Good day and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2022 Earnings Conference Call. [Operator Instructions] I’d like to now turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thanks, Gretchen. Good morning and welcome everyone to U.S. Physical Therapy second quarter earnings call. With me this morning include Carey Hendrickson, our Chief Financial Officer; Eric Williams and Graham Reeves, our Co-Chief Operating Officers; Rick Binstein, our Executive Vice President and General Counsel; Johnny Blanchard, our Assistant Controller. Before we begin to review our quarter and year-to-date results, I’ll ask Johnny to cover a brief disclosure. Johnny?

Thank you, Chris. The presentation contains forward-looking statements which involve risk and uncertainty. These forward-looking statements are based on the company’s current views and assumptions. The company’s actual results may vary materially from those anticipated. Please see the filings with the Securities and Exchange Commission for more information.

Thank you, Johnny. Before I start with my prepared comments, I just want to say this. I have seen the reaction this morning. I know this is a little bit of a disappointment, the team that’s through this. The bulk of this pandemic in really good shape, same team that’s been together for a really long time. We have some really good things happening, which I am going to talk about. We are not however unfortunately immune to the environment that we find ourselves in from an interest rate and inflationary perspective, but we are making our way through and I think we will come out the other side in good shape. So I want to start out this morning by thanking a very committed and talented team, partners, clinicians, front and back office teams and our corporate support group for the work, not only this quarter in the year, but throughout these 2.5 years that we have worked our way through this pandemic and the collateral effects that has generated. I am going to try to keep my comments at a high level to talk a little bit about where we are and what we are working on, where we are making progress and where we are still working through adjustments. I will let Carey do most of the lifting this morning, where I am covering the finer details for the quarter and the year with some exceptions that I intend to cover here. Despite the challenges presented by the current economic operating environment overlaid with the persistence of COVID, really do think our team proves how resilient it can be to deliver what amounts to. This is the second highest earnings quarter in the history of the company. This is a quarter where we produced all-time high revenues…

Will do. Thank you, Chris and excuse me – good morning, everyone. All things consider, our team produced a really good result for the second quarter with operating results per share of $0.90, which as Chris noted was the second highest quarterly amount in our company’s history. Our reported adjusted EBITDA was $21.3 million for the second quarter, which was only down slightly from the $24 million in the second quarter of 2021, which was the second quarter high for the company. Like all companies, we are dealing with the increasing impact of macro environment factors, namely rising inflationary cost pressures and rapidly increasing interest rates in the U.S. Those factors are expected to continue to impact this through the remainder of this year, but volumes remain strong by historic standards. And our team is focused as always on finding ways to become even more efficient, so we can produce the best possible results for all of our stakeholders. Our physical therapy patient volumes per day per clinic were 29.5 in the first quarter, which was an increase from 27.9 in the seasonally low first quarter and slightly less than the company high of 30.0 in the second quarter of 2021. By month, our average visits per clinic per day for all clinics were 30.0 in April, 29.7 in May, and 28.9 in June, reflecting our historical pattern entering into the summer months. We don’t have final numbers for July yet, but based on trend data, we expect July volume to be similar to June. Our net rate for our physical therapy operations was $103.18 in the second quarter, which compares to the $104.46 we reported in the second quarter of ‘21. That rate is up slightly from $103 in the first quarter of this year. The decrease in rate…

Yes, thanks Carey. So Gretchen, let’s go ahead and open it up for questions.

[Operator Instructions] We will take our first question from Larry Solow from CJS Securities.

Hi, Larry.

Hi, good morning, Chris. Good morning, Carey. Thanks for taking the question. I guess the first question, just on the I guess the guidance, the outlook, and also Q2 a little bit in terms of just the volume trends. I realized Q2 last year was maybe a perfect storm or just an amazing quarter because it was sort of real acceleration and re-ramping back up there COVID. So, but what is your contemplate, it does seem like you are a little bit surprising, maybe it was at June month, which I know came down, taking more than normally in the seasonality, but little surprising, I guess from our end, that volumes were down a little bit. So what’s your thoughts on that and again, what are you looking at? And in the back half of the year, you mentioned it’s mostly inflationary pressures. What are you thinking about in terms of patient volumes the back half the year?

