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US Physical Therapy Inc (USPH) Q2 2019 Earnings Call Transcript

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US Physical Therapy Inc (NYSE: USPH)
Q2 2019 Earnings Call
Aug 8, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the U.S. Physical Therapy Second Quarter 2019 Earnings Conference Call. At this time, I would like to inform all participants that your lines will be in a listen-only mode. After speakers' remarks, there will be a question-and-answer period.

[Operator Instructions]

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

Christopher J. Reading -- Chief Executive Officer

Thank you. Good morning and welcome everyone to U.S. Physical Therapy's second quarter and year-to-date 2019 earnings call. With me on the call, Larry Mcafee, our Executive Vice President and Chief Financial Officer, Glenn McDowell and Graham Reeve, our Chief Operating Officers, Jon Bates, our Vice President and Controller, and Rick Binstein, our Vice President, General Counsel.

Before we begin our comments on the quarter and the year, we need to cover a brief disclosure statement. John?

Jon Bates -- Vice President of Accounting & Controller

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.

Christopher J. Reading -- Chief Executive Officer

Thanks, Jon. I'll go ahead and start with some color on the quarter and year-to-date periods. Second quarter was another strong quarter for us and a very good start overall for the year. Our net revenue grew 9.8% for the quarter on strong same-store revenue in the PT space of 5.4%, along with healthy growth overall across the platform in visits per clinic per day. Revenue from our industrial injury prevention business increased by 64%. You can 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 what we have done thus far. The Briotix deal was finalized in late February of 2017. Since that time, we've bolted on two terrific deals; one in the spring of 2018 and another just a few months ago. Our most recent injury prevention acquisition has helped to broaden our service offerings to include post-offer employment testing, which we refer to as POET, which is a core and very refined part of BTE's business as well as on-site medical clinics. Both of these programs, we ultimately expect will benefit our continued growth, service and organic expansion within our injury prevention business.

On the physical therapy side, we have continued to make progress in key focus areas. Notably, visits per clinic per day growth was a healthy plus 1% [Phonetic] from prior year and also from the first quarter of this year. Our partners and their staff, our sales group and the ops team have worked in concert with respect to new patient and overall relationship development, which is underpinned by great care and 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 and boosted our healthy industrial injury prevention margins by 480 basis points in the quarter.

Shifting briefly to development. 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. So we expect to continue to do what we've always done in the past, to grow internally with improvement in the existing business, add organic openings, which ramp up over time and give us more market presence targeted specifically to our best-performing markets, and 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 enjoy very much.

We remain focused on achieving our core objectives of 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?

Lawrance W. McAfee -- Chief Financial Officer

Okay. I'll start with the quarter and then talk about the first half. In 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 for physical therapy increased 7% to $113.4 million, as patient visits increased 6% to over a million, 1,058,000 and our net rate per visit increased by $1 to $107.16. Of note is that most of that revenue increase came from older Mature Clinics. Our revenue from management contracts was flat for both periods. As Chris mentioned, natural injury prevention business, revenue increased 64% to $10.3 million due to significant internal growth plus the April acquisition.

We did a much better job in terms of controlling cost with margin increases during the period. Total operating costs were 75.1% versus 76.4% a 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 18.2% as compared to 19.3% a year ago.

The gross profit for the second quarter grew by 15.7% to $31.4 million. The gross profit percentage increased by 130 basis points to 24.9%. The PT 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%. Probably, as I noted in the press release, the thing that I found the most impressive, is 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 and operating income as a percentage of revenue increased by 90 basis points to 15.7%.

As previously disclosed, on June 30, the company sold its 50% interest in one physical therapy partnership to the Group's 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 $600,000, $100,000 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 $0.81 per share; a record quarter. And that compares to $0.73 a year ago. Our 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 0.8%.

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, most of that coming from Mature Clinics. Industrial injury prevention business revenue grew by 54.5%. Our operating costs were reduced to 76% in 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 to 18.6% as compared to 19.7%.

Our gross profit for the first half of the year grew by 15.4% to $58.1 million. The gross profit percentage increased by 150 basis points to 24% versus 22.5% 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. Our 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 of the year was 25.8%. For the six months, our operating results increased 14.7% to $18.8 million or $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% to $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 per share to $2.97 per share. Our original early -- our original earnings guidance issued in March was $2.76 to $2.85. We update in April when we did the BTE acquisition to $2.82 to $2.92. And again raised it today by $0.05 on both the low- and high-ends of the range. Our third quarter dividend of $0.30 per share will be paid on September 13. On July 1, the company announced that it planned to increase the dividend from what had been $0.27 in the first and second quarters to $0.30 in the third quarter. At $0.30 in the third quarter represents an increase of 30% from the $0.23 paid in the third quarter last year.

