U.S. Physical Therapy (NYSE:USPH) Q3 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to the U.S. Physical Therapy Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Reading, Chief Executive Officer. Please go ahead. Thanks, Tasha. Good morning and welcome, everyone, to U.S. Physical Therapy's third quarter 2020 earnings call. With me this morning include Larry MacPhee, our Executive Vice President, Chief Financial Officer, Glenn McDowell, and Graham Reeve, our Chief Operating Officers, John Bates, our Vice President and Controller, and Rick Binstein, our General Counsel.

0:59 Before we begin our discussion today, I just wanted to remind everyone this will be Larry's last official earnings call with us prior to him kicking off his long-scheduled retirement here very shortly. I've had the distinct pleasure of working alongside Larry for the past 17 years, and we've enjoyed a great run with this company. Although Larry will be metaphorically riding off into the sunset, we are not done yet with what we expect to further accomplish. Publicly thank Larry for the significant contributions that he has made. And I want him to know that I expect him to catch a lot of big, beautiful fish in the coming months and years and to not be a stranger. Next week, Terry Hendrickson will start his new role as our CFO, and we will begin working on the transition that we have planned for a long time now, now that we are back on terrific footing. So before I begin to provide some color on the quarter and the year, I think we need to cover a brief disclosure.

2:01 John, a few words, 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 information. Thanks, John. So I'd like to start with some perspective. So let's just back up a little bit prior to the quarter and look back to June. We were making substantial improvements with our pandemic-affected volumes. The June volume had jumped materially from May to 21.8 visits per clinic per day. That further progressed into this third quarter with July coming in at 24.4, 25.9 in August, and 27.1 in September for a full quarter average of 25.8.

2:56 We finished the quarter within about one visit per clinic per day from where we were at the same point in 2019. Huge recovery from where we started post-pandemic just a few months earlier. For the quarter, our net rate was 105.91 ahead of the same period in 2019. In the cost control area, our team of partners, our ops team, and our support group in Houston have worked tirelessly together to very effectively manage our costs through this difficult period. I want to take a minute to thank the many people, our people, who without complaint or blame, very professionally work with us to trim hours and costs, in many cases to absorb personal furloughs, or significant salary reductions during this period. Your commitment and sacrifice is not unnoticed. Without it, we would not be in the very good shape that we are in today.

3:54 Most sincerely, I want to tell you thank you. For this third quarter, our operating costs as a percentage of revenue, excluding closure costs, were reduced 460 basis points. Total salaries and wages in our combined business were similarly reduced 410 basis points. In spite of the challenges this pandemic has produced, we were able to grow our gross profit this quarter by 11%. The gross profit margin was 27.9%, an improvement of 460 basis points compared to third quarter 2019. Our physical therapy gross margin improved to what feels like a high point, as far back as I can remember, at 28%, which is a 410 basis point improvement over a prior year.

4:47 In our injury prevention business, we also grew this quarter, with margins improving 870 basis points, 28.6 from the year-ago quarter of 19.9%. For a complete view of financials in just a minute, I'll ask Larry to cover our financials in a little bit more detail. Prior to that, I do want to take a minute to recognize what a huge lift this has been for our entire team these past seven to eight months. Nothing has been normal. This has been a battle the whole way. We are not through the end of it yet. What we have gone through, though, has taught us a great deal about ourselves and our resiliency. We believe we will still find a way to grow through any of those challenges.

5:41 I'm supremely proud of all of our team at every position and level in the company across the entire country. Right now we're seeing community infection rates climb again. Our clinical services team along with our compliance leadership have worked tirelessly to ensure that our clinics have what they need to protect themselves and our patients as we care for those who need our services to work and to function. Until we return to fully normal, whatever version of normal we return to, I remain very confident we have the right people and resources in place to get us to that point in the most efficient, safe, and effective way possible.

