PHC F3Q07 (Qtr End 3/31/07) Earnings Call Transcript

TRANSCRIPT SPONSOR

PHC Inc.
F3Q07 Earnings Call
May 15, 2007 4:30pm ET

Executives

Bruce Shear – CEO and President
Paula Wurts – CFO, Principal Accounting Officer, Treasurer, Controller, and Clerk
Robert Boswell – Senior Vice President
Nelson Luvall – Executive Vice President

Analysts

Darren Lehrich - Deutsche Bank
Robert Damron - 21st Century Equities
Daniel Rambert - Camden Partners

Presentation

Operator

Good day ladies and gentlemen, and welcome to the third quarter, 2007 Pioneer Behavioral conference call. My name is Shaun Polley, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the call over to Mr. Brett Maas of Hayden Communications. Please proceed sir.

Brett Maas, Hayden Communications

Thank you. Good afternoon and thanks to everyone for joining us today for the PHC Inc. fiscal 2007, third quarter conference call. Earnings were released after the close of trading today, and if anyone needs a copy of the release, please feel free to contact my office at 843-272-4653 or by e-mail to [e-mail].

Our call today will be hosted by Bruce Shear, President and Chief Executive Officer, and Paula Wurts, the company’s Chief Financial Officer. Following management’s discussion, there will be a formal Q&A session open to those participants on the call. Before we get started, I’m going to review the proper statement.

Statements in this conference call, that are not descriptions of historical facts, are forward looking statements that are subject to risks and uncertainties. Words such as expects, intends, believes, plans, anticipates, approximately, and likely also identify forward looking statements.

All forward looking statements are based on current facts and analysis. Actual results may differ materially from those currently anticipated due to a number of factors, including, but not limited to, history of operating losses, anticipated future losses, competition, future capital needs, the need for market acceptance dependent upon third parties, disruption of vital infrastructure, disruption of services, and due to natural disaster.

All forwarding looking statements are made pursuant to the Securities Litigation Reform Act of 1995. Additional information and factors that may affect the business and financial results of PHC can be found in the filings of the company with the Securities and Exchange Commission.

At this time, I would like to turn the call over to Bruce who will provide highlights of the third quarter, discuss the company’s accomplishments, and specific [indiscernible, 2:03] operating divisions, and the ongoing growth [indiscernible, 2:05], particularly in the Las Vegas Metro area.

We will then turn the call over to Paula, who will provide a summary of the financials. Bruce will then conclude with the outlook before turning the call over to answer questions. Bruce, congratulations on reporting the highest quarterly revenues in your company’s history. The floor is now yours.

TRANSCRIPT SPONSOR PHC, Inc. (ticker: PHC) operates companies that provide inpatient and outpatient behavioral health care services, clinical research and Internet- and telephonic-based referral services. The companies contract with national insurance companies, government payors, and major transportation and gaming companies, among others, to provide such services. For more information, please visit www.phc-inc.com. To sponsor a Seeking Alpha transcript click here.

Bruce Shear

Thanks Brett, and good afternoon and thank you all for joining us. The third quarter marks another productive quarter where we built upon our second quarter success and reported record revenue. We continued our investment in the growth initiatives in the Las Vegas area. In the second quarter, the majority of this was related to our Seven Hills Behavioral Hospital in Henderson, Nevada.

During the third fiscal quarter, we shifted the majority of our spending to the new BHO contract, the 10 year, $80 million contract with Health Plan of Nevada, which many of you remember is the largest contract in our company’s history.

We are making tremendous progress in our efforts to build a platform to support the next growth phase of the company. Following some significant investments in the Seven Hills Project this quarter we have now begun construction. The initial permitting and the details are behind us and complete, and the construction is well underway. We continue to project early calendar 2008 as the date this hospital will open.

Meanwhile, we continue to reap the benefits of the various growth initiatives we completed during fiscal 2006. Particularly related to our presence at the Detroit Behavioral Institute, our bed counts remain at all time highs, patient sensors remain strong, and our patient base continues to increase sequentially quarter over quarter. This has resulted in record revenues of $12.3 million, an increase of 23.8% compared to the prior year third quarter and sequentially versus the second fiscal quarter this current year.

Regarding our pharmaceutical research division, Pivotal Research, we continue to see a slow down in contracts and revenues, but this is not a surprise. We knew this business was one that fluctuates quarter to quarter and year to year. We do have a growing back log there, and we are already seeing a surge in sales during our fiscal fourth quarter.

