Aug 10, 2013
Executives
Christopher Reading - Chief Executive Officer Lawrance McAfee - Chief Financial Officer Glenn McDowell - Chief Operating Officer Jonathan Bates - Vice President and Controller Richard Binstein - Vice President and General Counsel
Analysts
Larry Solow - CJS Securities Brian Tanquilut - Jefferies Mitra Ramgopal - Sidoti Mike Petusky - Noble Financial
Operator
At this time I would like to welcome everyone to the U.S. Physical Therapy second quarter 2013 earnings conference call.
(Operator Instructions) I would now like to turn the conference over to Mr. Chris Reading, President and Chief Executive Officer.
Please go ahead, sir.
Christopher Reading
Good morning, everyone, and welcome to U.S. Physical Therapy's second quarter 2013 earnings call.
A number of people here with me in Houston, 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 provide some color on the quarter's results as well as our focus for the remainder of the year, I'll ask Jon to cover a brief disclosure.
Jon?
Jonathan 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. Our team of dedicated clinical partners and directors along with our entire USPH leadership remains with the support groups.
We've been working in a very focused fashion to position the company for very solid future, during a period of tremendous change within the healthcare environment. Earlier this year, you'll remember the series of federal payroll reimbursement reductions were enacted, first by Congress, through reduction we refer to is MPPR, a multi-procedure payment reduction.
And then as an additional reduction, which came as a result of the sequester. These changes began for us and the rest of the industry in April of this year.
So this quarter's results would be the company's first quarter financial reporting following these changes. Despite those reductions for the quarter, we were able to grow revenues by over 5% and we were able to offset the rate cut within net revenue per visit coming in ahead of where we were at this time a year ago, aiding both of those improvements have been around acquisitions, which have been excellent additions to our family of partnerships.
Clouding these improvements somewhat have been the additional costs born out through these acquisitions, coupled with a negative contribution from our physician services company. Within our physician services group, we have enacted a number of changes this year, including management realignments.
And most recently we have approved the new revenue model to further assist in salability to the physician groups. While, this entity has not performed as expected financially, we've had an outside group to look at our patient outcomes, which have been excellent overall.
Outlining and explaining this further, we've provided some specific information in the queue, which Larry, will reference and will cover in more detail in few minutes. We continue to work on behalf of our patients, clients, partners and shareholders, finding the best solution collectively for the service line, and further adjustments, and/or decisions are being considered.
Shifting gears a bit, earlier this year, we made some changes towards development team and resource allocation. Within our development department, we added a seasoned full time, well-respected and well known industry executive to focus full time on acquisition prospecting and deal closure.
I continue to be active as well as I have in the past, meeting and networking with talented owner operators. That's why I am very pleased with the results and the activity to date.
We are meeting and having great discussions with the significant increase in those over the past six to nine months. These continued efforts should help us to continue what has been a very good development year thus far, with three strong acquisitions, number of tuck-ins and a solid complement of our organic openings among our strongest partnerships.
I expect the remainder of the year to be active development-wise in all respects as well. Fit to work continues to be a bright star in the company driving new business and relationships across the nation with large regional as well as national companies.
As we work with them to be a solution for the ageing raising workforce and for the rising cost related to healthcare and productivity pressures. Currently, we are looking for expansion opportunities in the fit to work service line to further broaden and complement our existing offerings.
This will be another area where we will look for good companies and good people with whom to partner to further expand our investor offerings. Lastly, before I turn it over to Larry, to cover the quarters results in more detail, I want to say few words about our team, and what they have done to overcome this far, what they have done and overcome this far, what they still have to do.
This quarter we were able to make a good deal of progress, overcome the slow start we had earlier in the year. We've dealt with deferral payer changes, rule changes, documentation and billing requirement changes, working to implement new programs to grow the company in the right way.
They have had a lot thrown at them with a short period of time, and they have responded admirably and as I would have expected. I'm proud of all them, those here in Houston, as well as around the country, support teams and clinical teams alike.
