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U.S. Physical Therapy, Inc. (NYSE:USPH)

Q4 2008 Earnings Call

March 05, 2009 10:30 AM ET

Executives

Christopher J. Reading - Chief Executive Officer and President

Lawrance W. McAfee - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Jon C. Bates - Vice President and Controller

Glenn D. McDowell - Chief Operating Officer

Analysts

Lawrence Solow - CJS Securities

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Michael Petusky - Noble Financial Group

Mitra Ramgopal - Sidoti & Company LLC

Operator

Good morning. My name is Laurie and I will be your conference operator. At this time, I'd like to welcome everyone to the U.S. Physical Therapy Fourth Quarter and Year-End 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now turn the call over to Chris Reading, Chief Executive Officer. Please go ahead sir.

Christopher J. Reading

Good morning everyone. This is Chris Reading, President and CEO of U.S. Physical Therapy. I'd like to welcome you this morning to our fourth quarter and year-end earnings release call.

With me here in Houston, I have Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, Chief Operating Officer; and Jon Bates, our Vice President and Controller.

Before we begin today, I would like to ask Jon to cover a brief disclosure. Jon?

All right. We're going to do the disclosure again momentarily. Before, I ask Larry to cover the financials in detail, I would like to spend a few minutes talking about where we have come for the year. I will discuss the most recent quarter and then we'll look ahead to what we see for our company in 2009.

First for the year, 2009 in spite of the difficulties faced in the second half of the year by many companies, 2009 was a very good year for us, in fact a record year. Let me share with you some of the highlights. Our volume grew by 20% this year fueled through most of the year by strong same-store growth.

Our revenues grew 23.7% or over 36 million, but that revenue growth was assisted by a very solid net rate per visit improvement over $98 a visit. Another driving factor in our growth came through our development focus. For the year we added a very nice complement of facilities completing four acquisitions, which have performed very well for us. Additionally and importantly our de novo program brought an additional 16 facilities to our growing network of partnership based facilities.

Earlier this week in a Board meeting we discussed and reviewed the performance of all of our deals to-date. Christmas (ph) selection process, where we look to find supremely high quality practices with a great standard of care coupled with an ownership group possessing integrity, a passion for our business, and significant drive for growth, and continued success.

Typically a group who believes not only on what they have built, but in the partnership that we are looking to create not for them to retain a significant ownership position in the business. Because of these factors, we have done very well with our acquired clinics.

We're paying competitive market rates. Our growth in these facilities has produced aggregate and aggregate adjustment purchase price of about 4.7 times. On the de novo side of our development program, we've been very focused and deliberate staying away from small markets and going forward with our... only the strongest of partners.

In the past two quarters, the activity generated by our partner recruiting team has surfaced some very high quality partners, and we expect to have a good year with respect to our de novo openings.

Shifting gears a bit, our company continues to throw a lot... a great deal of cash. Even after acquiring four very nice sized acquisitions, investing in new equipment technology that has assisted us in achieving our solid net rate improvement in an otherwise flat pricing environment, we closed the year... we finished the year with a net debt of less than $4 million. We have a very clean balance sheet, we've worked very hard to use our cash and our capital to invest in the company in ways that will increase our cash flow.

For the year EBITDA grew 20% at a time when many companies in our sector suffered significant decline. For the year, we grew same-store revenues by almost 5% and that revenue... that same-store growth occurred through visits as well as net rate per visit expansion.

In the fourth quarter, we felt a late quarter tightening in our same-store growth with the first reported quarterly decline in same-store of 1.6%. Part of that came from an early winter storm that affected much of our central region and impacted us by approximately 1,900 visits or a little bit more than a $0.01 in earnings for the quarter.

Part of that decline came in the form of a modest blunting of referrals secondary I think to the economy and also to the extent that we were in the midst of the holiday season, and people are having to make hard choices in terms of how to spend their money.

As a part of our look forward, we've made the decision to accelerate the closing of a few more facilities in the quarter, which impacted us net which I believe by more than a $0.01 in EPS.

