 5.1% to $88.3 million, on approximately 5.2% visit growth. Our net rate was basically flat between the 2015 and 2016 third quarters.

The majority of our revenue growth came this quarter from the newer acquired clinics due in part to the same store net rate per visit decreased of $1.16 per visit for the quarter for our legacy facilities.

The takeaway here is that our newer facilities this year have been in areas with a higher average net rates in the company overall while we are seeing some slight rate pressure of a little more than $1 per visit more established areas.

This year we're seeing about what we expected on the year which is relatively flat rate year in aggregate, with pockets of rate pressure offset by development and other mix focused activities that are helping to balance rate out. The gross margin for this third quarter was relatively flat at 22.3% versus 22.5% on the prior year.

In combination we were able to take out some costs within our existing facilities of about $600,000 in operating expenses while new and acquired facilities added approximately $4.1 million in additional costs. Corporate office costs were $7.2 million in the 2016 quarter compared with $6.9 million in the 2015 quarter.

Portion of the increase of approximately $370,000 was due to additional bonus accrual compared with the 2015 quarter. Operating income for Q3 was $12.1 million compared to $11.9 million in the prior year quarter.

For the year-to-date period, operating income as well as operating results attributable to common shareholders increased by 11.2% while adjusted EBITDA increased for the nine months by 11.7%. Same store visits increased 1.2% for the quarter while coming in at 3.7% for the year-to-date period.

The story within the quarter as that we started with a relatively weak July pretty much across the board for the company. The good news is that we made nice sequential progress within the quarter from a visits per clinic per day standpoint compared to the year ago period.

With respect to the July month, again to help to put it in perspective, this was the second month of the year with January being other with only 20 operating days along with the paid holiday. That in combination with vacations made for a light month.

The good news is we have progressed forward from there with a nice sequential visit pickup for the rest of the quarter. We put together a good first half of the year despite January with a weak start and July this year was remarkably better than January although with similar characteristics.

Shifting gears a bit one exceedingly bright spot related to our development, we are having a great development year and that's going to continue to be strong right through year end. The team's done an excellent job of identifying good solid de novo opportunities the majority of these falling with our top 15 to 20 partnerships.

To-date we've opened 20 de novo so far this year with a number to come before year's end. Additionally, we plan to have a very good finish to the year with respect to our acquisition related activity as well. Our efforts in both of these areas is strong and ongoing.

So in closing, let me say that while it was a seems like a little bit of a bumpy quarter from an expectation standpoint we've a lot of good things going on, as we have in the past and in particular continued development looks very strong right now which further help us to advance with the talent we have within the company as we also work at new talent through additional acquisitions.

That concludes my prepared comments. Larry will now cover the financials in greater detail..

Lawrance McAfee

All right. Chris hit most of the highlights in terms of the dollars and percentages for the first quarter. I'll mention a couple things in addition now.

Operating income for the third quarter of 2016 was $12.1 million compared to $11.9 million in the 2015 third quarter, as noted in the press release, due primarily to higher estimated tax rate of 39.8% for the recent quarter as compared to 38.6% a year ago.

Earnings declined slightly to $5.7 million from $5.8 million and diluted earnings per share were $0.46 versus $0.47. I will go through the nine months in more detail. Year-to-date revenues have increased 8.6% to $265.7 million due to an increase in patient visits of 8.8% offset by a very slight decrease in the average net revenue per visit.

Clinic operating cost year-to-date are 76.2% which was a reduction of 60 basis points as compared to the figure last year. The gross margin for the first nine months increased 11.2% to $63.2 million or 23.8% of revenue as compared to 23.2% in the first nine months last year. Corporate office cost year-to-date are 9.3% versus 9.1%.

As Chris alluded to that is attributable to a slightly higher bonus accrual. Operating income for the first nine months of 2016 has risen 11.2% to $38.6 million, net income has increased 11.2% to $18.1 million and diluted earnings per share for the first nine months were $1.45 versus a $1.32 a year earlier.

Same store visits year-to-date have increased 3.7% excuse me, as same store revenue increased 3% while our average net rate per visit declined by about $0.82. As to other financial measures in the nine months of the year adjusted EBIT [ph] dollars grown 11.7% to $40.9 million.

Year-to-date operating results prior equity based compensation increased by 11.1% to $20.4 million. Total debt at the end of the third quarter was $40.5 million which is down 16% from the beginning of the year despite acquisitions and down 14% from the end of the second quarter. Debt net of cash at September 30 was $25.5 million.