There was more work to be done between now and the remainder of the year and everyone here is well aware of that. There are opportunities and decisions to make with respect to position services.
There are remaining cost opportunities for our company to further dial-in and adjust to the seasonal fluctuations that we experienced, while remaining focused on growth on continuing to provide exceptional care of all of our patients. These are opportunities that I expect us to realize, as we continue to work on moving the company forward.
In closing, let me say that I think the environment today is creating a great opportunity for us to be in a wonderful position to attract the best providers in the market through our continued development and expansion efforts. I believe that there will be a significant consolidation that occurs in our industry, and as we remain active as well as selective with our deals, we have great opportunity with our excellent balance sheet to further grow our company.
With that, I'd like to ask Larry to go with the financials in more details.
Lawrance McAfee
Thanks, Chris. First, I'll discuss the quarterly results.
Net revenue increased 5.1% to $67.2 million, due to an increase in visits of 4.6%, and an increase in our average net rates, despite the rate cuts from the government, $0.65 or sixth-tenth-of-a-percent. Our total clinic operating costs were 74.3% of revenue as compared to 73.4% in the 2012 period.
The increase was entirely attributable to the operating costs of the new clinics as the costs at our mature clinics were reduced by $335,000. The provision for doubtful accounts for the quarter was 1.8%.
Our gross margin for the second quarter of 2013 increased in dollar terms by $312,000, but declined as a percentage of revenue. The gross margin percentage reduction is attributable to slightly lower average number of PT patient visits per day, and a larger loss from physician services.
Our corporate office cost came in at less than 10% of revenue. Our operating income for the second quarter of 2013 was $10,684,000.
Net income for the three months was $4,514,000 or $0.41 per share. Same-store revenue decreased just slightly.
Now, I'll discuss the results for the first half of the year. Year-to-date our net revenue has increased 3% to $130.3 million, due to an increase in visits of 2.2% and an increase in our average net rate of $1.27 or 1.2%.
Our total clinic operating cost was 75.5% as compared to 73.8%. This increase is primarily attributable given the operating cost of new clinics and year-to-date provision for doubtful accounts was 1.8%.
Our gross margin in the first half of the year was 24.5%, down from 26.2% in the first half of last year. The gross margin decreased again, lower due to an average number of patient visits per clinic per day, and a negative gross margin year-to-date for physician services.
Our corporate office cost for the six months was 10.1% of revenue. Net income was $8,635,000 and our diluted earnings per share is $0.72.
Our same-store revenues year-to-date were flat. I would note as we discussed when we announced first quarter results, visits really in the first quarter, and that's what's affected the six months, were off because of weather and flu.
As I noted in quote in the press release, our cash flow has been terrific, receivable collections have been excellent. Our average A/R days is at an all-time low of 40 days, and despite having added in 21 clinics through acquisition in the first half of the year, we've actually been able to reduce our credit line borrowings year-to-date.
Christopher Reading
Thank you, Larry. That concludes our prepared comments.
With that we'd like to ask the operator to open up the lines for further questions.
Operator
(Operator Instructions) Your first question comes from the line of Larry Solow with CJS Securities.
Larry Solow - CJS Securities
Wondering, you could just give a little more color on the net revenue per patient growing sequentially, despite the implementation of the higher multiple procedure cuts and the sequestration. It was that just a factor of higher rates at your acquired businesses, or what else was in there?
Christopher Reading
That's certainly some of it. The deals that we've done, particularly this year, it won't always workout this way, but the deals we've done thus far, this year have been very solid net rate providers due to their operating model and programs, in a some cases their geography.
There have been other things that we've been focused on here, so the combination of those two things has resulted in net rate that's a little bit more favorable.
Lawrance McAfee
Another thing, it's a little bit of an increase in workers comp, because of fit to work, which were typically have the higher net rates.
Larry Solow - CJS Securities
Do you think these are, sort of, sustainable base that you could, assuming no other government cuts. Years out, who knows what's going to happen.
