Q3 2020 U.S. Physical Therapy Inc Earnings Call

Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily.

Until that time your lines will they can't be placed on music hold thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the U.S. physical therapy, Q3, 20 Twinning earnings conference call.

This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you would need to press star one on your telephone please.

Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Chris Reading Chief Executive Officer. Please go ahead.

Thanks, Josh Good morning, and welcome everyone to U.S. physical therapy third quarter 2000, <unk> earnings call with me. This morning include Larry Mcafee, Our executive Vice President Chief Financial Officer.

On Gran <unk>, Chief operating Officer, Jon Bates, Vice President controller.

Fear General counsel.

To begin our discussion today I just want to remind everyone. This will be Larry's last official earnings call. At this part of the computing office long scheduled retirement, you're very shortly.

The distinct pleasure working alongside Larry for the past 17 years, we've enjoyed a great run with this company, although Larry will be metaphorically, writing off some so we're not done yet what we expect to further called Bush.

Oh, good public we think worried for the significant contributions to the as Mary.

I wanted him to know they're expecting to catch a lot of big beautiful fish in the coming months and years and not be a stranger next week Carey Hendrickson will start his new role as our CFO. We will begin working on the transition that we planned for a long time no no no we're back on track.

Sure. So before it begins to provide some color on the quarter and the year.

Need to.

Cover a brief disclosure Jon 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 the company's actual results can vary materially from those anticipated. Please see the companys filings with the Securities and Exchange Commission for more information.

Thanks, John.

So I'd like to start with some perspective, so, let's let's just back up a little bit prior to the quarter back to June we were making substantial improvements with her and dynamic affected volumes in June were born a jump materially from May 21.8 visits per clinic per day.

Further progress into this third quarter with July coming you're at 24.4.

25.9 August 27.1 in September for a full quarter average of 25.8.

Finished the quarter with fair about one visits per clinic per day from one word same point 2019 huge recovery from where we started post endemic just a few months earlier.

For the quarter, our net rate was 191, having the same period in 2019.

The cost control area, our team of partners, our ops team or support group in Houston work tirelessly together.

Very effectively manage our costs through this difficult period.

I'll take a minute. Thank the many people or people without complaint blame very professionally and work with us to trim hours costs in many cases to absorb personally.

Those were significant salary reductions during this period.

Your commitment sacrifices not unnoticed without it we would not be in a very good shape. We are in today, most sincerely I want to tell you inside view.

For this third quarter operating cost as a percentage of revenue excluding closure costs were reduced 460 basis points total salaries and wages in a combined business were similar to leave reduced 410 basis points.

The challenge is this pandemic has produced where we were able to grow our gross profit this quarter by 11%.

Gross profit margin was 27.9% an improvement of 460 basis points compared to.

Two third quarter 2019.

Physical therapy gross margin improved to what feels like a high point as far back as I can remember the 28%, which is a 410 basis point improvement over prior year.

And our injury prevention business. We also grew this quarter with margins improving 870 basis points to 28.6 for me from the year ago quarter, 19.9%.

For a complete view financials in just a minute I'll ask Larry to cover our financials in a little bit more detail part.

Prior to that I do want to take a minute to recognize what a huge lift this has been front. Our team. These past seven or eight months nothing has been normal. It's just been a battle the whole way, we're not through the end of it yet, but we have gone through though has taught us a great deal about ourselves and our resiliency tenacity has given us.

The confidence that we can deal with whatever comes along at this point.

We believe we will still find a way to grow through any of those challenges I'm Supreme really proud of our of all of our team at every position in level in the company across the entire country.

Right now we are seeing three infection rates climb again.

Clinical services team along with our compliance leadership have worked tirelessly to ensure that our clinics have what they need to protect themselves.

Our patients.

Care for those who need our services to work it's a function.

Until we return to fully normal whatever version of normal. We returned two I remain very confident we have the right people and resources in place to get us to that point and the most efficient safe and effective way possible.

Speaking of pushing toward normal I'm pleased to convey that our development engine is again running is beginning to bear fruit earlier this quarter, we announced our first deal since.

It's a pandemic began and we have more balls in the air right now with a good deal of positive activity that we expect will help us to as we round the corner into the new year here very shortly.

That concludes my prepared remarks, Larry pure workforce. Thanks, Chris covered a lot of that margin items I'm I'm, just kind of give some highlights rather than go line by line through the release.

Earnings per share from operating results, excluding really bonds were 85 cents, the most profitable quarter in the company's history.

The analyst consensus estimate for the quarter was 51 cents.