Christopher J. Reading -- Chief Executive Officer

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brian Tanquilut of Jefferies.

Brian Tanquilut -- Jefferies -- Analyst

Hey, good morning, guys and congratulations. Good quarter. Hey, 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 -- on your ability to sustain that, what's driving that kind of like market share gains? Or is there any initiatives that is helping push that because it's obviously above your historical average?

Christopher J. Reading -- Chief Executive Officer

Everybody is working together well. Partners are doing great job. Obviously, sales team is as well, ops folks are doing well in the support side. So there is not what I would call any new initiatives that are driving that. We're just focused and it's working.

Brian Tanquilut -- Jefferies -- Analyst

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 -- or does that squeeze you in the PTA side?

Christopher J. Reading -- Chief Executive Officer

Can you repeat the last part, does that what on the PTA side?

On the PTA. I mean, 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 PTAs and lighten up on PT. So how does that dynamic help or hurt your staffing -- your ability to staff and your costs going forward?

Yes. I think there have been times in the past where when the big swings in home health and other areas related to employment that it's helped or hurt us tighten the market or open the market up. So I can't tell you that we've recognized any of that yet. I'm fully -- I am pleased and I mentioned this to the Board when we had the audit committee call the other day that given the fact that the labor market is pretty good right now and PPs are coming out with a fair amount of debt, I think the group's done a really good job in terms of cost management so far this year. So I want to give everybody a shout out on that side.

But I think long term, what you'll see with us, particularly a few years out as we expect CMS to pay us differentially for PPAs versus PTs, less for PTAs, is we'll do the opposite. We'll probably offload some PPAs, not completely, but where we need to and we'll probably go with more and we have that right now, more of a PT-centric employment structure. So, I think that goes well for us, if what you say plays out in home health.

Brian Tanquilut -- Jefferies -- Analyst

That is awesome. And then I guess my last question, during the quarter, you divested one practice or one-to-one partnership. If you don't mind just walking us through a little bit of background there and how -- it looks like some of the metrics -- it sounds like revenue per unit and business per unit are up. Was that a factor in driving those? And what was also the driver of the decision to sell to the partners in that specific instance?

Christopher J. Reading -- Chief Executive Officer

Yes. First of all, the deal didn't finalize until the last day of the quarter and so there was no...

Brian Tanquilut -- Jefferies -- Analyst

Okay.

Christopher J. Reading -- Chief Executive Officer

Any of the metrics in the quarter. The -- I need to limit a little bit what I can say about it. What I will say is we kept several key parts of that market in that original deal. We had three minority partners come with us. They are doing well. In fact, they are in Houston this week. And that's going very well and that has gone well and it was an opportunity on both sides to focus where we can -- where we believe we can make progress and sell some assets that were desired to be acquired on the other side that were doing a tremendous amount for us. So, I can't say a whole lot more than that.

Brian Tanquilut -- Jefferies -- Analyst

Okay. No worries. I guess 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.

Lawrance W. McAfee -- Chief Financial Officer

Minority interest moves around quarter-to-quarter just mean some of our larger partnerships were doing better, which is not unusual. The rent and utilities, some of that's a reduction in payroll cost too for contract employees as we've done a better job of limiting PRNs and whatnot.

Brian Tanquilut -- Jefferies -- Analyst

All right, guys. Thanks, guys. Congrats again.

Christopher J. Reading -- Chief Executive Officer

Thanks, Brian.

Operator

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

Larry Solow -- CJS Securities -- Analyst

Good morning. Thanks, guys. I echo those thoughts, really strong quarter in actually all your metrics. So congrats on that. Chris, any feel on how the industry is doing? Clearly, you guys are outperforming in a lot of company-specific initiatives, but with record low unemployment, I imagine that's got to be helping everybody. So, any feel how the industry has been, maybe just not this year, but over the last few years trend and why?

Christopher J. Reading -- Chief Executive Officer

The only company that we get really an opportunity to look at other than just having a talk over [Indecipherable] with some of the other CEOs and people aren't sharing in a deep way their own right statistics, the only company we get to look at is Select [Phonetic] and they've done well, they've done fine. So, I would just point you to them as maybe a broad comparable. I really don't have a sense for how everybody else is doing. I think we're kind of focused on what we need to do and how we can control what we can control and not too worried about everybody else.

