Q3 2019 Earnings Call

At this time I would like to welcome everyone to the U.S. physical therapy 2019 third quarter earnings conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time superstar and the number one on your telephone keypad.

If he would like to withdraw the question press the pound key. Thank you at this time I would like to turn the conference I would of course Reddy Chief Executive Officer. Please go ahead.

Good morning, everyone and welcome to U.S. physical therapy third quarter and year to date 2019 earnings call with me here and on the line.

Larry Mcafee Executive Vice President and Chief Financial Officer, Ram reason, Glenn Mcdowell, Chief operating officers, Rick Binstein, Our General Counsel, Jon Bates, Vice President and country anymore.

Before we begin today's call we need.

A brief disclosure John if you would please thanks, Chris. This presentation contains forward looking statements, which involve certain risks and uncertainties. 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.

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Thank you John .

So before I start I'm going to give you a quick summary of what I intend to cover.

We get into that Nitty gritty. So first some highlights from the quarter and year to date periods next I'll spend some time discussing some of the elements within this quarter, but I think we'll do better understand where we are and wide for the quarter and then we can look forward and discuss remainder of the year before Larry covers the financials in greater.

Detail.

Starting things all the companies operating results for the quarter. Despite some unique elements. It I'll cover here in a minute increased 11.7% for Q3 and on a year to date basis operating results were up 13.7%.

One of those unique elements that we previously.

That we previously announced in Q2 s earnings results, but remains important to remember an understand here is that we sold a part of a partnership on the final. Their Q2 this year that revenue of a little less than $6 million.

In the quarter no longer in our numbers also point out that sale posted a very nice nonoperating gain force as reported in Q2, so as we look deeper into the core PT business and mature facilities did really well excellent in my view with nice revenue growth and what I believe is one of them.

It's not the best year to date same store volume numbers, we have ever delivered our top 20 partnerships collectively are doing a terrific job.

And driving volume and together with our operations teams have been able to continue to demonstrate some nice margin improvement this quarter 110 basis points in or physical therapy gross profit line hundred 20 basis points under managed contracts.

In a 70 basis point increase.

And our operating income line, which of course includes all of our business segment.

These gains improvements in performance numbers are in spite them an adjustment in the third quarter for an approximate 525000 dollar overpayment.

Relating to a single physical therapy partnership the majority of which occurred over a multiyear period and discovered by discovered this summer by our team. This obviously impacted our rate for the quarter with some modest lingering effect to rate as we look forward. However, with an extensive review.

This was isolated in unique to this single partnership with a payer who is not a large part of our business affecting only clinics in one state interim loan partnership.

We're currently working to offset the rate adjustment with operational improvements.

Shifting gears weekend produced a very strong increase in revenue in our industrial injury prevention business combination of organic growth.

And the addition of another acquired company coming onboard in the second quarter for the third quarter revenue increased approximately 37% compared to the prior years quarter in for for the year revenues growing 47% for the first nine months of this year compared to the prior year period.

The gross profit for the industrial injury prevention business was 24% for the year, thus far in 2019 and for the third quarter gross profit percentage came in at approximately 20%.

In the quarter, we made the decision to substantially integrate the recently acquired BTD business intelligence or number of cost and investments related to that transaction.

Including the mills relocating the BTD home office into our expanded re Onyx corporate office, both companies happened to be located in Denver.

This allowed for substantially increase that improve communication connectivity across both companies.

Recently, we reinvested in further completion and refinement of the in operating system, which powers. The majority of BPM services, we upgraded and expanded a number of Barbree Onyx corporate support service areas, including investments in our finance and billing departments.

And continuing investment in our technology Department.

The work associated with and for the rapid growth that has been created within our injury prevention business has been significant.

The decision not to delay these infrastructure investments and enhancements.

Still have some more work yet to do as we believe strongly in this business and the opportunity in this space and then the difference were making in the work lives of those with.

Whom we saw some of the largest companies across our nation.

Finally, we see continued growth opportunities and cross selling opportunities among and across our customer base.

One area, we Didnt expect relates to the California fires.

The company, which largely form the basis of Riyadh. It started in California, we have great many companies, including PG, which as you know is a large electrical utility.

Numerous other companies, which are California base, great. Many of these companies are now feeling the impact those buyers burning throughout the state.

And that is impacting current business to a degree colors are remaining outlook. In addition to the reasons already discussed on how we expect to finish the year.

Finally, as we look forward. We continue we see continued growth opportunities both organic as well as acquired both parts of our company.