The company beat expectations by 34 cents or 67%.

With regards to revenue in the third quarter of 2020 108.9 million reported.

Pop the analyst consensus estimate by 5.4 million.

Operating income for the third quarter was 19.9 million, an increase of 18.5% as compared to the third quarter a year ago.

Operating income as a percentage of revenue increased by 400 basis points.

18.3% in the most recent period by comparison in the second quarter of 2020 operating income.

In the third quarter increased by 9.6 million or 94%.

[noise] terms or other financial measures and the third quarter. Adjusted EBITDA was 19.9 million versus 17, a year ago, excluding relief funds adjusted EBITDA was 19 and a half million.

This is not in the release, but if you look at the balance sheet debt has been reduced significantly this year.

If you include Medicare advance payments and deferred payroll taxes, a 17.7 million.

Debt, our third party debt obligations have been reduced by 20.8 million or 40 or 41% from 51.1 million at year end 2019 at 30.3 million at September Thirtyth This year [noise].

Okay that concludes our prepared comments operator, if you would open the line for questions.

Ladies and gentlemen, as a reminder, if he would like to ask a question. Please press star followed by the number one on your telephone keypad again that starwood.

Your first question is when a lot of Larry Solow with CJS, yes.

Hi, Good morning, Doug. Good morning, guys had just just real quick Larry you know congratulations and best of luck in your future and its been a I know weve covered you for 12 years I think so you know I appreciate.

All your assistance and Oh looks like you know.

Got you on your looks hopefully have a great future.

Just a few questions high level, you know, obviously I'm really a great margin performance this quarter.

Yeah, No I realized revenue, obviously trends are prudent probably little faster than planned come back up some of these costs, but you know you operate your EBITDA margin I think over 18% this quarter.

I think it's a couple hundred bits better than I think any other quarter right. So I was in the last 10 years. So I'm just trying to grow.

Grapple with or you know maybe at the high class problem, but just figure out is there you know some of the sustainable you know maybe you can give us a little more color on that.

Yeah, you know, we're we haven't really hit a steady state yeah, Larry and so we're trying to sort through that ourselves for the most part.

We've gotten I would say probably the majority of the people that are coming back at the clinical level. At this point. We're within you know visits per clinic per day of where we were before and that's not where we want to be we want we want to grow and we want to have same store growth again, but we've we've.

Well costs down in the ops team has done a great job along with our partners keeping their finger on them. All so I'm, hoping we can keep a good percentage of what we've gotten I will tell you through the quarter, we had some cost increases in the quarter as we reloaded people and we get people back.

[noise] positions, where we've really stretch folks pretty far including here in Houston.

Give us another you know another quarter to see how we settle in volume started to level off so in the past few weeks, we've leveled out oil, but up a little bit you know and maybe down a percent here or there, but but pretty steady still so.

We'll just have to we'll have to see our goal is to keep as much cost out as we reasonably can provide the service that we need to provide outdoor patients into our partners.

And you didn't give a I know you didn't give us its still a store set number last quarter I'm <unk> can you maybe just share a little bit. This quarter. Just you know just to give us a rough idea. It sounds like you know sales on a same store basis were down I guess single digits and some you know mid single digits or even lots maybe.

Honestly, we didn't generated for the second and third quarter, because it really doesn't mean a lot yes, yes, they're down.

I mean, we've been focusing on trans and it's in March in upward. So I'm sure in the fourth quarter will give that again like I said, we didnt even generated this quarter it's almost.

Meeting thanks.

Right what about this it's just I know you made.

You mentioned visits captain <unk> improved to 27, a day average in September.

I think you mentioned the year over year. It is it was down one was that for the full quarter or was that for September.

A month that was for the month of September Okay. So still down a little bit. Okay. So just look no volume just still down probably somewhere in the 5% ish range plus or minus about sort of right. Okay. Great. Thank you I appreciate it.

And in the September this year was 27.2 visits per day per clinic.

For 2009, it was 28.2, so it was down one bit.

Got it great excellent I appreciate that color. Thanks, so much.

Thanks.

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

Good morning, Brian Hey, Good morning. This is Jack Sullivan on for Brian.

Congrats on a great quarter guys I.

I guess, yeah right now just wanted to kind of project out a little further get your thoughts on top.

2021, and and how we should be thinking about that particularly as it relates to further M&A opportunities from some of the announcements you made recently.

Yeah, you know I can't I can't predict what 2021 is going to look like and a lot of respects, but I can't tell you that we're going to be active on the development front. We are right now I expect we'll continue to be.

<unk>.