But in terms of near-term, the sustainable revenue, rate per patient, perhaps that grows a little bit sequentially through the year?
Christopher Reading
I don't know, it kind of, may move around a little bit, depending upon the deals that we do and the rates of those deals, but I think probably in the ballpark.
Larry Solow - CJS Securities
And I guess, I assume this is partially offset, I guess, by a higher cost structure in some of these acquired companies?
Christopher Reading
The thing to remember is when we buy this companies, we are buying them on a multiple of their EBITDA, which takes in the right now, whatever the cost structure is and we're not trying go in and dismantle things from the get-going backward front to add resources, so they could grow going forward without changing their staffing model at all, if we can help it. So in many cases, they might have a little bit higher cost structure.
In some cases they might also have a little bit higher net rate. We start with that and then we look to build that going forward.
So it does cause our numbers to more around a little bit.
Larry Solow - CJS Securities
And just in terms modest drop in average patients visits per day at the existing clinics, is that just a function of a difficult comp and any change in the environment or any color there that will be great?
Lawrance McAfee
Our average visits per day for the quarter as compared to same time last year are off a half a visit a day.
Christopher Reading
I don't know that it's a comp related issue. We are focused on and we've got the operations and the sales teams focused on it.
Honestly, I think some of it is the result of just the physicians having lot more to think about and worry about for these days, and running and dealing with their own decisions and their own practices. We have made gains in some areas, which don't show up on the visit column within fit to work or some of those revenue gains and some of those programs and procedures don't result in actual visit counts.
And so we are focused on growing the whole base, but we are attentive to the fact that our visits are, as we'd like to be a little bit higher at this point.
Lawrance McAfee
It is fair to say that visits are little lower than we would like, like Chris was alluding to. It's but obviously put some pressure on the margins.
If you look at not just acquired clinics, but existing mature clinics, so that's caused us to focus on operating costs, we're able to reduce those in mature clinics by over $300,000 in the quarter. But there is more to be done.
Larry Solow - CJS Securities
And just lastly, did you give a number? I may have missed it, just on the losses on the physician services segment?
Lawrance McAfee
The Q was out this morning. I could you give you the numbers, but I think it's worth spending some time on the Q today.
It's in three different places, but I would refer to page 20, where we have the management discussions. And in the three months physician services lost $280,000.
And we talked about in there, the management change we made. We have actually, we closed, if you recall, at December 1, the brick-and-mortar OA sites.
Then we had two, we are closing the second one in August this year. And then as Chris talked about we're reviewing the business structure and the long-term plans for RMG.
If it didn't turn around frankly, we're going to have to take a write-down. And so we talk about that in there, too.
It would be a non-cash charge, there those money, sort of, paid several years ago. But we've got to do need to some things with the physician services.
Operator
Your next question comes from the line of Brian Tanquilut with Jefferies.
Brian Tanquilut - Jefferies
Chris, just wanted to hear your thoughts on, what you're see in terms of the pipeline for new partners. I know that's something that you used to discuss quite a bit.
So just wanted to see if that has changed in terms of the willingness, or just the number of people looking to partner with you guys. And also on the acquisition front, what you're seeing.
I know you've done a few deals already, but just wanted to hear your thoughts on that.
Christopher Reading
We shift the gears little bit, Brian, for the last few years. Our ability to find the, kind of, who could predictably open brand new facilities in markets where we had no penetration at all, was becoming increasingly difficult and we shifted and we talked about this at the end of last year, beginning of this year.
We shifted some resources out of that prospecting area. Devoted more resources to finding talented director level people that could further develop existing markets and that's going to really well.
And that's helped our top partnerships continue to be able to expand our organic openings this year, running very solid. There have been for sometime much more predictable in their performance than have the new partnerships over the last few years, particularly we continue to get calls from new partners, we continue to look at new partner openings.