While these are difficult decisions, we felt like we had positioned the company well to not only make it through these difficult times, but to take advantage of some of the opportunities that we believe will be created as a result.

We feel that in the next year or so we can continually grow our network of facilities, our EPS, spend our cash flow along maintaining an excellent balance sheet. We've guided this growth in our release this morning in a range of $0.84 to $0.90 in EPS excluding acquisitions and share repurchase.

While this is a reduction from prior consensus estimates, we now feel that the economy will certainly have some impact on our business, which has an element of discretionary behavior attached to it. With that said, we think there is opportunity as well. We have a strong vibrant network of quality partner providers who have been... with whom we have been working closely to move market share from our competition.

Many of these competitors are caught up in the difficulties surrounding the current economic uncertainties and with a strong cash and balance position, we believe that we can focus in and move market share. We continue to invest in new tools, technology and service offerings at a time when many of our competitors are looking to trim their sales and hunker down.

We've expanded our sales team by adding more part-time sales people all of whom are very focused on moving market share. I will add that given the state of the general employment in the economy, we are finding some supremely capable sales people who are hungry to work and join a company with the stability and growth opportunities that we have.

We are in the middle of rolling out a direct-to-consumer marketing and sales focused program around several of our key niche clinical programs. This marketing tool kit which includes all the resources necessary for any of our partners to advertise for and host these community based seminars have been very well received by our partners. We began this initiative with our OsteoArthritis Centers of America program and it is been very successful and we expect to roll it out across the company.

In closing, let me say that we continue to expect good things from our team relative to our overall performance despite of these very challenging economic times. I think we are well positioned to come through this period in a very strong fashion to continue to grow using the strength of our balance sheet, to grow organically, as well as through acquisitions at a time when many providers will not make it through this difficult market cycle.

Our team is as energized and excited to move the ball as I've seen them since we arrived now a little more than five years ago. Our team is stronger than we have ever been and we will work to deliver solid performance in this upcoming period.

With that I'd like to turn it over to Larry to review in more detail specifics of our financial performance for the year as well as the quarter. Larry?

Lawrance W. McAfee

How about Jon, before we proceed, why don't you go ahead and read the disclaimer?

Jon C. Bates

Sure. Thanks, Larry. This presentation contains forward-looking statements which involve certain risks and uncertainties. And these forward-looking statements are based on the current, 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.

Lawrance W. McAfee

Thanks, Jon. I'll go ahead and go over our 2008 annual results as well as for the fourth quarter. For the year of 2008, net revenue increased 24% to 188 million due to a 20% increase in patient visits, and an increase in our average net rate per visit of just under 2% or $98.05. Total clinic operating cost from continuing operations were 76.5% in net revenues compared to 75.4 in the previous year.

Clinic salaries and related costs as a percentage of revenues were 53.4% in 2008 versus 52.2 in 2007. Rent, clinic supplies, contract labor, and other costs from continuing operations as a percentage of revenues declined to 21.2% from 21.5.

Our provision for doubtful accounts was 1.6% of revenue in 2008, as compared to 1.7 in 2007. In 2008, the company incurred closure costs totaling 432,000 pre-tax. Our corporate office costs were 10.8% of revenue in 2008 versus 11.4 in 2007.

As Chris mentioned, our adjusted EBITDA that amount tripled to USPH and net of minority interest increased 20% in 2008 to $24.5 million.

Net income rose 14.5% from 8.7 million in 2007 to over 10 million in 2008, and our earnings per share increased to $0.83 from $0.75. For the year, our same-store revenues increased 4.6%. That includes the same-store visit increase, as well as an increase in our average net rate per visit.

During 2008, the company opened 16 new de novo facilities, acquired 14 clinics, closed 18, and sold one for a net addition of real fit (ph) clinics bringing our total up to 360 clinics as of year-end 2008.

I'll now review the fourth quarter. Net revenues from continuing operations increased 8% to 48 million due to a 6% increase in patient visits and an increase in average net revenue per visit of almost 2% from 98 to 68.