In some cases a couple of these early deals were deals that we had ready to go or or in the process. When when this all happened back in March when the pandemic started and so.

Those are those are moving forward again, and you know we're active in other areas as well so.

I would expect 21.

To be good you know normal or I mean, we'll see but we're going to we're going to start out the year and you're going to see activity I would expect 21 to be good solid year force acquisition from a development on the de Novo development side.

We're moving forward again with those.

We're being very selective still has as it is I think we should be and staying with our strongest partnerships and good opportunities. We're also doing some small tuck in so I expect us to be active in all fronts. This year in terms of our capacity to do deals the balance sheet.

There's literally in the best place ever seen it and 17 years, we have over $100 million unused availability under our credit line.

And so I don't think theres anybody in the sector that has positioned better from a capital standpoint to do M&A.

Got it I guess as a quick follow up any color on what valuations have been looking like recently in some of the discussions you've been having.

Yeah, it's too early to tell on the news and the new stuff I expected that valuations will will be sub peak peak during late 2019, not enough not enough data yet to give you you know any.

Worthwhile color on exactly how that's going to look as we go forward.

Got it Okay and one last one for me you guys have talked about kind of how there would be challenges getting maybe that last.

Couple of points off of your pretty common leveled back with some of that related to activities in schools and sports could you just provide an update on what you're seeing on that front and maybe how it.

Different across geographies.

It is different cross geography, so we have some markets that are backed fully back in a little bit better than fully back.

We have other markets that are still off you know somewhere between five and 10% again kind of following up.

The pattern that we had originally with the northeast being more greatly affected the west being maybe a little better shape. Some parts in the in the in the middle of the country that south central portion of the country also in pretty good shape. So berries literally you know state by state.

Market by market almost aggregation gets us to within about 5% right now and we're still hopeful we can move market share and if the rest of the way there.

Got it that's it for me thanks, guys.

Your next question comes from the line of Matt Liberal with William Blair.

Hey, Matt.

Hi, Good morning. This is Dan Lawler on for Matt Thanks for taking my questions.

I wanted to first ask it looks like you sold your interested one close clinic in the third quarter. So can you give us a sense for how many of your clothes clinics. You agree opened to date and then maybe how we should be thinking about the recovery ramp in these reopened clinics.

33, I think we reopened 30.

And we permanently closed 40 of which have sold.

So we saw about 15 of those 40 I think.

And that's an off the top of my head number but the Reopenings most of the Reopenings have occurred months ago.

And so those are.

They're all open and there you know returning during the portfolio with our aggregate numbers, but they're returning for normal like the other facilities.

Okay, great. Thank you and then just a quick follow up do you expect you know maybe any additional when it closes in the fourth quarter with the ongoing case surge.

I don't think I don't think what will happen in the fourth quarter. It won't be related to any any case surge necessarily is we have leases that come due and other things well you know I don't want to get stuck into this.

And to this perspective that because we closed more than the average that we won't ever have closures again, we're going to have closures periodically as it makes sense to do.

To that and I don't know yet whether it will have any in the fourth quarter I don't we're not worried about the case.

Let me say it differently I don't like the case.

The virus numbers increasing.

But we're dealing with that and we dealt with it so far pretty effectively and so I don't I don't expect.

I don't expect a major.

<unk> announcement of any sort of now we have 550 clinics opened today.

We might close a few because we pretty much every quarter, we closed no.

But we're also opening new de Novo clinics again.

And.

And really had a pretty good pace so.

I don't see that clinic count changing significantly other than for acquisitions.

And then okay great.

Yes. Thank you and then just on just lastly, shifting over to the IP segment. You noted that it's currently running slightly below pre cobot levels compared to around 90% July. So can you give us a sense for as employees are returning to work and maybe to the case surge this summer how that impacted recovery.

Then how you're looking at a return to pre cobot levels and margin performance in the fourth quarter.

Yes, so I P is held up really well they didn't drop nearly as much as that PT business and at the same time the recoveries Ben just <unk>.

Rather rather flat through the period. So what happened early on was a couple large customers our largest in fact.

Got it got busier and more willing to shift people into more of their facilities. So that helped us through that early period.

Things have returned to normal for the most part in that regard, meaning those people have been redeployed into the regional customers and.

Such settled back down to normal our opportunity and our challenge is going to be you know to continue to add new contracts as we go forward in this still not yet normal period of time.

We're going to we like like we did in PT got some pretty significant cost reductions margins in that business are going to return I think more toward where they have normally been.

This is a company that's still young company were growing we still need to.