While we’re still early, we think the statement of our business may be turning around. We remain confident in this portion of our business, as new studies by the major pharmaceutical players in the behavioral healthcare field are proliferating, with roughly 40% of all new drugs in the clinical trials right now targeted towards behavioral healthcare and there is more than a million in news studies that were approved.

We just recently opened our phase one new in-patient unit at Pivotal, which could have the overnight capacity of up to fifteen patients. We believe this will be a new and significant revenue producer, once the new phase one study flow has come online. But currently, Pivotal contributed a loss of over $300,000 to the quarter and this shortfall, along with the initial startup fees for the Amex essentially was the entire difference of our profit compared to the previous year.

We believe Pivotal’s performance is already starting to swing back in a positive direction, and I’m confident this progress will be evident in our fourth quarter results. I’m now going to turn the floor over to Paula Wurts, our CFO, to discuss the financial details.

Paula Wurts

Thanks Bruce. Let’s turn to the financial results for the third fiscal quarter. Total net revenue from operations increased 23.8% to $12.3 million for the three months ended on March 31, 2007, from $10 million for the three months ended on March 31, 2006. The components of our revenue include a net patient care revenue increase of 37.4% to $10 million for the third quarter from $7.3 million.

This increase in revenue is primarily due to the addition of the behavioral healthcare options contract at Harmony, and twenty adjudicated juvenile beds at Detroit Behavioral Institute, which helped to create a 3.4% increase in patient days for the three months over the same period last year.

Revenue from pharmaceutical studies decreased 23.6% to $1.2 million for the third quarter. I should mention that on a sequential basis, this segment saw a 33.2% increase in top line revenue. The year over year decrease, as Bruce mentioned, is due to the typical nature of the pharmaceutical research business. Where the size and number of clinical trials starts and stops changes monthly. Contract support services revenue provided by Well Place increased by less than 1% to 1.1 million, essentially unchanged compared to the second quarter and a year ago third quarter.

The total operating expenses for the quarter increased 32.1% to $11.7 million from $8.8 million in the third quarter of last year. The bulk of this increase included expenses related to ramping up of new programs and service associated with contracts signed during the previous three quarters. More specifically, our operating expenses consisted of the following: notable increases in operating expenses were 31.5% rise in patient care expenses, and 8.9% increase in pharmaceutical related patient care expenses, and a 9.8% increase in the cost of contract support services.

Increases in administrative expenses of approximately 52.7% were due to several factors, including $65,000 in non-recurring expenses relating to our listing on the American Stock Exchange and approximately $100,000 in spending related to the startup of our new BHO contract. We believe these expenses are now behind us, and thus far in the fourth quarter our profitability has improved. Specifically, this spending was related to the training and double coverage of staff required to get the project up to speed.

Our provision for doubtful accounts increased 27.7% to $426,812 to the third quarter as bad debt as the percentage of revenues actually declined for the same period.

Income from operations for the quarter was $638,155, down 42.7% from 1.1 million reported for the same period last year. The company’s provision for income taxes was $202,924 for the quarter, versus $45,427 in the third quarter last year, due to the company’s net operating loss carry forwards. Please note that this doubling over our income tax provision reflects a tax rate of 39%, which now that we’ve recorded our net operating loss carry forwards, is our effective tax rate.

Net income for the three months was $315,779, or two cents per basic and fully diluted share, compared to net income of $950,549, or five cents per share last year. Sequentially, our net income increased 21% compared to the second quarter, due to higher revenues.

Total net receivables from patient care for the third quarter of 2007 were $7 million, compared to 6.9 million reported as of June 30, 2006. Overall days outstanding or day sales outstanding for patient care receivables improved to 71 days.

Allowance for doubtful accounts were 9% higher at approximately $3.4 million for the end of our fiscal year. This number reflects the situation with our billing software, has been resolved, and we expect a reserve requirement as a percentage of accounts receivable to normalize.

Looking further into the balance sheet, we ended the quarter with $4.3 million in cash, up significantly from 1.8 million as of June 30, 2006, primarily due to the equity financing in December.

Our current ratio was two to one as of March 31st and our stockholders equity increased 25.4% to $16.9 million, compared to $13.5 million as of June 30, 2006. Looking at the debt side of balance sheet, we continue to pay down debt, trimming our draw down on revolving credit line by $347,000, and we’ve paid down $872,000 of our long term debt since June 30, 2006.

