Q2 2019 Earnings Call

At this time I would like to inform all participants that your lines will be in listen only mode.

After the speakers remarks, there will be a question and answer period.

If he would like to ask a question during that time. Please press star one on your telephone keypad.

I would now like to introduce your host for today's call Mr., Chris Reading Chief Executive Officer. Please go ahead Sir.

Thank you good morning, and welcome everyone to U.S. physical therapy second quarter year to date 2019 earnings call.

With me on the call Larry Mcafee, our executive Vice President Chief Financial Officer.

Glenn Mcdowell and Graham revert Chief operating Officer, Jon Bates, our Vice President and controller.

And Rick Binstein, our vice President and General Counsel.

Before we begin or comments on the quarter and the year, we need to cover a brief disclosure statement Jon. 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 Companys actual results can vary materially from those anticipated.

Please see the Companys filings with the Securities and Exchange Commission for more information.

Thanks, Sean.

Start with some color on the quarter and year to date periods.

Second quarter was another strong quarter for us a very good start and roll to your net revenue grew 9.8% for the quarter on strong same store revenue and the P.T. space, the 5.4% along with healthy growth overall across the platform and visits per clinic per day.

Revenue from our industrial injury prevention business increased by 64%.

You could apply your own adjective to that but I think that's pretty darn good.

And that's compared to where we were a year ago period.

Just a quick recap of when that business started and that we have done thus far.

The brioche like steel was finalized in late February 2017, since that time, we've bolted onto terrific deals one in the spring of 2018 and another just a few months ago.

Most recent injury prevention acquisition helped to broaden our service offerings to include post offer employment testing, which we refer to as poet, which is corn very refined part of <unk> business as well as onsite medical clinics. Both of these programs. We ultimately expect will benefit our continued growth service inorganic expansion within or injury prevention business and the physical therapy side. We have continued to make probably make progress in key focus areas, notably visits per clinic per day growth was a healthy plus one from prior year and also from the first quarter of this year.

Oh partners and their staff, our sales group and our ops team have worked in concert with respect to new patients and overall relationship development, which is underpinned by great care in communication and that has been the driver around a very strong same store growth numbers for the year as well as the current quarter.

That all came together and helped us to improve margins 100 basis points for the quarter.

For physical therapy.

Okay, and boosted our healthy industrial injury prevention margins by 480 basis points in the quarter.

Shifting briefly to development in the second half of the year should be strong in all areas for us de novo openings across our largest and most successful partnerships are looking very good will pick up.

In the second half.

And right now is as busy as I've seen it with acquisition related opportunities. We expect to continue to do what we've always done in the past to grow internally with improvements in the existing business.

Organic openings, which ramp up over time and give us more market presidents targeted specifically to our best performing markets. We will get good partner centric deals done, which will further expand our talent pool, and our geographic reach bringing renewed energy creativity innovation and opportunity, which we enjoyed very much.

We remain focused on achieving our core objectives, realizing our current opportunities and looking forward to those which we believe are yet ahead of us that concludes my prepared remarks. So Larry you want to go ahead and cover the financials and our guidance in more detail okay.

I'll start with the quarter and then talk about the first half and the recent quarter revenue increased 11.3 million to 126.4 million.

Due to an increase in revenue from both physical therapy operations and the industrial injury prevention business.

Revenues from physical therapy increased 7% to 113.4 million.

As patient visits increased 6% to over a million million 58000, internet rate revisit increased $5 to $107.16.

Of note is that most of that revenue increase came from older mature clinics or revenue from management contracts was flat for both periods.

Chris mentioned industrial injury prevention business revenue increased 64% to 10.3 million.

Due to significant internal growth plus the April acquisition.

We've had a much better job in terms of controlling costs with margin increases during the period total operating costs were 70.

5.1% versus 76.4 year ago salaries and related costs were reduced to 55.9 from 56.1.

And our rent supplies contract labor and other costs were down to 18.2 as compared to 19.3 a year ago.