Add some resources, particularly on the technology side infrastructure, So I see margins getting pretty close back to where they were before maybe a little better.

Close to where they were I think in the PT business will have a little bit more margin gap there because were much bigger and bigger scale just allows.

Allows for a little bit more effectively on that side.

Great. Thanks, so much.

As a reminder, if you want to ask a question. Please press star. One. Your next question is when a lot of Mitra Ramgopal with Sidoti.

Yes, hi, good morning, Thanks for taking the questions first congratulations on a great quarter, just wanted to follow up a little on D. Among some of the benefits you are seeing as a result of coal, but I think last time, you talked about a tele health platform, that's something I'm not really able to start taking little advantage off I was wondering if some of the businesses.

It'll be transition there more on a permanent basis and kind of drive some efficiencies going forward for you.

Yes, So mitra Tele health has been important for us, particularly early in the pandemic and.

And it's going to continue to be an offering.

Thats available to our patients we do not have a perspective, where we want to transition in clinic business to tell how that's not something that we're interested in doing.

And what I mean that is I would rather see the patients in the clinic fixed income now the reality is with or without a pandemic or there are times in instances when patients can't get there and wouldn't normally chance on appointment in from those times Tele health will become.

Importantly away to you know to get a visit in maybe somebody has you know that the kids are stuck at school and they can't they are not going to be able to make a time, where we can connect with them on a tele health basis. So it's going to be another service offering as well we're we're piloting.

In home or at work solution.

We're getting ready to kick that off in the Houston market place and so we'll see how that goes we're trying to afford a patient.

The most flexible opportunity.

Our preference is going to continue to be serve people in the clinic. When we can we'll have oh.

Venues and ways to do that.

Okay, No that's great and I know you talked about you know some costs coming back obviously, especially I would expect on things like salaries et cetera, but on the rent side I noticed a significant.

Reduction there relative to one Q and even a year ago and I was wondering if some of the benefit.

Benefit you're seeing there if they are really more short term in nature. You think you can sustain that going forward.

It's close clinics.

Okay, that's changed at all for Us.

And as a percentage, it's coming down because the clinics you closed your running at lower revenue level. So their their rent utilities as a percentage of their revenue was higher yes.

Okay. Okay. That's great. Thanks, and I was wondering if you have any update for us on the reimbursement front, obviously with the proposed caught up for next year I don't have anything.

On that front for you.

Yeah, we do it well first of all I don't there isn't anything that certain at this point.

We do have a bill.

That's a good vehicle that.

Has a decent amount of support we've created a coalition among them across a variety of different different specialties, including variety of different specialties that are dr. based.

You know we've got good support from the Hospital Association other groups like that so we have a vehicle to vehicle would provide for a two year stay in terms of.

No payment reduction at all.

You know with the election, we're kind of in a in a holding period probably for at least another week until we see what comes out of the election and were able to get you know see if we can get final traction before we kick off the year. Shortly here in another couple of months.

Okay, No that's fair and I.

I think Chris on the M&A front, you sounded a little more bullish in terms of maybe some opportunities, especially near term et cetera, just wondering.

If that is a result of maybe a cold it have an impact in terms of some of your competitors out there and you're finding.

More opportunities than normal or anything else, maybe just the due diligence you have been doing yeah, I would say Larry's earlier comments you know.

I think should resonate with everybody just the fact that we're we're so under levered than others potentially maybe not in as good a shape, but weren't different we're different solution for people you know, we're a place where people can come in and stay for you know the next decade and real.

We invested in their company with a lot of resources the people that we're attracting aren't afraid.

They've done well through cope with the people that we're having conversations with expect that they will see in their markets some opportunities to pick up some small providers single site, maybe onesie twosie kind of clinics.

So we continue to attract those folks and I don't think this is going to be a run from scenario.

Although you know I have talked the plenty of people, who say if this were to happen again, it's sure rather have a big partner to carry some of the load and so we do think it'll move people Directionally you know.

Youre, considering you know a different solution a partner potentially and I think we're the company that people look to when they think about partnership.

I think we'll have plenty of opportunity.

Okay sounds good and again.

That's it for me on questions Barry I'd again, Larry I'd like to wish you all the best in retirement, it's been great 15, plus years to working with you and you've done a tremendous job you and Chris in terms of the company and growing and so wishing you all the best against.

Thank you thanks nature.

The next question is when a lot of micro Tesco with Barrington research.

Good morning, good morning.

Good morning, guys.

Yeah first of all when I joined everybody else Larry. Thank you. So much that you guys first in 2003 down in Houston and it's been it's been a great ride. Larry you are truly one of them just class last guys in class C up a lot of them ever met so thank you for that.