6:26 Speaking of pushing toward normal, I am pleased to convey that our development engine is again running and is beginning to bear fruit. Earlier this quarter, we announced our first deal since the 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 as we round the corner into the new year here very shortly. That concludes my prepared remarks. Larry, if you would, for us. Thanks. Chris covered a lot of the margin items. I'm just going to give some highlights rather than go line by line through the release. Earnings per share from operating results, excluding relief funds, were 85 cents, the most profitable quarter in the company's history. The analyst consensus estimate for the quarter was 51 cents.

7:14 Thus, the company beat expectations by 34 cents or 67%. With regards to revenue in the third quarter of 2020,108.9 million reported topped the analyst consensus estimate by 5.4 million. Operating income for the third quarter was 19.9 million and 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 to 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%. In terms of other financial measures, in the third quarter, adjusted EBITDA was $19.9 million versus $17 a year ago. Excluding relief funds, adjusted EBITDA was $19.5 million.

8:13 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 of $17.7 million, debt or third-party debt obligations have been reduced by $20.8 million or 41% from $51.1 million a year in 2019 to $30.3 million at September 30th this year. Okay, that concludes our prepared comments. Operator, if you would open the line for questions. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad.

8:59 Again, that's star one. Your first question is from the line of Larry Sallow with CJS. Good morning, guys. Good morning, guys. Hey, just real quick, Larry, you know, congratulations. You know, best of luck in your future. And it's been, you know, we've covered you for 12 years, I think. So, you know, appreciate all your assistance. And, you know, congratulate you and hopefully have a great future. Just a few questions. High level, you know, obviously really a great margin performance this quarter. I realize, you know, revenue, obviously trends are improving probably a little faster than planned. Come back up some of these costs, but, you know, your EBITDA margin, I think over 18% this quarter. I think it's a couple hundred bits better than I think any other quarter in the last 10 years.

9:56 So I'm just trying to grapple with or, you know, maybe a high-class problem, but just figure out is there, you know, some of this sustainable? You know, maybe you can give us a little more color on that. Yeah, you know, we haven't really hit a steady state yet, 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, a visit per clinic per day of where we were before, and that's not where we want to be. We want to grow, and we want to have same-store growth again. But, you know, we've held costs down and the ops team has done a great job along with our partners keeping their finger on that pulse.

10:46 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 in positions where we've really stretched folks pretty far, including here in Houston. Give us another quarter to see how we settle in. Volume has started to level off, so in the past few weeks we've leveled out a little bit, up a little bit. and maybe down a percent here or there, but pretty steady still. So we'll just have to see. Our goal is to keep as much cost out as we reasonably can to provide the service that we need to provide both to our patients and to our partners.

11:40 I know you didn't give us any store sale number last quarter. Can you maybe just share a little bit this quarter, just to give us a rough idea? It sounds like sales on a standard basis were down, I guess, single digits in some, mid-single digits or even less, maybe? Honestly, we didn't generate it for the second and third quarter because it really doesn't mean a lot. Yes, they're down. I mean, we've been focusing on trends, and it's been marching upwards. So I'm sure in the fourth quarter we'll get that data again. But like I said, we didn't even generate it this quarter. It's almost... I don't really need anything. Right. What about visits? I know you mentioned visits. I think they improved to 27 a day on average in September.

12:25 I think you mentioned the year-over-year, it was down one. Was that for the full quarter or was that for September? That was for the month of September. So it's still down a little bit. Okay. So just looking at volumes, they're still down probably somewhere in the 5%-ish range. plus or minus. That's about right. Right. Okay. Great. Thanks. I appreciate it. In September this year, it was 27.2 visits per day for clinic. In September 2019, it was 28.2. So it was down one visit. Got it. Great. Excellent. I appreciate that call. Thanks so much. Thanks, Larry. Your next question comes from the line of Brian Takula with Jefferies. Morning, Brian. Hey, good morning. This is Jack Slevin on for Brian.

13:15 Congrats on a great quarter, guys. I guess right now I just want to kind of project out a little further, get your thoughts on 2021 and how we should be thinking about that, particularly as it relates to further M&A opportunities from some of the announcements you've made recently. Yeah. You know, I can't yet predict what 2021 is going to look like in a lot of respects, but I can tell you that we're going to be active on the development front. We are right now. I would expect we'll continue to be, in some cases, a couple of these early deals were deals that we had ready to go or were in the process when this all happened back in March when the pandemic started. And so those are moving forward again. And we're active in other areas as well.