Adjusted EBITDA for the trailing 12 months ended September was $54.2 million. So debt-to-adjusted EBITDA presently is slightly less than 0.5. In the press release we noted that we are declaring the fourth dividend for the year of $0.17 that will be paid on December 2 to shareholders of record as of November 18..

Christopher Reading Chairman & Chief Executive Officer

Thanks Larry. Operator that concludes our prepared comments. I you would let's go ahead and open it up for questions..

Operator

Sure. [Operator Instructions] Your first question comes from Brian Tanquilut of Jefferies..

Christopher Reading Chairman & Chief Executive Officer

Good morning Brian..

Jason Gammel

Hey guys this is Jason Gammel on for Brian. I was just wondering given the monthly trends were helpful. And if you could, any thoughts on how October is trending in comparison to September.

And if you've seen continuation of the improvement based at the end of Q3?.

Christopher Reading Chairman & Chief Executive Officer

We are seeing about the same progression we saw this time last year with October and September kind of on par with each other. So I don't know that I would consider a progression per se. But September was the strongest visit per clinic per day month in the third quarter. And so we've continued forward and that -- it's about where it was in October..

Jason Gammel

Okay, that's helpful. And then on the same store rate pressure, how much of that is attributable to mix.

Or Larry, can you provide the payer mix stats and how much influence that's had on the changes in rate per visit?.

Lawrance McAfee

Yeah, and certainly mix is part of it. I'll go through the stats. Comp -- combined private and managed care was 51.1%, worker's comp was 16.2% which is down and it's obviously normally a higher payer. So that will bring you right down a little bit. Medicare and Medicaid combined was 26.4% and other was 6.3%.

So certainly mix is a part of the rate decline for the older mature clinics but overall with the new clinics our rate is pretty flat..

Jason Gammel

Okay, thanks. I'll hop back in the queue..

Christopher Reading Chairman & Chief Executive Officer

Thanks Jason..

Operator

Your next question is from Larry Solow of CJS Securities..

Lawrence Solow

Good morning guys. Just to follow up on that question, just on the progression of the months.

Was July actually down year-over-year? And I know September normally seasonally should be I guess probably best month by far in the quarter, right?.

Lawrance McAfee

Yes, I don't have it in that format in front me. I don't think it was down a lot.

But do you remember Jon?.

Jon Bates Vice President & Corporate Controller

Yeah in terms of ….

Lawrance McAfee

It was just a slow month, I don't know that it was a down month..

Christopher Reading Chairman & Chief Executive Officer

Yeah, mean our visits per clinic were up compared to the prior year July. But we had less days this July than we had last July. And in combination it was a slightly weaker EPS month overall..

Lawrence Solow

Got it. But it sounds you guys aren't too concerned and I know you're not talking specifically about forward-looking same store sales growth or volumes. But it's been sort of tracking in the 3% 4% range last couple of years.

Are you still sort of comfortable with those numbers as you look out?.

Christopher Reading Chairman & Chief Executive Officer

Yeah I think, again try not get into a quarter-to-quarter look. I know we had a strong finish last year, I know we had a weaker comps at the beginning of the year. We are certainly doing everything we can and continue to build volume persistently.

This year we've been consistently, let's see, I've got the numbers here we've been consistently at or above 24 visits per clinic per day with just a couple of exceptions. So that we had a slow start in January. We dipped little below that in July and came up to near that amount in August and then kind of back to normal in September.

So we're continuing to kind a press the gas and see what we can develop between now and year end. Again I don't know -- haven't done enough analysis to be able to give you projection for what we think the last quarter is going to be. But it should be positive..

Lawrance McAfee

I'm just going to throw this out. Frankly when we got our budget we knew from the beginning of the year. You only get annual earnings guidance. We knew that honestly without exception all the analyst estimates for the third quarter were too high based on our normal seasonal pattern.

And I know our numbers as announced they are slightly below what the Street expectations were in terms of revenue and earnings. They are pretty much on what we budgeted with acquisitions..

Lawrence Solow

Okay, that's fair enough. And I'm certainly guilty of being a little high myself. How about just in terms of the dollar, a little over a dollar decline and now there is been some spotty pressure.

Does that concern you going forward, or do you still feel it was sort of in a relatively benign overall flat type of environment with obviously some ups and down on a quarterly basis?.

Christopher Reading Chairman & Chief Executive Officer

Yeah I think, I've been telling people for the last 18 months to two years going back again more than a year ago that this next period was going to be relatively flat. I think as we go forward mix sort of only has an impact, these acquisitions have little bit of an impact up or down.