Now moving to the nine month period. Total net revenue from operations increased 17.1% to $32.3 million for the nine month period ended March 31, 2007, from $27.6 million in the last year’s same period. Led by a 26.3% increase in patient care revenue, which was 25.9 million compared to 20.5 million for the last year’s nine month period. Contract support services revenues provided by Well Place increased 5.6% to $3.4 million for the nine month, from 3.2 million last year.

Revenue from pharmaceutical studies decreased 21.1% to 3.1 million for the period from 3.9 million last year. Total operating expenses for the first six months increased 20.5% to $30.5 million, from $25.3 in the same period last year. Included in the increase was a 27.4% increase in patient care expenses to $13.2 million, and a 21.3% increase in cost of contract support services to $2.3 million, partially offset by a 16.4% decrease in the company’s provision for doubtful accounts.

Income from operations for the nine month period was $1.8 million, down 20.6% from the $2.3 million in the same period last year. The company’s provision for income taxes was $547,829 for the period versus $205,655 for the nine month period last year, due to recording of our net operating loss carry forwards at the end of fiscal 2006, resulting in our expense tax rate increase to the full corporate tax rate of 39%, as I detailed previously in the call.

Net income for the nine months was $860,150 or five cents per basic and four cents per fully diluted share, based on 19 million basic and 19.6 million fully diluted shares, compared to net income of $1.7 million or nine cents per basic and fully diluted shares, based on 18.1 million per basic and 19.2 million diluted shares for the last year’s nine month period. With that out of the way, I’ll now turn the floor back to Bruce.

Bruce Shear

Now that you’ve all memorized those numbers I guess we’ll move on. Thanks Paula. As previously discussed, we’re focused on building a strong, diversified presence in the Las Vegas market, to match a similar presence in the Detroit market. Patient care represented by the Detroit Behavioral Institute in Michigan, and soon by our Seven Hills Facility in Nevada, represents the majority of our new revenues.

For the last decade, our Harmony Healthcare Subsidiary has been creating a name for itself in the Southern Nevada region, contracting with hotels, resorts, casinos, and other major employers to perform internet and telephonic support, including things like their employers systems hotlines.

Today we contract with 21 separate properties in the Las Vegas area for this type of service. During this period in Nevada, we have built many relationships in this region, and these relationships will serve us well now that we’re adding two major revenue centers to our Nevada operations.

The first is the contract which we signed with BHO. This is a ten year $80 million contract, by far the largest in our company’s history and an opportunity to leverage our expertise at providing crisis management and mental health services, as well as further building the relationships that we have formed in the last decade.

The Seven Hills Behavioral Hospital will take this to another level. I’ve discussed the Manford chemical dependency and in-patient mental health services on prior calls, so I won’t get into that level of detail here. I will say that as this community grows and it is growing, mental health facilities are often the last priority for local governments who are focused on schools, hospitals, infrastructure, based on the demographics of this region in terms of age, financial status, and other factors, chemical dependency is a significant issue, and not surprising, our experience in this community and our conversations with local healthcare providers, have reinforced this perception. Clearly there is a need for what our Seven Hills Hospital will provide, and we can’t wait to open our doors.

Finally, we continue to evaluate the opportunities for our Pivotal Research subsidiary and will likely proceed on these options, as pivotal segment returns to consistent growth and profitability. As I mentioned on the pervious call, our Smoking Cessation contract was renewed and we are currently evaluating plans to further expand this contract, as well as other contracts in the government arena. This area has extraordinary growth potential, and we are very, very focused on growing this portion of our Well Placed division.

In summary, by early in calendar ’08, we’ll have a total bed count system-wide of 290 beds, compared to 180 for the fiscal 2006, and 131 for fiscal 2005, representing compounded annual growth of 61% and 30% respectively. In the last two quarters, we’ve accelerated our revenue growth, and our top line performance is on track.

I believe we can maintain this 20% year over year growth for the next few quarters until our BHO contract and the hospital begin to significantly contribute further to revenues. Our profitability is accelerating in the current quarter and I believe this trend will continue as well.

Looking forward, we are reiterating our expectations of 20 to 25% revenue growth for calendar 2007 and more rapid growth in fiscal 2008, supported entirely by organic growth. I’d like to thank you all for joining the call today and it’s very, very clear that our plan is coming together.