14:06 So I would expect 21... to be a good normal. I mean, we'll see, but we're going to start out the year and you're going to see activity. I would expect 2021 to be a good solid year for us on the acquisition front. On the DeNovo development side, we're moving forward again with those. We're being very selective still, as 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 is literally in the best place I've ever seen it in 17 years.

14:57 We have over $100 million in unused availability under our credit line, and so I don't think there's anybody in the sector that is 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 new stuff. I expect that the valuations will be sub-peak, peak being late 2019. Not enough data yet to give you any worthwhile color on exactly how that's going to look as we go forward.

15:45 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 pre-COVID levels 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's different across geographies? It is different across geographies, so we have some markets that are back, fully back, and a little bit better than fully back. We have other markets that are still off, you know, somewhere between 5% and 10%. Again, kind of following the pattern that we had originally with the Northeast being more greatly affected, the West being maybe in a little better shape, Some parts in the middle of the country, the south central portion of the country also in pretty good shape.

16:39 So very literally, you know, state by state, market by market almost. Aggregation gets us to within about 5% right now. And, you know, we're still hopeful we can move market share and get the rest of the way there. Got it. That's it for me. Thanks, guys. Your next question comes from the line of Matt LaRue with William Blair. Hey, Matt. Hi, good morning. This is Dan Lauer on for Matt LaRue. Thanks for taking my questions. I wanted to first ask, it looks like you sold your interest in one closed clinic in the third quarter. So can you give us a sense for how many of your closed clinics you've reopened to date and then maybe how we should be thinking about the recovery ramp in these reopened clinics?

17:28 Thank you. I think we've reopened 30, and we've closed 40, of which I don't know how many we've sold. We've sold about 15 of those 40, I think, and that's an off-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 they're, you know, returning soon. They're in the portfolio with our aggregate numbers, but they're returning toward normal like the other facilities. Okay, great. Thank you. And then just a quick follow-up. Do you expect, you know, maybe any additional clinic closures in the fourth quarter with the ongoing case surge?

18:17 I don't think what we'll have in the fourth quarter will be related to any case surge necessarily. If we have leases that come due and other things, I don't want to get stuck into this perspective that because we closed more than average that we won't ever have closures again. We're going to have closures periodically as it makes sense to do that, and I don't know yet whether we'll have any in the fourth quarter. We're not worried about the case. Let me say it differently. I don't like the case. The virus number is increasing. But we're dealing with that. And we've dealt with it so far pretty effectively.

19:05 And so I don't expect a major, you know, announcement of any sort. No. We have 550 clinics open today. You know, we might close a few because we pretty much every quarter we close five. You know, a few, but we're also opening new de novo clinics again and really at a pretty good pace. So, I don't see the clinic count changing significantly other than for acquisitions. Okay, great. Yeah, thank you. And then just lastly shifting over to the IIP segment. You noted that it's currently running slightly below pre-COVID levels compared to around 90% in July.

19:50 So can you give us a sense for as employees are returning to work and maybe the case surge this summer, how that impacted recovery, and then how you're looking at a return to pre-COVID levels and margin performance in the fourth quarter? Yeah, so IAP has held up really well. They didn't drop nearly as much as the PT business. And at the same time, their recovery has been just, you know, rather flat through the period. So what happened early on was a couple large customers, our largest in fact, got busier and were willing to shift people into more of their facilities. So that helped us through that early period.

20:36 Things have returned to normal for the most part in that regard, meaning those people have been redeployed into the original customers and things have settled back down to normal. Our opportunity and our challenge is going to be to continue to add new contracts as we go forward in this still not yet normal period of time. Like we did in PT, we 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 a young company.

21:21 We're growing. We still need to add some resources, particularly on the technology side for infrastructure. So I see margins getting pretty close back to where they were before, maybe a little better, but close to where they were. I think in the PT business, we'll have a little bit more margin gap there because we're much bigger and scale just allows for a little bit more effectively on that side. Dave, thanks so much. As a reminder, if you want to ask a question, please press star one. Your next question is from the line of Mitra Romgopal with Sidoti. Yes. Hi. Good morning. Thanks for taking the questions. First, congratulations on a great quarter.