Severe winter storms in the Northeast and Midwest as Chris mentioned are estimated to

have negatively impact our revenues and pre-tax profits by more than at least a $170,000. Total clinic operating costs were 77.6% of revenues as compared to 76.5% in the year earlier quarter. Clinic salaries and related costs were 53.7 versus 53.5.

Rent, clinic supplies, contract labor, and other costs were 21.5 as compared to 21.2. Our provision for doubtful accounts was slightly higher in the fourth quarter running at 1.8%. The 2008 fourth quarter includes the conversion cost of 284,000 related to ten clinics we closed, and I'll talk about that some more in a minute.

Corporate office costs were 10.6% of revenues in the recent quarter. Our net income was 2.2 million as compared to 2.486 million a year earlier, EPS was 19 versus 21.

Same-store revenues decreased 1.6%. The visits declined 1.9, while the revenue increased slightly. As further described in the press release, during the fourth quarter 2008 in light of the recession in conjunction with our annual budgeting process, we made the decision to be more aggressive with our cutting cost and closing marginal clinics.

Ten clinics were closed during the quarter. We do not currently anticipate additional significant clinic closures and we'll not... just taken all the closed clinic year-to-date and we haven't closed any clinics thus far in 2009.

Excluding clinic closure costs, the company's adjusted diluted earnings per share would have been $0.20 in the fourth quarter and $0.85 for the year, so within guidance.

The company achieved strong net cash flow not only during the year, but particularly in the fourth quarter despite making two acquisitions during the period for cash consideration of 7.6 million. We finished the year with 10.1 million in cash, a debt balance of only13.8 million. So a net indebtedness debt plus cash is only 3.7 million. The average age of the company's receivables was reduced by 7% in 2008 decreasing from an average of 55 days as of the end of 2007 to 51 days as of December 31, 2008.

In the press release today, we issued guidance for the year 2009 in a range of earnings of approximately $10.1 million to $10.9 million or $0.84 to $0.90 per share. I want to note that these figures are based on anticipated patient volumes, reimbursement levels and they exclude the possible effect of future acquisitions or share repurchases.

I would note that a number of the analysis now include additional acquisitions and their estimates, so that when you compare this number to the consensus estimate, you have to realize that you're looking at apples-to-oranges.

We don't plan on issuing quarterly guidance or update this annual guidance unless there is material future development such as acquisitions et cetera.

Christopher J. Reading

Thanks Larry. I think at this point operator We'll go ahead and I am sure we have a number of people that have specific questions. So let's open up the line and we'll be happy to handle those questions.

Question-and-Answer Session

Operator

(Operators Instructions). Your first question comes from the line of Larry Solow of CJS Securities.

Christopher Reading

Hi, Larry.

Lawrence Solow - CJS Securities

Hi, guys, how is it going. Just a question, first of all on the Q4 would it be fair to say that visits would have been nearly flat if we kind of exclude the weather impact and I believe there was also one to two less business days in 2008 versus 2007?

Christopher Reading

In terms of the business days, let me just check here... December--

Lawrance McAfee

There is no question we had more severe weather in the fourth quarter than we had in '07, that was certainly an impact, and we tried to quantify that number.

Lawrence Solow - CJS Securities

Okay. And then--

Christopher Reading

On the business days question Larry, I think had we not had, hadn't this early winter storm, which hit us in the central part of the country where we have some really big partnerships. We did come in at I think at consensus.

Lawrance McAfee

Yeah.

Lawrence Solow - CJS Securities

You're right. And then, it's actually nice to see that your revenue per visit actually went up sequentially despite the environment. Just looking out into 2009 and I don't expect an exact answer, but do you kind of expect in your guidance, does that kind of imply that visits and revenue per patient visit kind of remain kind of where they are at right now or any more color on that?

Christopher Reading

Yeah, I'll give you a little bit color. In terms of visits where they're at, I think visits will continue to grow. I think we will see some potential blunting. Part of the guidance is really related to the uncertainty that we expect just given the progression of the economy.