We’re very excited about it. The projects that we’ve been working on are real. They’re in place. Construction is ongoing. Contracts are moving in the right direction. So, we really feel like our platform is ready now, and we’re just excited about rolling it out over the next one to two years. At this point, what I’d like to do is open it up for some questions. Operator, if there are any questions, please open it up.

Question-and-Answer-Session

Operator

Yes sir. (Operator Instructions). And your first question comes from the line of Darren Lehrich of Deutsche Bank. Please proceed sir.

Darren Lehrich - Deutsche Bank

Hey, good afternoon. Just a couple of housekeeping RN questions; what was the patient day count in the most recent quarter here? And, if you can provide any detail around your in-patient and out-patient revenues on the patient care line that would be helpful. And then Bruce, if you could just remind us the quarterly progression of your beds and service, going forward, getting you to 290 beds in ’08. Thanks.

Bruce Shear

Okay, well, remember the last fiscal year we added the additional twenty adjudicated girl’s bed in Michigan and then that would be followed up with the sixty acute psychiatric beds in Nevada. So, that will get us to the 290 bed number. I don’t have the patient counts in front of me, Darren. I’d be happy to get them to you later, we’re just actually filing the queue as we speak, and the patient days are there, so I’d be happy to get that to you at a further time.

Darren Lehrich - Deutsche Bank

Okay great. And the beds and service at the end of this period was 200 you said?

Bruce Shear

180 beds.

Darren Lehrich - Deutsche Bank

180, okay.

Bruce Shear

Right, and what I did miss, I did miss the third phase of the Michigan beds which are yet to come online, too, which will take us up to the additional fifty to sixty beds to get us up to the 290. I’m sorry I missed that.

Darren Lehrich - Deutsche Bank

Okay, perfect.

Operator

And your next question comes from the line of Robert Damron of 21st Century Equities. Please proceed sir.

Robert Damron - 21st Century Equities

Good afternoon. Nice quarter Bruce. If you could just give us more color on when these hospitals open, both the Vegas and then the expansion in Detroit, do you expect the expanded hospital in Detroit to open first, and then Vegas after that?

Bruce Shear

No. Vegas, as we’ve said all along, will open first. We’re anticipating January of ’08. Construction is ongoing. I’m actually on a plane out there tomorrow morning and we’ve anticipated that the additional beds in Michigan will be later in calendar ’08.

Robert Damron - 21st Century Equities

Okay and do you expect one time costs associated with getting these new facilities up and running, or will most of these costs be capitalized?

Bruce Shear

Well some costs are capitalized, but we are having a lot of ongoing costs, and have for our Seven Hills Hospital and we did have a lot of startup costs for this large contract with BHO. Both of those are pretty much behind. The BHO contract is well under way, but we had quite a bit of that in the first calendar quarter of ’08 or our third ’07, our third fiscal quarter.

The Michigan phase up of the next beds will not have the kind of opening cost that we’ve seen out in Las Vegas because our infrastructure is pretty much more in place there now.

Robert Damron - 21st Century Equities

Okay and maybe just give a little bit of color on what kind of incremental margin, or margin targets, that you think the company could achieve if we looked out twelve to eighteen months from now, once the new hospitals and the new facilities are up and running, and the BHO contract is fully operational. Where do you think the profitability of the company can go?

Bruce Shear

Well, I think we’ve talked all along that we would see some synergies and some leveraging and our goal was to probably improve our net income before taxes margined by a couple hundred basis points. I still feel that that is something that is doable. Looking at our peers, I think it’s conceivable that we could see 12%, maybe even 13% net before taxes on a gross revenue standpoint, which would be a 200 to 300 basis point improvement in the margins we’ve been experiencing historically. So we will see some good leverage in that regard.

Robert Damron - 21st Century Equities

Okay and just this last question from me. Can you talk a little bit more about your pipeline of new research drugs? You sound like you’re a little bit more optimistic about that business. And then, you mentioned about fifteen new beds for phase one trials. Just talk a little bit more about the pipeline and the expectations for that business.

Bruce Shear

Well, as I said all along that the problem with the clinical research business is that it’s lumpy and I think that everyone in that industry would say the same. What we’ve done is, because of the pharm. co.’s requests, we opened up a new in-patient overnight phase one unit. That’s the highest end of the study site, the highest revenue per day and the highest potential margin.