The gross profit for the second quarter grew by 15.7%.

The 31.4 million the gross profit percentage increased by 130 basis points to 24.9%.

The P.T. gross margin increased 100 basis points to 24.7 and as Chris mentioned.

Gross margin for the industrial injury prevention business grew by 480 basis points to 29.2%.

Robby.

I noted in the press release, the thing that I found the most impressive.

When you look at both the industrial injury prevention business and treatment of injured workers that revenue combined revenue increased by 28% year over year.

Corporate office costs were 9.1% of revenue in the second quarter compared to 8.8% last year, our operating income for the quarter increased 16.9% to 19.9 million.

Operating income as a percentage of revenue increased by 90 basis points to fit.

7%.

As previously disclosed on June Thirtyth, the company sold its 50% interest in one physical therapy partnership to groups founders the sales proceeds all of which.

Was cash was 11.6 million and we had a pre tax gain of $5.8 million.

Interest expense was was 600000 100000 higher than a year ago. The provision for income taxes in the second quarter was 26.7%.

Our operating results, which excludes the gain from the sale increased 11.7% to $10.3 million or 81 cents per share a record quarter.

And that compares to 73 cents a year ago or same store revenue for de Novo and acquired clinics opened a year or more increased 5.4% visits increased 4.6% and the rate increased eight tenths of a percent.

I will now briefly cover the first half results total revenue increased $19.2 million or 8.6%.

Revenue from physical therapy operations increased 6.5%.

Again with both most of that coming from mature clinics.

Industrial injury prevention business revenue grew by 54.5%.

Our operating costs were reduced to 76% for the first half of the year versus 77.5, a year ago.

Salaries and related dropped from 56.8 to 56.4 rent supplies contract labor and other costs were reduced 18.6% as compared to 19.7.

Our gross profit for the first half of the year grew by 5.4% to $58.1 million.

The gross profit.

Percentage increased by 150 basis points to 24% versus 22, and a half a year ago.

PT operations gross margin grew 110 basis points and the industrial injury prevention gross margin grew 580 basis points.

Corporate office costs were 9.4 versus 9.1% of revenue or operating income increased 17.4% to $35.3 million.

Operating income as a percentage of revenue increased 110 basis points to 14.6%.

The tax rate for the first half the year was 25.8%.

For the six months, our operating results increased 14.7% to $18.8 million $1.47 per share compared to $1.29 a year ago and our same store revenues in the first half increased 5.2%.

In terms of other financial measures in the second quarter, our adjusted EBITDA increased by 12.2% to $19.1 million and as a percentage of revenue increased by 30 basis points to 15.1%.

For the six months adjusted EBITDA increased 12.1% that $34.7 million.

And as a percentage of revenue increased by 40 basis points to 14.3%.

We announced today that we are again raising earnings guidance for 2019, we now expect operating results to be in the range of 36.6 million to 37.9 million or $2.87 to 297 per share.

Our original early our original earnings guidance issued in March was for 276 to 285, we update in April when we did the BTT acquisition to 82 to 92 and again raised it today bye bye sense about the low and high ends of the range.

Our third quarter dividend of 30 cents per share will be paid on September 13th.

On July Onest, the company announced that it plans to increase the dividend from what had been 27 cents in the first and second quarters to 30 cents in the third quarter at 30 cents in the third quarter represents an increase of 30% from the 23 cents paid in the third quarter last year.

Thanks, Larry with that let's go ahead, operator and open it up for questions.

Thank you as a reminder, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad again that is star one.

Our first question comes from the line of Brian Tanquilut of Jefferies.

Hey, good morning, guys, congratulations good quarter growth.

Hi, Chris.

All right. So I guess my first question with the strength in volumes this quarter same store coming in at 4.6% is there anything you would call out or any views on the.

Your ability to sustain that whats driving that kind of market share gains or is there any initiative that helping push that because it's obviously above your historical average.

Now everybody's everybody's working together well partners are doing a great job, obviously sales team is as well up folks.