Yes. So let’s talk about volumes for the quarter, first of all. So April came in solid. We had a really good March, really good April. That was the last time when you guys heard kind of where we were. And then typically, May follows April, did pretty closely. We pulled back three tenths of the visit in May compared to April. And then once we got into June, we pulled back a little bit more, and I don’t think it was more than a normal seasonal pattern. But if you remember last year, I think this is from memory. So give me a little attitude, but I think it was the highest visit per clinic month in the quarter in ‘21, which has never happened in 19 years that I’ve been here. That’s the best I can tell you in combination. One, we still have a bunch of people in quarantine from this COVID variant that we’re dealing with right now. Nobody wants to – the world doesn’t want to talk about COVID anymore. But as a healthcare company, in a lot of places, we’re back in masks and our patients have masks and in some markets like Tennessee and other places, patients don’t like that and that impacts our volume a little bit. We’ve got people in quarantine. And so Larry, I think we’re back into, what I would call, a more normal seasonal pattern. So a little slower in the summer, God knows people have pent-up vacation that they put, including our staff, which they need to. They have done an amazing job. A little bit longer time off, a little bit more time away for doctors as well. But I think, once – I’m going to say, I hope once school picks up, vacation seasons largely in rear view and football 2-day start, I hope things pick back up again. We have model the rest of the year kind of in the vein of where the quarter was – Carey, I don’t know how you…

Yes, it could pick up in the fall like we normally have, just normal seasonal pattern, just the summer pattern then picking up usually in September and then October through December are really strong months. And I’d say for the full year, when we look at the full year from a volume standpoint, it’s probably going to be similar to last year from a volume standpoint.

Right, which is sort of flattish. And you’ve grown volumes pre-COVID sort of 2, 3, more than that. I think historically it’s been like a 2, 3, but always targeted 2, 3, you’ve grown probably 3, 4, maybe higher end of that, 4-ish, 5 years into COVID. So over the next 5 years, is that – do you looking out of the next 5 years, do you feel like- seems like there is room for volume growth, but I’m just trying to – certain one quarter doesn’t make a trend and they are all – it’s still difficult time – there is like you said COVID maybe more fortunately in most cases, a nuisance, as opposed to, not that it’s not serious, but people are just – so things are not a hundred percent efficient. So do you still view yourself as a modest grower in volumes, as we look on an annual basis? I get, this is still kind of a tough call over the next couple quarters.

Yes, no, I definitely think. I mean Larry, right now we’re impacted in certain markets, important markets for us, just on the labor side. We’ve done a good job. Our clinical turnover really hasn’t changed, but it’s taken a little bit longer to fill those spots and some of those markets we’ve got people that are tired that have been working hard and that’s impacting our volume some. So I definitely think we’re going to continue to grow. I don’t have a perfect crystal ball for 5 years. And in this last few years, we haven’t had two quarters that look like the quarter that rubbed up against us. So we’re making our way through, but we’ve got great capacity in our facilities. We’ve got a partner model that we think is the way to go and strong partners and strong team. And so we just need to get through this bumpy patch.

Yes, no, absolutely. And what about on the – I know you’ve been sort of pounding the drum on the rates. It certainly seems, seems like you guys are – it’s an uphill battle for you when everything is going up and pricing power, but it it’s tough. So it does sound like you’re trying to get – you’re making some leeway, at least for some of the bigger payers and hopefully the government will help you out too next year at some point, but any commentary there, any additional commentary there?

No, we just made a reasonably good investment, big investment in terms of some additional horsepower on the rate negotiation side. That’s been very recent. We finally got that done. We have had some wins here lately. As you might expect, I’m not going to name names or [indiscernible] changes but we’re making progress and we expect to make a good deal more. I think a lot of that will be ‘23 impacted rather than so much in ‘22, but it’s important. And we think that the value that not just we as a company provide, but physical therapy provides in general is extraordinary. And we think it deserves higher rates. And we’re going to keep banging on that until we get there.