22:09 Just wanted to follow up a little on some of the benefits you're seeing as a result of COVID. I think last time you talked about the telehealth platform. That's something you're really able to start taking a little advantage of. And I was wondering if some of the business is going to be transitioned there more on a permanent basis and kind of drive some efficiencies going forward for you. Yeah, so Mitra Telehealth has been important for us, particularly early in the pandemic. And it's going to continue to be an offering that's available to our patients. We do not have a perspective where we want to transition in clinic business to telehealth. That's not something that we're interested in doing.

22:55 And what I mean by that is I would rather see the patients in the clinic if they can come. Now, the reality is with or without a pandemic, there are times and instances when patients can't get there and would normally cancel an appointment. And for those times, telehealth will become an important way to, you know, to get a visit in. Maybe somebody has, you know, the kids are stuck at school and they can't, they're not going to be able to make it time. We can connect with them on a telehealth basis. So it's going to be another service offering as well. We're piloting an in-home or at-work solution.

23:40 We're getting ready to kick that off in the Houston marketplace, and so we'll see how that goes. We're trying to afford our patients, you know, the most flexible opportunity. Our preference is going to continue to be to serve people in the clinic, but when we can't, we'll have other venues and ways to do that. Okay, no, that's great. I know you talked about, you know, some of the costs coming back, obviously, especially I would expect them. Things like salaries, etc. But on the rent side, I noticed a significant reduction there relative to 1Q and even a year ago. And I was wondering if some of the benefits you're seeing there, if they're really more short-term in nature, or you think you can sustain that going forward?

24:25 It's closed clinics. Okay, that's changed. And as a percentage, it's coming down because the clinics you closed are running at lower revenue levels, so their rent utilities as a percentage of their revenue was higher. Yep. Okay, okay, no, that's great, thanks. And then I was wondering if you have any update for us on the reimbursement front. Obviously, with the proposed cut for next year, I don't know if anything new on that front for you. Yeah, we do. Well, first of all, there isn't anything that's 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 fund.

25:10 among and across a variety of different specialties, including a variety of different specialties that are doctor-based. You know, we've got good support from the Hospital Association, other groups like that. So we have a vehicle. The vehicle would provide for a two-year stay in terms of, you know, no payment reduction at all. But, you know, with the election, we're kind of in a holding period probably for at least another week until we see what comes out of the election and we're able to get, you know, see if we can get final traction before we kick off the year shortly here in another couple months. Okay, I know that's fair. And I think, Chris, on the M&A front, you sound a little more bullish in terms of maybe some opportunities, especially in your term, et cetera.

26:02 I was just wondering... If that is a result of, you know, maybe COVID having 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've been doing. Yeah, I would say Larry's earlier comments, you know, I think should resonate with everybody. Just the fact that we're so under levered and others potentially maybe not in as good a shape, but We're a different solution for people. We're a place where people can come and stay for the next decade and really invest in their company with a lot of resources.

26:47 The people that we're attracting aren't afraid. They've done well through COVID. The people that we're having conversations with expect that they will see in their markets some opportunities to to pick up some small providers, single site, maybe onesie-twosie kind of clinics. And so we continue to attract those folks. And I don't think this is going to be a run-from scenario, although I have talked to plenty of people who say if this were to happen again, they'd sure rather have a big partner to carry some of the load. And so I do think it will move people directionally. for considering a different solution, a partner potentially, and I think we're the company that people look to when they think about partnership.

27:43 I think we'll have plenty of opportunities. Okay, that sounds good. And again, that's it for me on questions, but again, Larry, I'd like to wish you all the best in retirement. It's been great 15-plus years working with you, and you've done a tremendous job. You're incredible in terms of Thank you. Thanks Richard. Your next question is from the line of Mike Potevsky with Barrington Research. Good morning. Good morning guys. First of all, let me join everybody else. Larry, thank you so much. I met you guys first in 2003 down in Houston, and it's been a great ride, Larry. You're truly one of the class guys and class CFOs I've ever met, so thank you for that.