Lawrence Solow - CJS Securities

Right.

Christopher Reading

We have discussed in the past and past releases that we really hadn't felt any effect. I think we began to feel some effect late in the fourth quarter. We don't know whether that will be stable, or whether there is a potential for that to accelerate. I think that in terms of what we've been working on in preparation for some of these things. I'm pretty sure. I might stop sort of saying I'm certain, but I'm very sure that we'll be able to get some net revenue per visit expansion this year. But there are a number of things the team has been working on hard, and we've gotten traction with those and we've seen some early good or early results. In terms of what the visits will do, what same-store looks like, I'm not sure.

Lawrence Solow - CJS Securities

Right. Okay, and then just looking at, and I would say reimbursement is somewhat of an issue. What do you think, I guess in 2009, you're pretty well locked up on the Medicare side, but you have any comments on what the new regime in Washington, and the stimulus package, and some people are worried that Obama will come harder on healthcare reimbursement, and do you have any thoughts on that?

Christopher Reading

Yeah, I'll give you a few and they are personal views more than anything and I still need to study some of the things that have just recently come out over the last week or so. But I think in general what we're hearing, and what I believe is that the statutory adjustment it's in place for 2010 and will happen. I don't think the government can afford to take particularly at the level of family practice, and the stability, or instability that exists today on the family practice.

Side of things where much of healthcare is delivered as an entry point. I don't think that sector can take a big hit right now. And I think that would kick things into more of an unstable fashion, will put more pressure on hospitals and ERs and I don't think... I think the administration recognizes that. We expect in '10 is more of a flat pricing environment. Honestly right now--

Lawrence Solow - CJS Securities

Okay.

Christopher Reading

I'll like to change.

Lawrence Solow - CJS Securities

Okay, that's fine. And then just last question and I'll move on. It sounds like your de novo development outlook it actually looks very strong. What do you see on the acquisition front. You guys still I know been talking to a lot of partners, potential partners and have things slowed or things kind of remained steady. How to look at it?

Christopher Reading

We continue to talk to a lot of people. I think that this craziness that we're all going through right now in the world has caused everybody to try to take a little a pause and figure out, what it means for them short and long-term. So I would tell you that I don't have anything that's imminent to close anytime in the next few months.

We're in discussion with a number of people. We're going to be very deliberate about what we do in terms of making sure that if we do anything its very high quality with predictable growth even in a tough environment. So we'll just have to see how the year progresses.

Lawrance McAfee

Yeah, I mean we've never had a acquisition pipeline per se. We've been opportunistic, always in discussions with a number of groups. When there is an opportunity, we pursue it. Certainly multiples being paid for acquisitions have come down. Our acquisitions have actually outperformed their pro formas and a cash flow, as you can see from our debt balances, they have been excellent.

Lawrence Solow - CJS Securities

Okay. And do you have a number for or kind of expectations for de novo. All the more do you expect it to be higher in '09 and '08 or similar?

Christopher Reading

Yeah, I'll expect it to be modestly higher.

Lawrence Solow - CJS Securities

Okay, great.

Christopher Reading

We'll actually have a good start to the year right now in terms of what we have on the books potentially not all those are open yet, but we're off to a good running start so far for the year with some really good folks.

Lawrence Solow - CJS Securities

Great, excellent. Okay, thanks a lot.

Christopher Reading

Thank you.

Operator

Your next question comes from the line of Rob Hawkins of Stifel Nicolaus.

Christopher Reading

Hey, Rob.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Hi. Good morning, folks. On the guidance, I'm still little fuzzy, so if maybe I could say back and you guys correct me where I've got it based on what you're seeing Larry is you're seeing that you are showing some growth in volumes. Are you expecting some growth in volumes but it to be blunted, which maybe I should take as kind of flat, or showed very low growth and that you kind of expect kind of flat pricing. Am I thinking about that right?

Lawrance McAfee

I think we have modest growth in visits not as much as normal and then our--

Christopher Reading

I think in pricing we expect to be up a little bit.