Doing well on the support side. So there's there's not what I would call any new initiatives that are driving that we're just we're just focused than that it's working.

Got it and then.

Chris.

There are upcoming changes in home nursing rules and I think the home nursing guys are looking to use more physical therapy assistance and reduce their reliance in Pts are you seeing any of that kind of.

Playing out already where the market is getting better for you from an employment perspective for Pts and then does that squeeze on the PA side.

Can you repeat the last part does that work on the PA.

Yes, let me because I think the assumption is that the home nursing companies are going to try to shift their staffing models to be heavier in the PPA and lighten up in PT. So how does that dynamic help or hurt your staffing your ability to staff on your costs going forward.

Yes.

I think there have been times in the past, where we're in a very big swing soon in home health and other areas.

Related to employment visits.

Helped or hurt us.

Tighten the market or open the market up so I can tell you that we've recognized any of that yet.

Im fully I am pleased that I mentioned this to the board we have the audit committee call the over there.

Given the fact that you have the labor markets pretty good right now.

MPS are coming out with a fair amount of that I think the group's done a really good job in terms of cost management. So far this year.

So you know I want to give everybody a shout out on that side, but I think long term.

What you will see with us.

Particularly a few years out as we expect CMS to pay us differentially for PPA days versus Ptcs.

Less for PVA, we'll do the opposite will probably off load some PT Dave.

Not completely but where we need to.

And we will probably go up more and we have that right now more of a PC centric.

Employment structure, so I think that goes well for us if before you say plays out and I don't know.

No that's awesome and then I guess my last question.

During the quarter you divested.

One practice or one to one partnership if your line is walking us through a little bit of background, there and how it looks like some of the metrics revenue per unit and visits per unit are up and it was that a factor in driving those and and what was also the driver the decision to.

To sell to the partners and Thats Pacific Incense, Yes first of all of that deal didn't finalize until the last day of the quarter and so there was no okay any of the metrics for the quarter.

The I need I need to.

I need to limit a little bit what I can say about it what I, what I will say is we capped.

Several.

Keep part of that market and Matt.

That original deal, we we had three minority partners come with us.

They are doing well in fact, they're there in Houston This week.

And that's going very well and that has gone well.

It was.

It was an opportunity.

On both sides to two.

Two two to focus where we can where we believed we could make progress.

And sell some assets that were desired to be.

Acquired on the other side.

We're doing a tremendous amount for us so I can't say a whole lot more than that.

Okay, then I guess sorry, my last question for Larry just really quickly any reason for the increase in minority interest as a percentage this quarter and also the rent expense.

Coming down quite significantly thank you.

Hi, minority interest is around quarter to quarter or just means some of our larger partnerships we're doing better.

Which is not.

Unusual.

The rent utilities some of that's a reduction in payroll costs for contract employees as Weve done a better job limiting PR ends and whatnot.

All right got it thanks, guys Congrats again.

Thanks, Brian .

Our next question comes from the line of Larry Solow CJS Securities.

Good morning, Thanks, guys.

Echo those thoughts in a really strong quarter I'm on basically all your metrics. So congrats on that.

Well, Chris I mean, any feel on how the industry is doing clearly you guys are outperforming in a lot of companies simply initiatives, but with record low unemployment I imagine that's got to be helping everybody. So.

And you feel how the industry has been maybe just not this year, but over the last few years trying to quantify.

You know.

We view the only company that we get really an opportunity to look at other than just having to talk over a three year with some of the other Ceos in.

People are sharing in a deep way their own rate sticks.

The only company we get to look at is flat and you know they've they've done they've done well they've done they've done fine. So I would just point you to them.

Maybe abroad, you know comparable I really don't have a sense for how everybody else is doing I think we're we're kind of focused on what we need to do and how we can control.

What we can control and and not too worried about everybody else yeah understood.

How about the pricing both on a same store basis, an overall.

I think we started the year, we thought it would be sort of flat you had a little uptick in Q1 and a little bigger uptick this quarter is that on a fishing off more units being build more efficiencies or.