And so high in several of our team just go back from annual private practice physical therapy convention in Orlando.

For the first time ever I was so busy with individual meetings at didn't intend to single lecture.

Conversations relationships development and opportunities continue to attract great people as evidenced by a recently announced 11 clinic deal with another group of dedicated capable.

Fantastic people as our partners. In addition to other opportunities in which in addition to the other opportunities in which we're working we're doing similar work in planning this week on and for injury prevention business with their Nash and work comp conference in Las Vegas or development operations team is working.

Hard to lay down the plan for continued growth of this important service initiative.

No we will have questions, but before we open for those Alaska, Larry to cover the financials in greater detail Larry.

Thanks, Chris.

I will try not to call from.

Fighting a cold so although with the quarterly results first for the third quarter as Chris mentioned, our operating results increased 11.7%.

To 71 cents per share from 64 cents, a year ago revenue increased 4.1 million or 3.7% to 117 million overall.

Due to an increase in patient revenue from physical therapy operations internal growth.

Clinic development and acquisition.

As well as an increase in revenue from the industrial injury prevention business again, due to internal growth and acquisition.

Despite the loss of the net patient revenue in the clinics as the sole partnership revenue from physical therapy operations increased 1 million dollar.

Patient visits increased 1.7% and that was offset by a slight slightly offset by slight decreases in that range per visit 68 cents.

Revenue from the industrial injury prevention business as Chris mentioned increased almost 37% to 9.9 million.

We were able to reduce total operating costs in the period.

To 76.7% of revenues overall from 76.9 salaries and related claw costs about physical therapy in industrial injury.

Prevention combined with 56.9% in the recent quarter versus 57% in the third quarter of 18 rent supplies, especially contract labor and other costs as a percentage of revenues were down 18.9% the recent quarter.

Versus a higher figure a year ago.

The gross profit for the third quarter of 2019 grew by 5% at 27.4 million the gross profit.

Percentage was 23.3% the most recent period compared to 23.1.

Your earlier physical therapy operations gross margin percentage increased by 110 basis points, 23.9%.

Then.

As Christmas the physical therapy operations margins were down.

All of which was due to the integration costs and the recent acquisition.

Margin dollars were up substantially.

Corporate office costs were 9% of revenue in the recent quarters compared to 9.4.

Operating income for the quarter increased 9% to 16.8 million.

Operating income as a percentage of revenue increased by 70 basis points to 14.3%.

Same store revenue for de Nova and acquired clinics opened for a year more increased 4% recent quarter.

I will now go over some of the nine months highlights for the nine months.

The company's operating results increased 13.7% to 27.8 million or $2 of 18 cents per share as compared to $1.93 a year ago revenue increased 23 million or 6.9% to 359.9 million.

Net patient revenue from physical therapy operations increased 14.5 million or 4.7% to 324 million.

Revenue from the industrial injury prevention businesses increased 47.4% in the first nine months 27.1 million.

Total operating costs were 76.2% of revenue in the first nine months of 2019 is competitive improvement of 110 basis points as compared to a year ago total salaries and related costs versus 56.6 versus 56.9 and rent supplies contract labor and other costs the percentage of revenue.

Were reduced to 18.7% from 19 and a half.

The gross profit for the first nine months of the year increased by 11.9% were 9.1 million to 85.5 million. The gross profit percentage increased by 110 basis points to 23.8%. The gross profit for PT operations increased 130 basis points the gross profit for the.

Doctoral injury prevention.

Was 24% in the first nine months this year as compared to 24.2 a year ago.

Corporate office costs were 9.3% of revenue year to date versus 9.2, a year ago and our operating income is increased 14.6%.

The 2.1 million and operating income as a percentage of revenues increased 100 basis points.

Teen and a half percent under the 2018 period to 14% this year.

Same store revenues for the first nine months.

Increased 5.8%.

In terms of other financial measures in the third quarter the year, the company's adjusted EBITDA increased by 8.4% to $17 million and as a percentage of revenue increased by 70 basis points from 13.8% to 14.5%.

For the first nine months of 2019, the company's EBITDA increased by 10.8% to 51.6 million and as a percentage of revenues increased by 60 basis points, 13.8% to 14.4%.

As I'm sure you're all aware, we decided that we needed to revise guidance based on the items that Chris mentioned.

So we now expect lower anticipated earnings in the Companys industrial injury prevention business in the fourth quarter and a slightly lower average net rate from physical therapy operations. Accordingly, we revised guidance for the year to the range of 35.6 to 37 million or $2.80 to $2.90 per share.