And is CMS given that doesn’t the next year’s proposal usually come out in July? So we are a little late this year. Did I miss it? Has there been anything mentioned for next year yet or no, in terms of the vols?

Yes, it came out a little bit late, but it did come out late in July. And it’s slated for 4.5% reduction for next year, which I can’t hardly imagine, but we’re working on that as we have. Yes. It’s totally stupid. So I don’t know how that’s going to land. We will not know until December, but we expect to do some significant work on that between here and then.

What’s the rationale behind? Is it just some convoluted equation that gets to that? Just some high level from a layman’s perspective, how do they cut you 5% when they are giving 9% to CPIU based rate debtors? It was so crazy.

We are out of that CPIU – some adjustments that were made some years ago. We will be back over, I think in that bucket. I believe it’s 2025. And so I think the original rate reduction was 9 and change, which we were able to mitigate. And so I think this is some residual from that, but we think and hope we will work to mitigate it again.

Okay, great. I appreciate all the color. Thanks.

Okay, thank you.

Our next question comes from Steph Wissink from Jefferies.

Hi, Stephanie.

Hi. Good morning, everyone. I wanted to spend a little bit more time compartmentalizing the labor and wage rate pressure you’re seeing because it does sound like there is a mix of things occurring. One might be availability of labor and just the cost of that labor, especially on the front end. But you also talked about some PTO or away time that you’re also noticing among your staff. So can you just help us think through what components of that mix are the most substantial burden on the revised guidance and what do you expect to be more transitory maybe related to summer vacations or holidays that you would see some of that labor availability come back into the fall?

Yes, certainly vacation’s going to be the transitory part. Really, there – I think for the most part while there might be a little bit more cost related to that, I mean, it’s banked and people are using it to the extent that we can find replacement or temp cost or somebody’s on vacation, that would bump our cost a little bit, but vacation’s a normal thing. We just have people that are a little bit more pent-up and carried over some vacation from prior period. So that’s going to normalize. The other part, the higher labor, we see that particularly- we’ve seen that particularly at the front desk on the non-clinical side. When you look at our mature facility rate changes, I think it was 4.2%, which given this environment, honestly, I think it could have been a lot higher. Some of that will take a little time to come down, but in talking with my brothers and sisters that are APPQI facilities, I think everybody’s in the same boat. Everybody right now is taking a hard look at their costs. We’ve made some adjustments for our remainder of the year, very surgical, very precise adjustments match very closely to volume. We’re able. And then we have some projects going on right now, that’ll impact longer-term efficiencies in the staffing and the labor load at our front desks. And so, that’s something that we are very focused on at the moment right now as well.

That actually leads to my second question, which is related to the projects. Maybe share with us a little bit more about what you’re doing, if you can, without it being competitive risk. And secondarily, if there is any sort of cost invited in the back half P&L for the projects, or if it’s a CapEx related project, just help us conceptualize what that might be? Thank you.

Yes. Yes, thank you. So the one project I referenced in my prepared comments. So the one resource I think, I’ll call it. I don’t want to name it because man, it’s an unbelievable resource for us, but it’s helping us on the recruiting side, identify therapists and connect with those people. It’s helping us on the injury prevention side, identifiably connecting with companies that are in our sweet spot on the injury prevention side of things. And it’s also helping us identify and connect with and time that connection with companies who may be interested on the development front for our acquisition pipeline, which right now is very solid. So, it actually doesn’t – it isn’t a big investment, but it’s an important investment for us. It’s going to bear fruit, I think for a good while. On the Front Desk project side, that’s ongoing. Carey, I don’t know if you want to speak to that or Eric. I don’t think that’s a big monetary investment. That’s really just people on time on our end working the way through it.