But I still think we're in a relatively flat environment right now for the next year. Medicare has come out with their rates for the year as flat. And so I think depending upon what our mix does, can move that a little bit. We've got to get some traction back in work comp.

Frankly, we've been missing somebody in that area and we'll continue to miss them for few more months as they deal with an outside family related health related issue, not them personally, but something they have to take care of. And then that's creating a little bit of a damper on us, but they will come back.

And I think -- so I'm not worried about it. So again I think we're flat right now and I think we'll continue to be relatively flat..

Lawrence Solow

Okay. Just looking at on just on just salaries, I've realized obviously revenues little bit down, even maybe versus your expectations. Just on as a percentage of revenue salaries I think look like there are I think there are the highest they’ve been, as I go back six years, I don't even see a quarter where you had 56.5% as a percentage of revenue.

So is there opportunity there, is that more a function just of the acquisitions and you get some cost cutting out of that or is it maybe perhaps it's throughout the company. Any thoughts on that will be great. Thanks..

Christopher Reading Chairman & Chief Executive Officer

Yeah, so we took some cost at our existing facility. The majority of that cost is salary based. And some of those will have come through acquisitions that have been with us for a longer period of time. I mean not necessarily cuts, but efficiency.

Our acquisitions as we aggregate those, as a group are markedly higher in their cost as a percent of revenue in our existing facilities. And so that does skew the number somewhat. Now in some of these acquisitions like one that we did earlier this year the margins are also pretty strong, but their costs are definitely higher.

So overtime, what we see is we're able to grow into that. We've got some things working right now with continued expansion and some of these deals with the sales and marketing program that ultimately propels growth.

And so while we look at it and certainly do what we can, we also try not to offset the cart particularly when these deals are strongly performing. And overtime we kind of grow back into that on a more normalized basis..

Lawrence Solow

Got it thanks Chris. Appreciate it..

Operator

Your next question comes from Dana Hambly with Stephens..

Dana Hambly

Hey thanks, good morning. Chris just last couple of quarters you've talked about strong de novo.

Could you just remind me kind of the economic, the unit economics on how long they take to open preopening costs, kind of time to breakeven and time to maturity?.

Christopher Reading Chairman & Chief Executive Officer

Yeah Larry why don't you go ahead and comment?.

Lawrance McAfee

Yes hi. So typically de novo clinics going to cost us about $175,000, including working capital advances. Now some of that, like leasehold improvements, that maybe $30,000 to $40,000 are capitalized and amortized over the initial life of the lease. A startup will typically lose money for anywhere on a monthly basis.

It will lose money and then finally get to breakeven sometime between month six and twelve, most normally probably around month 10 or 11 or something like that. So there is no question that the de novos are a drag on earnings in the first year.

Now they do tend to turn profitable on a monthly basis at some point in year one and then they ramp up for three years. So the profit they produced in the first year is very, very small on a net basis. And they're losing money during the ramp up phase, that -- the profit will increase in the second year.

And by the third year they normally hit whatever run rate they're going, which is going to be ongoing. So even though there are a drag on earnings short term they have been this year. Long-term I know we're going to have the best de novo year in all probability than we've had in over 10 years..

Dana Hambly

Okay.

And then you said 20 to-date and was there a target for the year?.

Christopher Reading Chairman & Chief Executive Officer

No we haven't given the target..

Lawrance McAfee

If you look back we normally open around 20 a year. So we are ahead of….

Dana Hambly

Okay, kind of tracking above that..

Christopher Reading Chairman & Chief Executive Officer

And we have a nice -- we'll have a finish to the year. We have everything that's scheduled right now. And so it's going to be big year..

Dana Hambly

Do you think -- I mean do you think 2017 is that going to be a continued best use of capital de novo development?.

Christopher Reading Chairman & Chief Executive Officer

Yeah when we talk about capital deployment, de novo is always the best use of capital. The challenge is we don't want to water down the quality of what we have to open, and quality is really determined by the available people to do it in these markets. Most of the de novos come within our top-20 partnership groups.

So they're within our strongest partnerships and they are continued kind of concentric opportunities to expand the footprint and the reach of those partnerships. They're limited by you having people ready to do them and the partner willing and able to deploy time and attention to making that happen.

But yes, I think we'll continue to deploy as many as we can effectively. But certainly not cash constraint to doing as many as we possibly can. And from there we'll continue to attract as we have really good acquisitions who will further grow de novos once they're under the roof. So it's that combination that I'd expect to continue..