But our focus really has been to intensify, existing markets and than to open a new market by acquiring or partnering with through acquisition, existing strong privately-owned facilities, until we have continued to focus on that. On that side discussion flow, if that's the right term for it, has been very strong and with really good quality companies and good quality people and that we're very encouraged about.
So we expect to continue to be active. And as Larry mentioned, the balance sheet certainly were in great position.
For us it's about combining the timing and the people and doing that in what makes sense for everybody, but we'll continue to active this year. You will that in our results.
Brian Tanquilut - Jefferies
And then, Chris, it's pretty public that one of your larger competitors is going through some financial struggles right now. Just wanted to hear your thoughts on whether that's already trickling down to the unit level operations, were you're picking up share from those guys.
And then expanding that further into the impact of MPPR and smaller guys, if you're seeing benefits for your operations as well?
Christopher Reading
So obviously, physio's had some challenges, and I don't know if the challenges are over. There are in some markets some impacts from that.
I think what we have to do is look at our overall company as an aggregate. We've got opportunity certainly whether it's related to our competitors or just related to our own internal opportunity.
We've got to execute on those things, and are also focused on what a single provider is doing or not doing, really focused on what we're capable of doing ourselves. And so we have a good team and they understand what's in front of them.
They understand where there are challenges in the marketplace to create opportunities for us and we need to realize those. So everybody is working on.
Lawrance McAfee
As compared to some of the other healthcare sectors, our sector is so fragmented. I mean, select had 6% market share, physio has like 3.5%, we have 2.5%.
So in most markets our primary competition still remains private practitioners and the local hospitals. So our overlap with physio, select is only in certain markets.
And if you ask most of our partners, they wouldn't name them as primary competitors.
Brian Tanquilut - Jefferies
And then, Larry, last question for you. So you talked about how gross margin was impacted by a half visit decline in the visits per unit.
Is there ability right now to flex the labor at the clinic level or is it the right staffing level to think of going forward?
Lawrance McAfee
I think it's a combination. I think we do have some ability to flex some staffing.
We certainly have within our partnership some part time staff. We need I think to do a little better job in being real-time reactive to daily and weekly staffing volume fluctuations rather than in retrospect and we can improve that.
I think on the other hand, we've had a lot to do this first half of the year with a lot of changes that have come down the pike, federal and otherwise in what is not a particularly easy economic or healthcare environment. The team has done a really good job.
Now, they've got some more chewing to do, as we chew our way through some of this and ops teams very focused on that, but we'll make some progress.
Operator
Your next question comes from the line of Mitra Ramgopal with Sidoti.
Mitra Ramgopal - Sidoti
Just a couple of questions. First, I believe you had mentioned the last time, given the reimbursement headwinds there, there were a number of initiatives you were looking at.
I was wondering if you've started along that line and how far are you in terms of maybe when we can see it effecting or helping margins?
Christopher Reading
I think you'll see some of that in our net rate. What we've got to do is, we've got to get the volume back towards the volume and make sure that as we made progress on this quarter with some cost reduction in the mature facilities, so that continues to be down then.
The business offerings that we've added, some of the home care things, as we've said it's going to take a little time to develop. I think the works gone terrific and we continue to add resources there, and we are looking to add more to that area that's helped on the net rate side.
And then we have to continue to grow organically and through acquisition. So you'll see us continue do a combination of those things, there won't be anyone of those things that is the deciding factor.
We're going to have to execute on all of them.
Mitra Ramgopal - Sidoti
And coming back to acquisitions, I know you said the pipeline looks good and in light of the pressures out there, you probably are getting more interest. But as you look at the acquisitions, are you going to be making more of a conscious effort to avoid acquisitions that might increase your exposure to Medicare in light of?
Christopher Reading
We have in the past, Mitra. I don't know if I would characterize it as more of a conscious effort.
I would probably characterize it as a continued conscious effort to bring companies in that support, our long-term view and vision, and have more of a portfolio back in terms of payers or certainly potentially more of a tilt in the direction of work comp or our ability there, maybe as a bias. But we stayed away from heavily weighted Medicare federal affairs for some times.