Thanks.

I guess.

Just sort of circling back in terms of the proposed Medicare caught Chris do you have any view that.

They're just sort of a prolonged.

Difficulties with coal bed and particularly the.

Nate elevation of infection now I mean does any of that make it more likely that you guys may may get some relief as an industry or were you know.

Either delayed implementation or gradual implementation I mean, do you feel like any of that matters or not really.

I think it does matter I think everybody Weve talked to who has become aware of this issue this big reduction issue.

And when I talk about everybody I mean, you know that the folks in Congress no.

Nobody has said well that makes sense I want you know why you bother me with what this cod. It makes perfect sense. Nobody has said that everybody has said this is crazy shouldnt be happening number one we're a low cost solution that helps prevent a lot of more expensive care.

Number two it's in the middle of a massive endemic we've stayed open throughout to get people back to work and back to the economy. So you know our thankfully our congressmen and women they understand that it's it's a matter of getting time and attention to aggregate the resources now.

Hopefully the election will conclude shortly that we can get this done between now and yearend neither.

Neither side is focused on a balanced budget.

And in the midst of a recession do you want to do.

A rate cut it's going to force you to have to lay off people.

Yeah in the swings that have occurred with CMS minus minus nine to plus 14 or 15 in any given year. It's just it doesn't make it doesn't make operational or or logistical or even fiscal sense.

The swing that high and low risk, there's got to be rationalization of that at some point in time.

Providers can.

And absorb that you're in Europe.

Gotcha, Okay, Great and then I got somehow got bumped off the call for five minutes just disconnected, but.

This may have been covered forgive if it had been and if you covered him Expansively I can just read your answer in the transcript, but yes.

Did you speak at all to the what you feel is the sustain a bill I mean 400.

You know 400 basis point gross margin improvement.

Medicine and just.

I guess any commentary around how sustainable that is what percentage of that you might think is sustainable over time. If you if you'd spoken extensively forgive me I jumped off from fine. Thanks.

Mike look at the transcript, but Chris spoke to both PT margins and the industrial injury prevention and that after this call. If you want to talk about some more you're welcome Doug on me and Mike you can give either one of US a call. We can we can catch up.

Okay. Thank you very much.

As a reminder, if you wanted to ask a question. Please press star one of your telephone Keypad. Your next question is from the line of what your so called with Lake Street capital.

Hey, guys. Thank you great quarter, I hate to beat a dead horse, but just want to go back to the Medicare cuts.

And.

I just want to know if the law is not change between now and year end any way you can quantify for us what that would do to revenue and earnings and my second question is is it just Medicare or are your commercial insurance policies also tied to the Medicare reimbursement rate. So they would be affected as well. Thanks.

So the easy question first our most of our insurance commercial insurance is not tied to a medical <unk> percent. The Medicare they're negotiated separately are you individually some some not tied.

On that front on.

Well on that on the revenue and earnings.

We withdrew guidance if we wouldn't normally give guidance for next year until we release earnings in the first quarter, which would be March.

I can tell you we're doing the budget budgets with and without the cat obviously your staffing would be different with the cut and you do other things to mitigate its impact I mean, it would be purely speculative now.

And again, you don't know what's going to happen with patient volumes related to coal. That's I think it's too early to tell you. What next year will look like I think we do have a good chance of getting this can be back I'm still optimistic.

I'm also.

Practically speaking we've we've managed the business in a way this year that Scott not some margin expansion and gotten us to a more efficient place and that will help to offset some of the reduction if it does in fact come. So we'll continue to do what we can to to look for opera.

200, east maybe leasing rate opportunities another thing since the market. So disconnected right now, but it's as Larry said I think it's a little too early yet for us to begin to speculate I think it was in 2013 is that when we had the 10% Medicare rate cut when the year was if you remember it.

13, or 14, yes. So 13, there was that a surprise 10% rate cut that came out in January and so it took us a few quarters that now.

Offset that but I think by and certainly by the fourth and I believe the third quarter, we were up again year over year. So this isn't the first time, we've seen something like this hopefully it won't come to pass, but if it does the company has dealt with it in the past.

Okay. Thank you.

As a reminder, ladies and gentlemen, if you wanted to ask a question. Please press star followed by the number one on your telephone keypad again Thats Star one.

At this time, Sir there are no further questions.

Okay, well listen thank you everybody free time and attention today. If you have additional questions. Please reach out to Larry or.

We hope you have a great day stay safe. Thank you find out.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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