Dana Hambly

Got it. And can you just remind me on Star Physical, I know that's been a fruitful acquisition.

But number of facilities or sites you had when that started and where we are now?.

Christopher Reading Chairman & Chief Executive Officer

Yes, we had right at 50 in terms of total service sites. I think we have 70 some facilities were over 80 service sites, when we look at managed locations and other thing..

Dana Hambly

Okay, that's helpful.

And Larry do you have the average visits per day, per clinic for the quarter?.

Lawrance McAfee

Yes, I figure. I got them. Okay, so in July, as Chris mentioned -- and again this is a normal seasonal pattern but it was a little slower than normal, it's 24.3 a day, grew in August to 24.8 and then was back up to that 25 number by September..

Dana Hambly

Okay, great. Thanks very much..

Operator

Your next question is from Mitra Ramgopal of Sidoti..

Mitra Ramgopal

Yes, hi good morning. Hi Chris. Just one with a follow up a little more the clinic expansion plans. Clearly you're seeing a lot of interest on the de novo side. I was wondering what's driving that, if you're doing more marketing or is it really more unsolicited on the part of the therapist.

And on acquisitions, I know you've mentioned you have a pretty nice pipeline. Larry if you could probably talk about the valuations you're seeing today versus maybe six months or a year ago..

Christopher Reading Chairman & Chief Executive Officer

Yes, and so I don't think the valuations have changed from six months ago or earlier this year. valuations are up compared to where they were a couple of years ago. For sure, there's more competition.

We're still having a great lock with deals and really, really good people, excellent people on the ones that we've done the last few years and prior to that. The ones that we continue to expect to get done here in the near term. So the quality of people is great.

Those acquisitions for the most part are what continue to feed the growth in the de novo program while those acquired partnerships stem from one, two, three, four years ago continued to spring on strong de novo growth. And so we expect that to continue.

I guess on pricing compared to going back of few years, we're able to get these deals some go to market, some with the broad curve, some come to us directly. And I think the partners for the folks I think we're great fits for somebody who wants to stay with the business.

I expect that with the resource as we'll deploy we could help accelerate their growth which is what we expect to happen and what generally happens. They're going to do very, very well overtime build their EBITDA and then ultimately build the strong backend for their residual interest.

So it's a good story, it works and we've got a lot of good discussions right now and things that we expect to get done near term and longer term..

Mitra Ramgopal

Thanks.

And as you look at potential for like margin expansion, where do you stand as it involves investing in sales force or any spending on, for example, IT, et cetera? Is there anything that we should be looking out forward?.

Christopher Reading Chairman & Chief Executive Officer

We've got some IT projects that Larry and Glenn others can discuss in terms of EMR [ph] and update and upgrade to our existing system kind of which is next generation. And that's in process. In terms of sales force expansion and then I'll let these guys talk about the IT part.

The most of the sales force deployment that's additional that we're doing right now is coming through our acquired partnerships. I think most of our organically growing partnerships are pretty saturated appropriately.

But I think most of the growth will come as a result of acquired partnerships, many that [ph] don't have what we consider to be a true sales force..

Glenn McDowell

And when you look at the sales force right now have 90 sales reps covering about 421 locations. As Chris said most of our de novo partnerships already have sales. Most of the acquired partnerships that come onboard, we usually end up producing sales and going forward from that standpoint.

Many of them then always have sales reps so that's usually an addition that we bring onboard and there is opportunity there to continue to do so. As Chris said on the IT side, it's really just the matter of the billing selection system that we're doing now.

We'll be jumping up to the most recent version of it and rolling out an updated EMR associated with that..

Lawrance McAfee

There is some smaller increases in cost associated with that. But most of that is capitalized and amortized over the period of years. So you won't see a big bump in CapEx spending. Most of the CapEx we're going to do is related to de novos or relocation of the existing clinic..

Mitra Ramgopal

Thanks. And Larry, how much do you have available under revolver as we look at potential acquisitions..

Lawrance McAfee

It's $125 million. We have 40 outstanding and then 50 remaining cash and that's the reason I said $25 million at that. we got plenty of availability and frankly I have ongoing discussions with Bank of America about they'd be happy to increase the line. We're not capital constrained..

Mitra Ramgopal

Okay, great position to be in. Thanks again for taking the questions..

Christopher Reading Chairman & Chief Executive Officer

Thanks Mitra..

Operator

[Operator Instructions] Your next question comes from Mike Petusky of Barrington Research..