We also to care declared a quarterly dividend today, which by the way, it's 30% higher than it was a year ago.

Fourth quarter dividend for 2019 of 30% will be paid on December .

Team.

Alright, thanks, Larry with that.

Operator, let's go ahead and opening up and will take some questions.

At this time I would like to remind everyone that if you would like to ask a question to press star one on your telephone keypad now again that star one for any questions, we'll pause for just a moment.

The first question will come from Brian Tanquilut from Jefferies. Please go ahead.

Hey, Chris lag good morning, and good morning that the rest of the team.

First question the headwinds that you outlined I understand industrial prevention side of the business, but.

The core physical therapy side, what are you seeing and on the rates I mean, what's driving that headwind or level of cautiousness is that just payers reducing rates or is there a mix shift thats happening in the business no I don't.

Lastly, I want to re characterize it I don't think we have a headwind I think we had a mistake on.

Large partnership.

That was.

A pretty substantial.

Adjustment to revenue in the quarter, but didnt happen in the quarter. It happened over a multiyear period in the partnership just happens to be big enough a number of big enough that it's one that number but we're seeing rates not.

Change from where we have been.

In the year this particular issue.

Has a little bit of a lingering effect and we're we're making operational adjustments in fact, we we've talked about as recently as yesterday and making progress in there. So we expect over the next quarter.

Maybe a little bit longer to have those operational adjustments work through with respect to.

The single partnership.

Overall.

We're not we're not seeing any big rate movements outside of that yeah. I don't think theres rate pressure, we had one entity, which to look at you book and as a reduction in revenue, which causes your average net rate to be lower.

But there is not rate pressure from the payers.

Okay, and then as I look at just metrics such as revenue per patient visit or.

Average revenue per unit on is there anything that you'd call out there I mean, it I see revenue per visit down a little bit year over year, and then down sequentially revenue per unit down as well visits per unit is there.

Anything with Q3, we had an extra day.

That impacted those metrics and what were the units for the third quarter versus the units a year ago me for the third quarter of 19. We're at 4.39 for Q3 at 18 were 4.41, so we're pretty much right, yes, and we look at visits per clinic per day.

Actually had a strong summer July .

So I actually went up fractionally from June which normally doesn't happen in terms of visits per clinic per day August held steady and then September as.

Usually our pattern begin to move forward, because we didnt dip as much in the summer months, we're actually came through that period and really what I consider to be really good shape relook at our same store numbers I don't.

You can go back and check I Havent had time, but I don't think we've had a year, where our same store is as good as it is right now so again I think the revenue.

Visit number within this quarter is related primarily and potentially exclusively to that one issue I mean, if you look at our metrics. We normally look at visits per day per clinic.

Fair enough units per visit average net rate revisit excluding that one off items.

We are happy if you look at how we've been able to control cost improvement in the margin percentage.

Thats, the PT operations or do announce Dan, Yes, I'm, not really my hands and worried about PT.

Okay got it.

Last question for me Chris.

Final rule came out last week on the position service.

Addition, feasible for Medicare What's your interpretation 2020, and then I know there is a pretty sizable cuts in proposed for 21.

What is the stance.

At this point in how are you guys view that operationally from within SBH.

Yes so.

Im kind of looking at that 2021 number I havent had to be honest I spent all last week getting get home till late Sunday night from this private practice conference that was that we've got a lot of emails bounce and.

Frankly, just need to spend some more time on it.

We expect a big change for 2020.

We'll begin.

Well, we'll begin the year I think probably in similar position. We're in right now 2020 ones, what we've got to get ready for him to be honest from Middle Alliance perspective Q.

And others were focused even though that's the final rule were focused on trying to maybe.

And then what the chances, but maybe move the needle before we get into 2021.

All right that yet.

Brian .

The next question will come from Larry Solow CJS Securities. Please go ahead.

Great. Good morning, guys. So just to summarize it sounds like.

Good therapy side, it's basically just as one timer as essentially see taking out you taken 500000, the that 800000 charger over charge you took this quarter and the rest next quarter. So it's like three in two cents I do the math correctly that hit in the second quarter about 300000, and we took your ticket in the second.

Okay and 500000 in the third quarter.

There will be a little bit of a lingering effect in the fourth quarter as we'll have to make operational changes to offset so olga.

Mike Frazzette, Thank you too.

Tax at 800000, it's like a five cents hit or something.