Larry Solow -- CJS Securities -- Analyst

Yes. Understood. How about the pricing both on a same-store basis and overall? I think when we started the year, we thought it would be sort of flat, you had a little uptick in Q1 and a bigger uptick this quarter. Is that more units being build, more efficiencies or better mix or what's sort of driving that better pricing?

Christopher J. Reading -- Chief Executive Officer

Units are flat. I wouldn't focus as much on the second quarter pricing, maybe on the year-to-date pricing on a blend basis is kind of where we think we are. We move around a little bit quarter-to-quarter but the Group's worked hard to squeeze out some gains, but I don't think it's coming from uptick in the utilization.

Larry Solow -- CJS Securities -- Analyst

Okay. How about the strength in the industry? The injury prevention business is really impressive. And I realize sort of separate from your core PT business. But does that bleed in, does that -- with such impressive growth, is there any sort of cross upselling or other opportunities that sort of help the core business?

Christopher J. Reading -- Chief Executive Officer

Yes. Not yet. There can be. The BTE deal, particularly with the post-offer testing, we pledged our current network when we did that deal that we keep that intact and we wouldn't change that, we haven't and we don't expect to. We do expect that our facilities, our USPh facilities as we grow that business forward will be a large benefactor where we haven't in the past been a contracted party with BTE prior to the deal. So, I think there's opportunities there.

We'll begin in some markets to see treatment-related opportunity. We initially play that very slow and we kept those companies kind of firewall from each other because we didn't want anybody to think that's why we had bought it, just to suck over the injury business. Our Group does a really good job on the prevention side and therefore there 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 Briotix group. So, I just think it works well and it's complementary. I don't think it's been a big impact or driver on any of our numbers on the PT side today.

Lawrance W. McAfee -- Chief Financial Officer

Just to explain the post-offer valuation tests are actually performed in physical therapy clinics and that was the majority of BTE's business. So they actually subcontracted the couple of hundred, 300.

Christopher J. Reading -- Chief Executive Officer

Yes, it's a bunch.

Lawrance W. McAfee -- Chief Financial Officer

300 clinics and we -- as Chris said and we said, we keep that network in place, but as we get new contracts in other markets, we will be able to direct some of that business to USPh clinics.

Larry Solow -- CJS Securities -- Analyst

Got you. Fair enough. And then just last question. In terms of the -- you mentioned, Chris, lots of opportunities for acquisitions, could we assume both sides of the business? Or -- I know you've done a couple of nice size good tuck-ins on industrial piece. Is that pretty much -- obviously, the opportunities will -- they will come, but are you more focused on the PT side or both?

Christopher J. Reading -- Chief Executive Officer

Lot of activity on the PT side right now. We've got to digest what we've just done and I think that's first order of business. And we did that last year when we did it -- when we did [Indecipherable] in the spring. And so, our foot -- our sales team within that whole group has just done including the newly acquired company has just done 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 we'll continue to look for opportunities there. Right now, it's more PT focus.

Larry Solow -- CJS Securities -- Analyst

Great. Thanks. Appreciate it, guys.

Christopher J. Reading -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Matt Larew from William Blair.

Matt Larew -- William Blair -- Analyst

Good morning. Larry, first wanted to ask a question on the cost side. A number of service providers had a little lighter cost in terms of health benefits and internal employees' costs in the first half of the year. Was there anything timing related that drove some of the cost containment? Do you think might to pick up or change in the back half of the year?

Lawrance W. McAfee -- Chief Financial Officer

No. We didn't get any benefit from healthcare costs for our own employees when factor claims were higher than we expected. So I think it was really -- it was controlling, the contract labor is probably the biggest swing factor [Indecipherable].

Matt Larew -- William Blair -- Analyst

Yes. Okay. And then Chris, you alluded to most of the focus for the near-term being on the PT 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 it geographic extension? At what point here do you think you have the scale to more aggressively acquire larger national contracts or opportunities? Just I guess think -- help us think beyond this year in terms of how you're looking at building that business.