Better mix or what's sort of driving that better people better pricing units are flat I wouldn't focus as much on the second quarter pricing, maybe on a year to date pricing on a on a blended basis is kind of where we think we're you know yeah. We are we move around a little bit quarter to quarter, but the groups who worked hard to you know squeeze out some some gains but I don't I don't think it's coming from you know uptick in utilization.

Okay, how about the you know the trends in the industry and you prevent your business really really impressive and I realize it's sort of separate from your core PT business, but does does that bleed and does that.

Which was impressive growth is there any sort of cross selling or other opportunities that sort of helped the core business.

Not yet there can be the BP deal, particularly with the post offer testing we pledge to our.

We we pledged our current network when we did that deal that we keep that intact and we wouldn't we wouldn't change that we have it and we don't expect too we do expect that our facilities are U.S. PDH facilities as we grow that business for war will be larger benefactor, where we haven't in the past.

And contracted party with BT prior to the deal. So I think there's opportunities there we're beginning in some markets to see treatment related opportunity. We initially played that very slow and we kept those companies kind of firewall from each other because we didnt want anybody to think Thats why we had bought it just the soco over the.

Injury business.

That's a really good job on the prevention side and in there for the you know the the should be less injuries, but over time, we're seeing more.

Synergy more opportunities that are being bubbled up from our partners in the local markets with relationships that they have which then benefit the briana Ics group. So I just think it works well in its complementary but don't think its been a big impact or driver on any of our numbers on the PC side today, just to explain as opposed to offer evaluation test.

<unk> are actually performed in physical therapy clinics and that was the majority of the business. So they actually several contract.

Yes couple of hundred three.

Yeah, its a bunch, it's a 300 clinics and.

As Chris said, we said, we keep that network in place, but as we get new contracts in other markets.

He able to direct some of that business to us.

Got you fair enough and then just just last question in terms of the you mentioned, Chris lots of opportunities for acquisitions.

We assume both sides of the business or or.

I know you've done a couple of nice SaaS good tuck ins on the industrial piece is that pretty much you know obviously opportunities looking at but no calm but is more focused on the P.T. side or both are a lot of activity on the PC side right now we've got to Digest, what we've just done and I think Thats first order of business and we did that last year. When we did that when we did a deal in the spring.

So.

Well you know our foot armed our sales team within that whole group has just gone.

Including the newly acquired companies just on a phenomenal job, creating organic opportunities. So we'll grow as we integrate that most recent acquisition and once we get that digested, we'll get our head up and you know we'll continue to look for opportunities there right right right now it's more PDP focused great. Thanks I appreciate it guys. Thank you.

Our next question comes from the line of Mettler rooms from William Blair.

Good morning.

Larry first wanted to ask a question on the cost side, a number of ships service providers.

I had a little lighter cost in terms of health benefits, an internal employees costs in the first half the year was there anything timing related.

Yes that drove some of the cost containment, you think might pick up or change in the back half of the year.

We didn't get any any benefit from health care costs for our employees in fact, our claims.

Higher than we expected so.

I think it was really.

It was controlling.

Contract laborer right.

Swing factor.

Right.

Okay, and then Chris you alluded to most of the focus for the near term being on the PD side for development, but just as you think about over the next year or two et cetera, broadening the industrial injury prevention.

Platform.

Is it more service line extension is a geographic extension.

What point here do you think you have the scale to more aggressively acquire larger national contracts opportunities. Just I guess think help us think beyond this year in terms of how you're looking at building that business, yes, well just to give some perspective and I don't have the exact number but.

We have done some pretty good sized acquisitions have had an entre national presence. We're now in all 50 states in that business and onsite in over 1000 locations with whom you know well.

Companies of all sizes Fortune 100 down so.

Regional companies and so.

There is a massive organic opportunity there.

As Weve added, particularly this most recent acquisition to cross sell some of those new products and services both directions between our original Robotics company and most recently the beauty company.