Larry I would just tell you this quarter between.

The apparent noise around the sale of the practice of took out a lot of revenue in the update to within while Didnt have the margin contribution that we have other places.

And I want to remind everybody recapped.

Three of those partnerships.

We sold one.

But there was a fair amount of revenue and there was a higher net rate out there. So in total we've got some noise in the quarter.

Right no shouldn't.

Kerry.

Forward as long as you kind of fall of the dots and understand what caused the noise.

Right right higher net rate in that market, but their margins were much lower than our norms right in their trajectory was not going where we wanted it to.

The fact, we were able to double or money on it.

Right and just your money.

Just remind us at the margin on that it was not sold revenue very Louis almost zero right Minimed outlet 0.10 that whereas we might run at 23% for the rest of the company right.

John and the teams.

Okay.

Okay, and then just switching gears on the industrial side you mentioned so the.

This was the other reason for a little bit of cut on the outline the earnings.

But that's all.

The only the fire maybe hurt your volumes a little bit this is up pace a little too those two things. Yes. So we had we definitely had integration and investment related costs and.

Look if we if we go back.

Happy.

Really happy with where we've come with that business, we started with a very small company.

That had had good infrastructure for where they were we've added to almost like size companies to that and pretty quick succession that offered an expanded service complement and so when you think about.

Different reporting different.

Structures.

And even billing and financial reporting all differ.

We've done I think.

Since job and getting that largely integrated I'd say largely because the most recent one was just a few months ago.

And we've done what we I think we've always tried to do is not look at the quarter, but look at what we need to do to build this thing the right way going forward and so we made investments will continue to make investments in.

Infrastructure to that business. So we can so we can continue to grow and do this the right way and so that you know that had an effect in the quarter.

Gotcha, when we talk about the virus the industrial injury prevention business remember most of that is contracted on an annual basis for X number of hours. Okay. The powers off PNG and he is doing pretty regular now obviously, they don't need us in the plant.

So we'll eventually.

We didn't do it last week for the week before next week, if they turn the power off again, so you don't get too.

You don't get the revenue.

Its power amplifier right now both excellent.

Right, yes, Okay, just lastly.

The complete a.

Smaller size acquisition this quarter I think any color that.

How.

So the Q still pretty looking pretty good terms of potentially more.

Tuck ins there were busy right now and I don't know that it was I don't know smaller was a nice nice size EBITDA deal.

With really nice margins, so maybe the revenue wasn't as high proportionately is okay.

We reported revenue, though and visit so 11 clinics.

Good in really good state with a great capacity to grow so it was really happy with that and yes, we're working on a number of things right now.

Really good folks so it's it's busy.

Excellent great. Thanks, guys I appreciate it thank you.

The next question is from Matt the rule with William Blair. Please go ahead.

Okay.

Hi, Good morning, I wanted to pop on the inter prevention business.

If you get a sense for.

So strip out some of the.

Integration work, you're doing that affected the margins can you give a sense for what the organic trajectory looked like in the quarter and what you're seeing in terms of additional penetration with existing clients any interesting new client wins or anything in the pipeline.

Just because it because of the BT, both revenue and deem the integration efforts muddied the waters long, but can you give us is that just what the underlying business like right now.

I'll try I don't have I don't have a complete segregation in front of me and maybe we can get it after the call the difference between organic and.

Acquired.

We don't have a broken out on the press release, and so we'll have the pool that.

In terms of client wins, our biggest client or large historic client, which I'd really rather not mention by name, but my guess is you shop there.

It would they be.

They've they've given us a green light for.

Very significant expansion as we look forward looking to expand both in stores and territories and a pretty meaningful way.

And.

I or team just summit in Las Vegas. This week around the the Cup conference I was here getting ready for this for Glenn was that I have great meetings.

Our teams led by by the founder really of what started this company Bob Patterson does a great job.

And so weve.

We've got to we've got to fight for everything but teams done a great job and we will continue to fight forward and I expect we'll continue to grow.

Fair enough.

I don't have exact figures, but they had very nice same store growth, excluding BT, but we've recently one actually several contracts and we're actually going overreacts budget today, they're showing nice internal growth for 2020 so.

There is nothing negative there is just that costs are a little higher than we anticipated. So the margin percentage is lower but the margin dollars will be up.

Got it thanks, Chris I think I am Hey, and member.

He's asking about.

And the margins would you I can lead to be it seemed to nice markets mentioned that here and again understanding the integration costs would you expect I can kind of in 2020 continued.