28:31 Thanks. I guess just sort of circling back in terms of the proposed Medicare cut, Chris, do you have any view that either just sort of the prolonged difficulties with COVID and particularly the, you know, elevation of infections now, I mean, does any of that make it more likely that you guys may get some relief as an industry or, you know... either a delayed implementation or a gradual implementation. I mean, do you feel like any of that matters or not really? I think it does matter. I think everybody we've talked to who has become aware of this issue, this big reduction issue, and when I talk about everybody, I mean, you know, the folks in Congress, nobody has said, well, that makes sense. You know, why are you bothering me with with this cut. It makes perfect sense. Nobody has said that.

29:33 Everybody has said, this is crazy. This shouldn't be happening. Number one, we're, you know, a low-cost solution that helps prevent a lot of more expensive care. Number two, it's in the middle of a massive pandemic. We've stayed open throughout to get people back to work and back to the economy. So, you know, thankfully, our congressmen and women, they understand that. It's a matter of getting time and attention to aggregate the resources now that hopefully the election will conclude shortly that we can get this done between now and year end. I mean, neither side is focused on a balanced budget. And in the midst of a recession, do you want to do a rate cut that's going to force you to have to lay off people?

30:25 In the swings that have occurred with CMS minus Minus 9 to plus 14 or 15 in any given year, it doesn't make operational or logistical or even fiscal sense to swing that high and that low. There's got to be a rationalization of that at some point in time. Providers can't absorb that year in and year out. Gotcha. Okay, great. and then I got somehow I got bumped off the call for five minutes just disconnected but so this may have been covered forgive if it has and if you covered expansively I can just read your answer in the transcript but did you speak at all to the what you feel is the sustainability I mean 400 you know 400 basis point gross margin improvement you know it's tremendous and just I guess any commentary around how sustainable that is, what percentage of that you might think is sustainable over time. If you've spoken expansively, forgive me, I was off for five minutes.

31:32 Thanks. Mike, look at the transcript. Chris spoke to both the PT margins and the industrial injury prevention. And after this call, if you want to talk about some more, you're welcome to phone me. Yeah, Mike, you can give either one of us a call. We can catch you up. Okay. Thank you very much. As a reminder, if you want to ask a question, please press star 1 on your telephone keypad. Your next question is from the line of Richard Sokol with Legacy Capital. Hey, guys. Thank you. Great quarter. I hate to not beat a dead horse, but I just want to go back to the Medicare cuts. And I just want to know if the law is not changed between now and year end, any way you can quantify for us what that would do to revenues 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.

32:29 So the easy question first, most of our insurance, commercial insurances are not tied to a percent of Medicare. They're negotiated separately and individually, so not tied on that front. On the revenue and earnings We withdrew guidance. 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 budgets with and without the cut. Obviously, your staffing would be different with the cut, and you'd do other things to mitigate its impact. But I mean, it would be purely speculative now. And again, you don't know what's going to happen with patient volumes related to COVID, so I think it's too early to tell you what next year's going to look like.

33:18 I think we do have a good chance of getting this cut beat back. I'm still optimistic. I'm also, practically speaking, you know, we've managed the business in a way this year that's gotten us 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 look for opportunities, maybe leasing rate opportunities and other things as the market's a little disconnected right now. But as Larry said, I think it's a little too early yet for us to begin to speculate. I think it was in 2013. Was that when we had the 10% Medicare rate cut?

34:04 What year was it? Do you remember, Glenn? There's 13 or 14. Yeah. So in 13, there was a surprise 10% rate cut that came out in January. And so it took us a few quarters to offset that. But I think 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 want to ask a question, please press star followed by the number one on your telephone keypad. Again, that's star one. At this time, sir, there are no further questions.

34:58 Okay. Well, listen, thank you, everybody, for your time and attention today. If you have additional questions, please feel free to reach out to Larry or I. We hope you have a great day. Stay safe. Thank you. Bye now.