We just completed the construction about three weeks ago and we have four or five phase one’s that are sort of in the hopper right now. The phase one’s, if you recall last year, our large phase one resulted in well in excess of $1 million in revenue and really made our year. So, with this fifteen bed unit, it’s going to give us the potential to run two or three of those at the same time, and we believe, provide some revenue stability and profitability stability for that business.

So, the study flow--our focus really is on the phase one’s right now. I mean the phase two to four’s are the bread and butter business. But our goal is to have one good phase going every quarter, and if we can accomplish that we’ll see significant growth and return back to the record profitability that we experienced nine months ago.

Robert Damron - 21st Century Equities

Okay that’s helpful. Thank you.

Bruce Shear

Thanks Rob. Thanks for your support.

Robert Damron - 21st Century Equities

Sure.

Operator

(Operator instruction). And your next question comes from the line of Daniel Rambert of Camden Partners. Please proceed.

Daniel Rambert – Camden Partners

Hey Bruce.

Bruce Shear

Dan, how are you today?

Daniel Rambert – Camden Partners

Peachy. I apologize. Shane’s out of the office. She couldn’t jump on the call. I just wanted to clarify. The BHO startup costs you guys said was about 100,000?

Bruce Shear

At least $100,000 in additional staffing, training costs. All pretty much in the first quarter. It’s behind us now.

Daniel Rambert – Camden Partners

Okay, that’s what I’m going for, just the one-time fees. And the Amex you said was 65,000?

Bruce Shear

That’s correct, and that was a one-time listing fee.

Daniel Rambert – Camden Partners

Okay. You guys also mentioned software expenses that couldn’t be capitalized; do you have a number on that?

Bruce Shear

I don’t have the number. Paula, what would you estimate it for the quarter?

Paula Wurts

I would say for the quarter about 25,000 because it’s actually gone down this quarter. We’ve been doing more of our training remotely than in person.

Daniel Rambert – Camden Partners

Okay.

Bruce Shear

So there’s a couple hundred thousand dollars in pretty much one time expenses this quarter, which is a significant number for a small company.

Daniel Rambert – Camden Partners

Yea, it’s helpful when you guys break it out. I guess the other thing is one time expenses from Vegas that weren’t capitalized. And then were all the costs for the fifteen new beds at Pivotal. Were those all capitalized or were there some expenses run through on that as well?

Bruce Shear

The build up costs were built into the lease. There were some pre-opening staffing costs that were expense costs. We hired a director of the phase one unit who was online prior to the unit generating any revenue. So, there was some there. But, rather than listing, there’s always going to be something. We’re in a very fluid, growing company. It’s not going to be the significance that was experienced in this current quarter. But I think in all fairness, there will always be something.

Daniel Rambert – Camden Partners

Yea, okay. And actually I just wanted to follow up on the collection efforts that have been on going since you guys have had to install the software.

Bruce Shear

Well, you know, I think as we reported, the outstanding is under control. The bad debt percentage of net revenue was lower this quarter. So I think we’re fine. We’re operating at or above our peer levels in terms of bad debt percentages, and there’s not any bells or whistles at our end that are going on. We need to just continue it and hope that our next opportunity to improve it will be once we go live with our media-tech software in the fall.

Daniel Rambert – Camden Partners

Okay, fair enough, that’s all I have. Keep up the good work, guys.

Bruce Shear

Thanks so much.

Operator

(Operator Instructions). And there are no further questions in queue at this time. I would like to turn the call back over to Mr. Bruce Shear, CEO. Please proceed sir.

Bruce Shear

Thank you all for joining us. As I’ve said, we’re just feeling like the plan is really coming together and we’re just excited about the execution stage of it now. We have a lot of work to do, but we have so much business ready to move in our direction that it’s just very, very exciting.

So, I just thank you all for your support. Again, I believe that I’ve talked with just about everybody that was on this call today, and we’re always available. Thanks so much for your time and thanks for joining us.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Good day.

TRANSCRIPT SPONSOR PHC, Inc. (ticker: PHC) operates companies that provide inpatient and outpatient behavioral health care services, clinical research and Internet- and telephonic-based referral services. The companies contract with national insurance companies, government payors, and major transportation and gaming companies, among others, to provide such services. For more information, please visit www.phc-inc.com. To sponsor a Seeking Alpha transcript click here.

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