Margin expansion with the IP business.

No I think.

Im a little reticent to say right now we continue these these deals that we've done they've been pretty significant and as you see 30, 747% revenue growth.

Move the needle markedly me to catch up a little bit in terms of our infrastructure. So im a little hesitant to say that 2020, youre going to see a lot of margin expansion.

Probably don't model any margin expansion in the near term I would say mircera to where we merge and percent margin percentage I don't mean, we're going to grow we're going to grow bottom line just in terms of the percentages.

I think in the near term recontract percentage, a little bit, but we continue to grow forward.

And then Chris you mentioned you came back from.

From Orlando and you're quite busy is there anything you think that ends.

Instigated maybe urgency and saw the size of other outlook into 2021.

Or anything going on the industry or could you maybe.

Different in terms of the composition of the meetings or is it just the volume has increased.

The volumes increase for sure look when I go to these meetings have been going for a long time I've been doing this for 35 years, there's probably a greater percentage of folks in that room that are beginning to have gray hair like me and so there's going to figure out what the long term at least a lot of these groups of multi partner groups.

So somebody in that group has gray hair for sure.

I have to figure out what they're going to do we're at a time in the industry, where multiples are an all time high.

There is interest in the industry and people want to sort out the difference between what the partners are like can we offer such a compelling difference in terms of life after brand continuity.

Not all laying off and Synergizing were just this.

Septic term everybody uses for letting all their value people go because they're going to move things too.

Two different state, we don't have that and so.

Mitra Ramgopal with <unk>. Please go ahead.

Yeah, Hi, good morning, I'm, just a couple of questions for Sunday.

I.P. business, Chris obviously, it's still in the early stages, a new you obviously feel very good in terms of the longer term prospects I was just wondering.

Was it investments you're making the air as it relates to for example on a sales force.

If you feel you need to commit more resources, there or you also finding it easy in terms of potential customers coming to you now as you started to brand yourself into space.

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I.

So.

I always trying to go as partners.

Yeah.

It's not easy frankly.

Oh, Gee requirements and the cyber security requirements.

For good reason, you know increased exponentially and probably.

To get better you know we have we have competition in the market just like everybody else and and we don't take.

Even the fact that we've had really strong revenue growth of success in the past were not coasting on working hard every day. So we're going to continue to grow that sales group over time take some time to get somebody you know understanding exactly how to make cell cycle, but we've gotten good people from three of.

These companies now all working together.

Really you're just tip of the iceberg gone cross selling opportunities, but that's going to have to be a focus for the group and we need to get after that and we're we're in the early early innings on that side.

But we're certainly not approaching it like we've got it all figure it out working hard every day to make it you know as good as we can make it and we'll continue to do that.

Okay. No. Thanks again, given the tight labor market how difficult is it for you in terms of being able to recruit on boats sales already even on the therapist side in terms of maybe a cycle it's taking.

Depends on.

The same in therapy it depends on the market. Some of these companies are positioned in places where there are a lot of people live a lot of these people that were hiring or athletic trainers.

Some are physical therapists.

Smaller markets it's tougher.

We recently found in this or something you know not as happy about I I think we we need to be we need to be careful we've done a review of all of our ads recently and you know we had some jargon creep back in that I was not particularly pleased about jargon meaningful <unk>.

Us, but not meaningful to others. So we've stripped all that out and there's now a a heavy into hard focus on reducing the time to fill these positions because we have meaningful revenue opportunities that.

Unless we can stop it don't don't happen and and these are kind of locked and loaded revenue opportunities. So we're not perfect were you know we're still we're still working on this and and and trying to work across a number of different areas, but we're making progress and I expect will continue to do so.

Okay. That's great and then Larry just a couple of questions. Intel was that for example, how can we think of the tax rate going forward and if you have the P.R. mix handy that that'd be great.

Right.

Yeah.

You know, 26.5% it'll bounce around a little quarter to quarter of an on an annual basis, that's probably pretty close and in terms of payer mix for the third quarter private and managed care, which is your insurance business was 47.8% worker's comp was 14%.

Medicare and Medicaid combined or 31.2% and then.

6.9 per cent.

Okay. Thanks, again for taking questions. Thanks to me.

And I didn't find their no further questions.

Okay listen thanks, everybody learned and I are here. If you have questions off line, we're happy to take goes and thank you for a your time today and have great rest of your we.

Yeah.

Ladies and gentlemen, thank you for participating in today's topic.

Disconnect.