Lawrance McAfee

Yeah, but we didn't really, probably honestly we didn't put a lot of that in the budget.

Christopher Reading

Yeah.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Okay.

Lawrance McAfee

And I'll tell you year-to-date and that rate is running ahead of what we budgeted.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

You just took my next question I was thinking, how you're doing. What metrics do you have to share so far. I mean are the volumes picking up a little bit so far in 2009?

Lawrance McAfee

In January, we got hurt by some more storms, but February turned out pretty good.

Christopher Reading

Yes, February has been a solid month with the visits progressing week-to-week through the months of February and February ended up looking like it was very solid.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

And that seems to jive with what I'm hearing from other folks. One just kind of administrative question. The ten clinics and how you accounted for that this quarter. It sounds to me like most of the charge was in the bad debt line. I'm just trying to make sure, how to normalize some of your expense in those margins?

Christopher Reading

No, it's our interest in bad debt.

Lawrance McAfee

Yeah, separate lines for clinic closure cost and most of it relates to writing off lease hold improvements and that kind of stuff.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Was it in a separate line?

Lawrance McAfee

Yeah, a separate line item.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Yeah, I'm sorry.

Christopher Reading

Those were costs.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Okay. But I guess I thought that was, I thought I guess I'm confused. I thought there was 435 not 280.

Lawrance McAfee

Annual number and there is a quarterly number, but our closure costs normally involve things like what's the remaining rent due on a lease, unamortized leasehold improvements that you have to write off. Certainly sometimes--

Christopher Reading

Any severance or separations.

Lawrance McAfee

Yeah, severance, separations. Certainly sometimes you write-off the receivables. Well, we do that every month, whether it's an open or closed clinic, we're constantly evaluating the receivables.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

And, but there was some usual pieces to it or?

Lawrance McAfee

We just closed more clinics. We factored a budget and looked at the economy and we said where we have some clinics or maybe close one clinic that was profitable and we said some of these clinics are on the margin, their leases are coming up for renewal in 2009. They're small, there is not lot of upside, they were singles, most of them were single location partnerships. While we threw them, with them in this kind of an economic environment.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

No, I completely understand and I'm not second guessing anything you guys have done here. Just trying to understand maybe what a normalized margin run-rate is as you've been running a little bit higher, the fourth quarter is a bit of a dip. I'm suspecting there will be some recovery here coming forward. Am I thinking about that, right?

Lawrance McAfee

Well, the fourth quarter is a slower quarter for us. So you're going to see on average a lower number of patients per day per clinic in the fourth quarter. That is automatically going to affect your margins, because you're going to have less revenue per person. We also did some, we did do some cost cutting in some of those, some of that expenses in--

Robert Hawkins - Stifel Nicolaus & Company, Inc.

All right. And then the second quarter I know is usually probably one of your best quarters, because you kind of get back to the weakened warriors in the spring so forth. Then just kind of shifting gears, can you give us a little more color on the direct marketing program. I know you've taken some of this stuff from the OsteoArthritis Centers of America, but how is that going. How do you envision that rolling out over the next few quarters?

Christopher Reading

Yeah, let me just touch on it briefly and then I'll ask Glenn to comment. The group that we're working with our partners in the OA center, the guys at RMG, they have done this around the country for a while, it's new to us or it has been new to us until recently. Our OA centers is we do the traditional doctor-to-doctor marketing that we do it all of our other PT related facilities.

In addition to that we do a direct-to-consumer marketing or we advertise for and then subsequently host a seminar related to a particular service offering in the case of our OA centers obviously it has to do with typically a specific joint knee or shoulder osteoarthritis. You know current treatment updates and new emerging thing and the way we have done this in a very systematic way as we have created a program that looks to track every single aspect, the warranties that we do and measure those results.

And I'll just give you some rough numbers a typical ad that we'll run will turn out anywhere from 50 to 100 people if we have an offsite venue, a smaller number but more of them if we do it on an onsite venue, 20 to 30 people and we have a capture rate of somewhere between 20 and 40% of those people will become patient.