Yes. That’s more of just a rollout integration and timing issue. And Eric, do you want to talk about it some?

Yes. It is a timing issue and obviously with all the different partnerships that we have out there, these systems changes do take a little time. But we are trying to figure out how to improve automation in that Front Desk operation, so we can get by with less labor. So, creating patient portals that allow our patients to schedule, electronic insurance verifications that would reduce the amount of time front office people are spending now verifying insurance, and we have dabbled in patient kiosks. You have probably seen these in lots of different businesses now. That used to be people you talk to when you checked in and now it’s more of a norm. And so we are looking for electronic kiosks that would allow us to get by with less front office labor, because that’s really where our biggest turnover is in the company. Our clinical turnover right now is really below industry average, and we have kind of told the line. And as we have talked about on calls before, our clinical turnover is 3 percentage points lower than it was pre-pandemic. So, we are doing pretty good. Having said that, every time somebody does walk out the door clinical or non-clinical the new person walking in is more than likely going to be making a little bit more money. So, our focus right now is the front office side that has the highest turnover percentages, and we believe focusing right now on our systems to get by with less labor really is a long-term way to go.

Very helpful. Thank you so much.

Our next question comes from Michael Petusky from Barrington Research.

Hi Mike.

Good morning guys. So, in terms of sort of the double whammy of inflation and sort of going against you, reimbursement away from the government side, going against you, I guess how do you think about M&A in terms of both how you want to approach your balance sheet? And then also, how do you think this impacts smaller PT companies, because gosh, you guys are getting squeezed. You have got significant size and scale advantages over some of these smaller entities. And I am just curious if we are going to see a consolidation just based on sort of the macro? Thanks.

Yes. I don’t think there is any doubt about that. It’s going to squeeze unequally, and it’s going to squeeze larger providers as well, who are more highly levered than we are and who don’t have the financial parameters that Carey just outlined, which are, even though it’s more expensive than we were a year ago, it’s still very, very efficient. So, we are going to use our balance sheet. You guys are going to see that over the coming short-term. We think that there will be even more opportunities as we go forward, as this environment punishes people who are not in equal sized boats, so to speak. And we think it will be good long-term for us. So, yes, it’s challenging on several fronts, but it’s not just challenging for us. In this profession, it’s going to continue to provide value to the healthcare system. There are a lot of drivers to the growth, the physical therapy. And so we are going to get through this bumpy period. And I think out the other side, there are definitely, as you point out, good catalysts that are going to come out of that.

And just sort of a follow-up on the proposed rule for reimbursement cut from CMS. I mean, do you think even at this point, as you look at it that there is more of an opportunity just given the givens and given what it could do for smaller providers that there is a better chance of beating back most of this than maybe last year when you did have some success there too. But I guess it just feels like things have deteriorated in the last few months. And I am just wondering if you think there is a recognition out there, APPA thinks there is, that 4.4, whatever it is, 4.5. It’s ridiculous.

Yes. I do think it is ridiculous. And I think I hope we will get a feedback. We got most of last year’s feedback. I mean this year, unfortunately, the impact which isn’t directed at, it’s not directed at us. Most of that impact was sequester impact. That sequester relief going away, I think last year was 0.75% that we felt was less than 1%. And so we got most of it out last year and I am hopeful that we can do the same or better this year. Time will tell, but obviously, that’s not a certainty.

And just last question and I may have missed the nuance of this. It almost sounded, Chris like, you may have said that obviously the macro is impacting staffing to the great extent, but it almost sounded like, you alluded to possibly late in the quarter maybe you guys could have done better in terms of that piece of things, or did I pick up on something that really wasn’t there?

Look, I think our team’s done an incredible job. We came out of Q1 expecting kind of blow and go Q2 from a volume perspective. I don’t know the volume materialized quite the way that we expected. We also came out of Q1 with a real urgency around hiring and anticipating real strong volumes. I just think it’s having now rear view look at it very, very, very closely, I think we probably selectively onboarded, not a lot of full-time people, but we probably let our part-time folks. We ended up paying a little bit more cost than we could have otherwise. We have made and we are making those adjustments to make sure that stays very, very closely dialed in. We kind of have a handle, I think a sense on volume here. And so I expect that dial-in to be much tighter from here to the rest of the year.