Lawrance McAfee
I don't think, we've done any acquisitions through Medicare, it was more than 30% of there business. And typically at that high we're doing it, because we think we can shift a mix.
For a long time, we felt that the government's not a rational buyer of goods and services that we've avoided government pay.
Mitra Ramgopal - Sidoti
And finally, just maybe a quick update, as it relates to the sales force in terms of are you looking to expand anymore on that front or you pretty much feel comfortable with the coverage you have?
Christopher Reading
Yes, we'll expanding the sales force. We actually dropped down at 62 reps in the second quarter from where we were before.
We lost about 16 reps in the second quarter. Kind of those were for underperformance, so we're looking to fill that 20 position on the sale rep side, which I think will have a positive benefit, once we finish all those positions and get them ramped up.
Operator
Your next question comes from the line of Mike Petusky with Noble Financial.
Mike Petusky - Noble Financial
So just following-up on that last question, I mean I didn't hear this listed as a factor in the visits. But I mean, could you essentially point to the number of sales reps that were either let go or left the company as a factor in the visit issue?
Glenn McDowell
Well, I think in sales reps we have a strong belief and the ability of sales reps to impact our business. And I think that as we add more it should have a positive impact, but we also need to make sure that we're getting the action that we need at the local level from our partners and directors that they continue to do sales, whether we had a rep in place or not.
So I think it's may be a factor, but it's one that we need to continue to focus on anyway.
Christopher Reading
I mean, Mike, I would say looking back or looking around, we're probably had more change in this last quarter than we've seen in some time, some of that as Glenn mentioned, we initiated. But to answer Mitra's question, I think we're at rep level, the number of facilities we have is pretty well covered, where we see rep increases with our newer partner companies through acquisition.
And then as we continue to expand in some of our largest markets with Fit-to-Work and other things we've added reps. So there'll continue to be growth.
We need to get that number back up to where it was.
Mike Petusky - Noble Financial
And forgive me if you've commented on this already, but last quarter, you talked about some new disability coding and reporting requirements that might be a challenge, have you talk about how that's going? I think that was supposed to get going in this quarter, I believe.
Christopher Reading
Yes, July. So Glenn?
Glenn McDowell
Yes. July 1, is when the functional G-codes went into effect.
We're just beginning to get the reimbursement back from that to see what the impact is. If you do your G-codes, it should not have any negative impact, because there's not any rate effect to it.
And just if you don't apply the G-codes, you don't get paid. So we're seeing a very good response in both of the fields from our clinicians and from our billing collection offices.
As Larry mentioned, our A/R days are looking in very good shape. So, so far we've seen no negative impact from the G-codes.
Christopher Reading
Now, we were very much ahead and on top of this, guys did a great job. We actually rolled this out in advance up to the date than it was required to come out.
And so we've got a lot people that are monitoring it. But I would say that the guys have done very, very well on top of it from beginning.
Lawrance McAfee
And just one other things that's going to hurt to small operators and put more pressure on, and the government seems to be not only cutting rates, but trying to make it more difficult to operate.
Mike Petusky - Noble Financial
And Larry, do you have that, I didn't catch it again, if you mentioned, I didn't catch it, payer mix for the quarter?
Lawrance McAfee
Our managed care really traditional insurance was 53%; workers comp was 18%; Medicare and Medicaid, which is almost all Medicare was 24%; and that other, which includes self-pay is 5%.
Operator
At this time there are no further questions. I would now turn the floor to management for closing remarks.
Christopher Reading
So we appreciate everybody's time here this morning. Larry and I are around the rest of the day, so if tomorrow if you have any follow-up questions, we're happy to spend some time on the phone.
Thank you and have a great day.
Operator
Thank you for participating in today's U.S. Physical Therapy's second quarter 2013 earnings conference call.
You may now disconnect your lines at this time.