We began to roll this out to our PT centers, we're in the front-end of that, our partners have decided about it. And we think it's a way that kind of jump ahead a little bit and it maybe help to offset some of the economic drags that we expect that we may feel.

Glenn, any other things you want to say about that?

Glenn McDowell

Just to add to it. I mean essentially what we have done is taken what we have learnt how to do in the osteoarthritis side, we have modified it for a smaller venue in our outpatient rehab clinics. We've rolled it out to our partners and in the process of implementing a number of these steps with the templates that we've created. If we were probably to take the first and second quarter for us to get it out there, get it implemented and have people start using it to see how we need to tweak it. But we have high expectations for how it will work and there is a lot of enthusiasm forward.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

Of that the newspapers, doctors' offices, or offshore (ph) how is that--?

Glenn McDowell

Typically, most of these will be done through new paper advertisings which will then create a community based seminar. Some of this is done through physician offices on a smaller scale but that's how the majority gets done is from a newspaper standpoint in small local communities.

But we expect it to be able to bring in some key positions to kind of co-brand and co-market this which we think will help to continue strengthen relationships and drive business not only to us but to give them an opportunity as well which we think will have a downstream effect.

Lawrance McAfee

Yeah, as Glenn mentioned we're in the early states of this so we're not saying it's going to be a big pick up with volume in Q1or Q2.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

As you track and measured I mean you got any sense of what the IR is or payback on the expense outlaid for the ads and people to do this seminar and all that kind of stuff?

Christopher Reading

Yeah, we can tell you what it is for the OA side. I mean typically on the osteoarthritis side we'll get a return from a percentage standpoint about 30 to 40% because the cost outlay is very minimal when you look at the number of patients that we get from that standpoint. So we get a very good return on the investment from advertising and running a seminar. We'd have... we don't have enough experience in the outpatient rehab side yet to be all to give you any kind of return.

Robert Hawkins - Stifel Nicolaus & Company, Inc.

All right, that's helpful; it's good to hear. All right, I'll jump back in the queue. Thank you.

Christopher Reading

Thanks Rob.

Operator

Your next question comes from the line of Mike Petusky of Noble Research.

Christopher Reading

Hey, Mike.

Michael Petusky - Noble Financial Group

Hey, good morning. A couple of quick housekeeping, payer mix, sales reps and coverage; visits per FTE, you guys have some of that?

Lawrance McAfee

Yeah, the payer mix was as follows private pay was 25%, managed care 34%, workers comp side 15%, Medicare 22%, and other 4%.

Glenn McDowell

On the sales reps side we've increased the number of sales reps to 57 total for the company covering 230 locations we've added a number of part-time reps to, in markets where we have increased density to see we've enough, we can impact from that standpoint, visit per FTE we actually jumped up in the fourth quarter of '08 to 11.05; which is a nice improvement and we hope to you all keep it there.

Michael Petusky - Noble Financial Group

And just in terms of I guess all it's going on and including in that I guess the stock price any change Larry and how you guys are thinking about your use of free cash I know your guidance excludes acquisition on share repurchase but any change in your thinking there?

Lawrance McAfee

No, as we said we remain opportunistic in terms of looking at acquisitions. We just had Board meetings for last two days. We discussed at length a possible share repurchase, our present credit agreement precludes that we would have to amend it but at certain place then we'll consider.

Michael Petusky - Noble Financial Group

Okay. So should I take that as there hasn't been a change or because in last couple--

Lawrance McAfee

No change yet because we couldn't do it if we wanted to. Our credit agreement preclude share repurchases so we would have to amend the credit agreement first.

Christopher Reading

I think what you'll look at, what you'll see Mike is we'll take an opportunity to invest in the company because we believe that there is plenty of opportunity and we'll get back to you when we have specifics of that.

Michael Petusky - Noble Financial Group

Do you guys in terms of your guidance have you actually made an assumption as far as unemployment or where that peaks out or do you guys not drill down to that level in terms of providing guidance?