Christopher J. Reading -- Chief Executive Officer

Yes. Well, just to give some perspective and I don't have the exact number, but we have done some pretty good-sized acquisitions and have had a national presence. We're now in all 50 states in that business in on-site, in over a 1,000 locations within companies of all sizes, Fortune 100 down to regional companies. And so, there is a massive organic opportunity there as we've added, particularly this most recent acquisition to cross-sell some of those new products and services, both directions, between our regional Briotix company and most recently the BTE company. And that really hasn't started yet. So we're still in the digestion process and continued growth within all of those product lines. There is going to be continued opportunity to bolt-on other companies whether they're -- 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 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. I don't know yet. What I do know is, we have a good team that's doing a great job and we'll continue to look at what makes sense as we go forward.

Matt Larew -- William Blair -- Analyst

Okay. Thanks. And then the last one would be again, Chris alluded to the PT -- development opportunities on the PT side ramping up in the back half of the year. Do you think -- relative to the first half of the year where you did not complete as many detail of deals, is this at all timeline extensions from new competition in terms of these partnerships? Or [Indecipherable] 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?

Christopher J. Reading -- Chief Executive Officer

I think as much as anything, we're lumpy, and we have some ebb and flow 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 some of the other parts of your question, I'm not really sure I followed all of it, but it's just busy as -- we're busy with meetings and discussions as we've been a long time and whether that continue in some indefinite way or that's just season we're in right now, I don't really know. But it's good right now, and I expect we'll get some things done.

Matt Larew -- William Blair -- Analyst

Okay. Thanks.

Operator

[Operator Instructions] Our next question comes from the line of Mitra Ramgopal of Sidoti.

Christopher J. Reading -- Chief Executive Officer

Hey, Mitra.

Mitra Ramgopal -- Sidoti -- Analyst

Yes. I -- how are you, Chris. Just wanted to follow-up a little in terms of, it seems like you're seeing some heightened activity on the de novo side and I was just wondering if it's more case of potential partners approaching you or are you just doing a good job also identifying some opportunities that you might not have seen before?

Christopher J. Reading -- Chief Executive Officer

Yes. No, on the de novo side, just to be clear, we're not doing any new de novo partnerships from the ground-up. We stopped that probably four, five years ago. The de novo activity, all of that, 100% of it is additional satellite opportunities within predominantly our most successful partnerships, our largest partnerships around the country. And so, those take a little while to develop and develop staff and find a location and get things going. But the second half of the year will be a busy half but that is as a result of staying focused on in the first half of the year. They just take all the time to come to fruition.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. No, that's great, thanks for clearing that up. And also on the same-store, again tremendous numbers. I think the best we've seen. And I was just curious in terms of driving that, is it the case also of the sales force investments you've made? And do you need to do anything more on that front drive even forward against?

Christopher J. Reading -- Chief Executive Officer

I think that's just -- we continue to look for opportunity, right? And so whether that's a fractional person or full-time person or just the right person. But that's ongoing. That's not anything new or different than it was a year or two ago. It's working well right now and we'll continue to try to keep that -- keep that ball rolling forward.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. No, that's great. And Larry, just on the, when you look at potential acquisitions, especially on the IIP side or versus the traditional PT side, I was just curious in terms of valuations or differences between the two segments?

Lawrance W. McAfee -- Chief Financial Officer

Well, we've only done three deals, but they were all whole but almost exactly the same multiple.

Christopher J. Reading -- Chief Executive Officer

In a lower multiple than we've paid for PT.

Lawrance W. McAfee -- Chief Financial Officer

For PT, yes.

Mitra Ramgopal -- Sidoti -- Analyst

Okay.

Christopher J. Reading -- Chief Executive Officer

Whether that continues or not, I don't know. But that's how it's been so far.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. No, that's great. And then finally, Larry, I don't know if you have the payor mix handy?

Lawrance W. McAfee -- Chief Financial Officer

Yes. So, private managed care, then 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 more Medicaid, though in many states we don't take Medicaid. And then other was 7.6%.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks again for taking the questions. Great quarter.

Christopher J. Reading -- Chief Executive Officer

Thanks, Mitra.

Operator

[Operator Instructions] I'm showing now further questions at this time. I'd like to turn the floor back over to management for any additional or closing remarks.

Christopher J. Reading -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Christopher J. Reading -- Chief Executive Officer

Jon Bates -- Vice President of Accounting & Controller

Lawrance W. McAfee -- Chief Financial Officer

Brian Tanquilut -- Jefferies -- Analyst

Larry Solow -- CJS Securities -- Analyst

Matt Larew -- William Blair -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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