Christopher Reading Chairman & Chief Executive Officer

Hey Mike..

Michael Petusky

Hey good morning guys. Hey, so maybe I'm more sensitive to this being where I am located but did weather particularly the hurricane in the first 10 days of October, did that cause any missed days or any kind of clinic damage or anything along those lines.

It sounds like you guys really aren't citing it, but I'm just curious if there is anything there?.

Christopher Reading Chairman & Chief Executive Officer

We do get impacted in basically through Florida, and North Carolina, parts of Virginia by the hurricane. We lost a number of days from the hurricane itself and even a few days after that where there was some flooding and additional waters, Georgia and a number of places.

So yes, I mean as I said Florida, Georgia, North Carolina, North Carolina Virginia took a little bit of hit across the board..

Lawrance McAfee

But I mean with that said it hasn't been as bad as some of the other storms over the years. And that's why we didn't file an 8-K announcing, a big loss attributable to it..

Michael Petusky

Okay, so I mean is it fair to say early enough in the quarter and limited enough in nature that you guys probably were able to kind of catch most of those appointments at some point..

Lawrance McAfee

I don't know if we caught it out but again there were certainly loss attributable to it but it wasn't significant enough that we would file with that..

Christopher Reading Chairman & Chief Executive Officer

I don’t know that you ever catch up, seasonality, it's disrupted a bit but I think Larry characterized it well..

Michael Petusky

Okay, all right great. And I just wanted to clarify something. Glenn said that there was only like 90 just exactly 90 sales reps. I didn't know that there was something like 97 as of last quarter.

Is that correct or did I not hear that right?.

Christopher Reading Chairman & Chief Executive Officer

No, you heard it right. We just dropped from 97 to 90 and that's not unusual to happen. sometimes we'll consolidate sales reps based upon what's going on if we bring different groups on we'll consolidate and look at different sales marketing territories and what we need to do. So that number will fluctuate from quarter-to-quarter by a couple..

Michael Petusky

All right. I guess going into Chris's comments earlier, there was a point in there where you said there were [ph] 20 de novo more to come, M&A as well.

When you made the comment around M&A, do you actually think are you guys may close something before year end or were you just talking generally over the next several months?.

Christopher Reading Chairman & Chief Executive Officer

We'll get things done between now and year end..

Michael Petusky

Okay.

Are any of the things out there that you guys are in serious discussions, needle movers or are these kind of your traditional smaller deals?.

Christopher Reading Chairman & Chief Executive Officer

I wouldn't characterize them as small. There could be good deals but it's we're not going to -- we do not guess. So it's not going to be something where it's going to reconstitute the company..

Lawrance McAfee

So Mike you want to have that figure there [ph] in red box..

Michael Petusky

Absolutely. I'll get that offline. So last question and just more of a bigger picture longer term question. But when you guys look at your business as it's sized today. And this is obviously this is always subject to change. But in a relatively flat pricing environment maybe slight headwinds that relatively flat where you can kind of mitigate that.

I mean is this a business where you guys should be able to grow profitability at 10% or better on an annual basis. And I know there is quarterly fluctuations but is that achievable here on a consistent basis in a flattish pricing environment..

Lawrance McAfee

I was going to say during the recessions even years, not in the recessions we've had net rate down, we were yet flat and grew earnings by more than 10%..

Christopher Reading Chairman & Chief Executive Officer

So Mike, I would just point and my kind of standard answer and I don't like to get into predicting the future. But the team here is been together for long time until you've got a long retrospect of history to look back in terms of what we've done. And it hasn't been perfect by any stretch, but it's been pretty good overtime.

We've bumped around a little bit here and there. We've bump around a little bit as we go forward. But I think we can continue to deploy the capital and the grow the way we have in the past..

Lawrance McAfee

I mean this would be what Jon our 8 or 9 record earnings here in a row. And so some of those year's, rate's down some years it's up. Honestly most year it's pretty flat. And our growth earnings growth rate some years is much better than others. But overtime it's probably average in the teens. So some years its 8% some years its 20%..

Christopher Reading Chairman & Chief Executive Officer

So yes I think we should continue to grow the company double digits..

Michael Petusky

Excellent. All right, thanks guys. Really appreciate it..

Christopher Reading Chairman & Chief Executive Officer

Thanks Mike..

Operator

There are no further questions at this time..

Christopher Reading Chairman & Chief Executive Officer

Okay everybody. Thank you for the time and attention today. We appreciate your interest and have a wonderful day..

Operator

Thank you that does conclude today's conference call. You may now disconnect..

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