Christopher Reading

No we have seen solid settlements. I think there has been a lot that's gone into this, I mean that--

Lawrance McAfee

We don't have an economist on this staff. We present the economy would be poor this year, that it would have some impact on us. We kind of looked at what's happened in the past. We present this slower growth rate, we think we're going to have increased earnings this year despite but the markets doing today, we're actually fairly bullish.

Michael Petusky - Noble Financial Group

All right, okay. I think that's all I have got. Thanks.

Christopher Reading

Okay, Mike.

Operator

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

Mitra Ramgopal - Sidoti & Company LLC

Yes, hi, good morning, guys. As you look to cut cost with that sort of flow in also and how aggressive you are with regards to hiring sales reps?

Christopher Reading

No, actually the cost cutting and the sales reps probably kind of balanced each other. We think that the sales reps will obviously help to drive referrals and ultimately volume. The cost cutting that we've done has been. We've done a number of cost cutting programs here at the corporate office with some fairly good cost savings that we expect through the year.

We continue to do a quarter-to-quarter review of our facility performance, our staffing particularly in an area of non-licensed, and other costs. We've gone to our vendors. We're viewing leases and we've been aggressive about lease renegotiations, so we have a number of different areas. We don't expect to cut sales reps though.

Glenn McDowell

And when we look at sales reps, you have to keep in mind that again in our models with sales reps we have a very low base. They make most of their money in commission. So for us to add additional sales reps is not a huge salary impact. Basically even if they would kill us or if they do well, they can make money, if they don't, it doesn't cost us a lot.

Mitra Ramgopal - Sidoti & Company LLC

Okay. And coming back to the guidance. It seems like you expect something from the OA venture in the second half of the year, or is it more of 2010 story?

Lawrance McAfee

Now, we projected that for the year the first '08 clinic would be possible, it's still right in there, its volumes have picked up nicely recently. So we expect, sometimes in the second and third quarter, the first clinic will pass over to a breakeven level. But the OA group as a whole will report a loss as we open additional clinics just like with our PT clinics they tend to lose money in the first six to 12 months.

Mitra Ramgopal - Sidoti & Company LLC

Okay. And would you reporting that as a separate line item?

Lawrance McAfee

I mean is a fraction of our business. Its very, very small, still on the experimental stage. Its not a separate business.

Mitra Ramgopal - Sidoti & Company LLC

Okay. And with regards to the ten clinics that were closed I know if you could give us a sense of the average each of those clinics or if they are around back when you say when you had a big closure in late '06?

Christopher Reading

I think, Mitra it's a range how hard we average age (ph) with this right now. I think we had some--

Glenn McDowell

I would guess probably in the five or six year range almost all the clinics that we closed leases were coming out for renewal which means they would have been in the five year range or greater probably so--

Christopher Reading

And we had few clinics for our partners had made the decision to... because of the challenges they were having and lack of additional profitability that was coming to do other thing. So like most of our closures it was very... but I think it was the right decision.

Mitra Ramgopal - Sidoti & Company LLC

Okay. And with regards to the share repurchases what's the current authorization in terms of buyback?

Lawrance McAfee

It doesn't matter because we can't do any under our credit agreement we have like 50,000 under our programs from several years ago. But we would have to go back to the Board get authorization for a new share repurchase program. If we were to do it we'd have to amend the credit agreement, if we could do it and then we would make an announcement as to how much we were authorized to repurchase. So when and if we do a share repurchase program its helped and that we'll put out there to the whole world.

Mitra Ramgopal - Sidoti & Company LLC

Okay, thanks. And finally, coming back with the recession and as it relates to the workers comp area, are you seeing any particular softness there or it's just been holding up?

Christopher Reading

Obviously, on the employment side there is some concern but we haven't seen any particular change in our payer mix, our payer mix system is very steady.

Lawrance McAfee

It was... while maybe declined 1% from 16% in Q1 and Q2 to 15% in Q3 and Q4. But not really a major shift in terms of visit surcharges.

Glenn McDowell

And I will agree with that I mean where it will continue to soft and based upon the lay-offs that are going on that possibly could happen but right now we are not seeing any significant change in our work comp mix.