And that really hasn't started yet so we're we're still in the digestion process and continued growth within all those product lines. This is going to be continued opportunity to bolt on other companies know, whether there and I don't have any right now and we're like I said, we're focused on what we're doing and we're making good progress with that but as we grow we may we may develop broader service lines will certainly cross sell the lines that we have.

And that will give us a good organic opportunity, but we're early on I don't know yet.

What I do know is we have a good team is doing a great job.

And we will continue to look at what makes sense as we go forward.

Okay. Thanks, and then the last one would be again, Chris alluding to that Pete the development opportunities on the P.T. side.

Ramp up in the back half the year.

Do you think.

Relative to the first half the year, we did not complete as many detailed deals.

Is this at all time line extensions from new competition in terms of these partnerships or.

Folks the attrition would look at having discussions with potentially other players out there that maybe they wouldn't have had before or is this again simply just a timing issue.

Yes, I think.

I think as much as anything were lumpy and you know.

We have some ebb and flow and and how these come through I think generally speaking, we're seeing more new brokers in the market we're seeing.

More deal flow in the market right now in terms of.

Now some of the other parts of your question.

Not really sure I, followed all of it but.

It's his disease.

Busy with meetings and discussions as we've been a long time and whether that can continue.

In some indefinite way or let's just season, we're in right now I don't really know, but it's it's good right now.

I expect we'll get some things done.

Okay. Thanks.

Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad.

Our next question comes from the line of Mitra Ramgopal Sidoti.

Yes, Hi, Chris.

Just wanted to follow up a little in terms of it seems like you're seeing some heightened activity on the Delaware side and I was just wondering if it's more a case of potential partners approaching you or you're just doing a good job loss of identifying some opportunities that you might not have seen before yes or no on the de Novo side. So just to be clear, we're not doing any new de novo partnerships from the ground up we stop that probably four or five years ago.

The de Novo activity.

All of that 100% of it.

His additional satellite opportunities within.

Predominantly our most successful partnerships are largest partnerships around the country and so those take a little while to develop and.

Well staff and find a location and get things going but the second half.

Of year will will be busy half, but that is as a result of staying focused on it you know in the first half of the year. They just take a little time to come to fruition.

Okay. No that's great. Thanks for clearing that up and also on the same store a again tremendous numbers I think the best we have seen.

And I was just curious in terms of.

Driving that isn't the case also of the Salesforce investments you have made and.

You need to do anything more on that front.

Drive, even Florida gains.

Yes, I think Thats, just we continue to look for opportunity right and so whether that's a fractional person or a full time person or just the right person.

But thats ongoing that's not anything new or different than it was a year or two ago.

It's it's working well right now we'll continue to try to.

Keep that.

Keep the ball rolling forward.

Okay, No that's great.

And Larry just on the phone.

When you look at potential acquisitions.

Especially on the IP side are versus the traditional PT side I was just curious in terms of valuations are differences between the two segments.

Well, we've only done three deals, but they were all.

If I call it almost exactly the same old.

And a lower multiple than we paid for PT yeah.

Okay, whether that continues or not I don't know I don't know, but.

That's how it's been so far.

Okay, No that's great and then finally.

Larry I don't know if you have the payer mix handy yeah.

So private managed care.

Traditional insurance business.

Was 46.8% of revenue.

Workers comp was 15.1.

Medicare and Medicaid was 30.6, we've had a little pickup in Medicaid because.

In some states like Texas, and Florida, it's not a bad payer so we're doing a little bit.

Medicaid, though in many states, we don't take Medicaid.

And then.

Other was 7.6%.

Okay. Thanks, again for taking the questions great quarter. Thanks Mitra.

Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad.

Okay.

[laughter].

I'm showing no further questions at this time I would like to turn the floor back over to management for any additional for closing remarks.

Okay, everyone. Thanks, so much for your time. This morning, thanks for your attention and your questions and have a great day.

Okay, let's see the greatest thank you ladies and gentlemen. This does conclude today's conference call you may now disconnect.

Yes.