Mitra Ramgopal - Sidoti & Company LLC

Okay. Thanks again guys.

Operator

Your next question comes from the line of Zonnie Zebecca (ph) of Longbow Research.

Unidentified Analyst

Good morning. And thank you for taking my question. First, I'd like to ask is a little bit more color if you would about some of the things per metrics for fourth quarter. Do you find any change in terms of visits per patients will that fall in full year to same-store level or was it a mix of on an overall patients visiting the clinic are you seeing patients refraining from coming in for prescription for therapy?

Christopher Reading

In the fourth quarter we didn't really see any significant impact in durations or visit for referral as of yet. We do think that, that maybe a essential factor moving forward just based upon where the economy is and peoples looking at discretionary cash. But we are hopeful with the clinical focus that we are putting out there and trying to bring value to patient care that will be a minimal factor for us moving forward.

Unidentified Analyst

Okay. Are you planning to be... have you seen any pressure from any repairs, if example, workers comp or in Medicaid in some of the states where Medicaid budgets are being a little bit pensioned (ph) is that having an impact at all in terms of patients not being able to coming for as many visits as they require?

Christopher Reading

No, impact at all on either workers comp or Medicaid. You have to remember that Medicaid is a very, very, very small part of our business; I'd say less than 1%. So there's been little to no impact.

Unidentified Analyst

Okay. Thank you. It's very helpful. Next I want to ask about your contract with Ford, have you seen any changes in some of the expectations for that?

Christopher Reading

No, I mean we continue to... it continues to underperform based upon what our original projections were. But we haven't seen any significant changes in the volumes that we've been having in the fourth quarter versus the second and third quarter. So at this point we expect it continue to run about where its been running.

Glenn McDowell

That said Michigan has been very strong for us over the last couple of years.

Lawrance McAfee

Well the number of visits we get from Ford as a total... as a percentage of our total visits it's de minimis, it's not a big percentage.

Unidentified Analyst

Okay. And then you are going to set up, entertain that's coming here in terms of providing additional volumes for Michigan do you?

Christopher Reading

No, it's not a significant factor to our volumes in Michigan. So no, I don't expect to see any significant changes with it.

Unidentified Analyst

Okay. And then finally, on the ten clinics that you closed was there a sort of regional impact there in terms of where they were located or is that across the portfolio?

Christopher Reading

Across the portfolio.

Unidentified Analyst

Okay. Okay, then just one final question on the guidance you use said that osteoarthritis clinics you are not expecting to have any profitability there really as a group and so 2010 and beyond so your guidance do that include any additional extension of your osteoarthritis clinics in terms of cost to opening new centers; anything on those lines?

Christopher Reading

Yes, all the above.

Unidentified Analyst

All the above. Okay, great. Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Robert Verdi of Sykler Capital (ph).

Unidentified Analyst

Hi, good morning.

Christopher Reading

Good morning.

Unidentified Analyst

Quick clarification on your guidance; if you would I believe you said that you expect total visits to grow in '09 but could you sort of explain what the range of assumptions for same-store visits that you're thinking about are?

Lawrance McAfee

We only look at that way to be honest. We looked at... same-store visits are visits at a clinic that are say year older. In our total visits you are including the new clinics we opened in 2008.

Christopher Reading

As well as acquired facility--

Lawrance McAfee

We look at it as total visits whether it's same-store or clinic that's ramping up because it was opened the previous year. So I'll be answering we all measure on an historical basis but we don't project it, we look at total visits.

Unidentified Analyst

Okay, thanks.

Operator

At this time there are no further questions. Mr. Reading are there any final remark?

Christopher Reading

Yes, thank you all for listening. Thank you for tuning in this morning. Larry and I are available today and for the reminder of the week to answer any additional questions that you may have. We appreciate your support and have a very best of the week. Thank you.

Operator

Thank you. This does conclude today's U.S. Physical Therapy fourth quarter and year 2008 earnings release conference call. You may now disconnect.

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