Thanks for the update. I appreciate it.

Thanks so much.

Our next question comes from Mitra Ramgopal from Sidoti.

Yes. Hi. Good morning and thank you for taking my questions. Hi. Just a couple for me. Chris, on the M&A side, you sound pretty confident in terms of getting deals done between now and year-end. Just wondering any specific drivers there? There is the question of valuations being a lot more attractive in this environment versus maybe a year ago. And is it a case also where maybe post-COVID you are seeing one thing in a number of areas of healthcare, increasing retirement, etcetera. And so maybe that’s also boosting your pipeline.

Yes, so it’s mixed. So, we have been busy all the year, a few of these just, the planes that I expect to get on the runway, just taking a little bit longer to land and the timing has been a little bit different. But we are very active, very, very active right now. I think this isn’t related to people retiring. I think it’s related to where people have been the last few years. The folks that we are attracting are really, really strong, highly capable people. We have very high expectations for all of these deals. They are not ready to retire, but they have been through like we have all been through rather unique theory. My 37 years as a therapist, these last few been kind of crazy. We have done real well and these companies have done well, but most of them see the opportunity to get some support that we provide, some really strong support so they can continue to grow because in their market, they are maybe the big provider and they see a lot of opportunities among and across smaller providers to tuck those in or to move market share. And they want a partner to help do that. And so I think that’s what’s going to continue to drive our opportunity more than anything. That and the fact that when our partners come, they pretty much stay forever. We have been a really good home. We don’t take that for granted. We work hard at it, but we are going to have the opportunity surround ourselves with even more good people as we go forward.

Okay. That’s great. And then, tied in also on the M&A side, who knows how it plays out, but there is obviously talk of recession or obviously a weaker environment heading into next year. Does that factor into how aggressive you want to be on the M&A side? And maybe you can remind us how the company has fared in fears of economic downturn or recession?

Yes. So, yes, everything factors in, Mitra. The interest rate environment factors that impacts the multiples that we and others, I think are going to be able and willing to pay multiples that are at, kind of for me, a career high they have been, and I expect that to pull back. It has to. With the rising interest rate environment, returns aren’t as great. And that is without taking in consideration the macro environment where there are some challenges as well. So, those things certainly influence. There was another part of that, that I was going to speak to and I just – last point…

Recession.

Well, on the recession. So, if we look at ‘08, ‘09 and ‘10, we grew through those years, and we did some things differently when there was a massive kind of labor glut back then. When companies were laying people off, we created the front end of this, a commission-only sales force, and we doubled our sales force in that period of time. And it helped us grow break through that recession. We continue to get deals done at good multiples back then. And so it hit our same-store a little bit, certainly when there is high unemployment. I don’t know that I believe – I don’t believe that we will get to a high unemployment situation like we did back in 2008 and front half probably of 2009. I think we are too employment stretched right now for that to happen. But I think we are still well-positioned as we have been. We have a good balance sheet. We are making some adjustments and I forgot to mention this too. It’s not huge, but it’s going to give us an impact, I think in next years. We are changing who we buy things from and we are moving our resources or will be to get some efficiencies there and we have to. But there are some embedded cost savings in terms of what we have planned there as well. So, we will see, but I don’t think – I think we are well-positioned to deal with what comes at this point. But like we have had to do this quarter, we are going to have to make some adjustments depending on what changes.

Okay. And then just finally on obviously you always had to run a very lean and efficient company. I know on the G&A side, it’s probably the lowest I have seen it in some time in terms of percentage of revenue. So, obviously trying to limit your costs in this environment, just curious if you have more room there or is that something we should expect to start kicking back up?

This quarter we made – we wouldn’t have had to do it because it affects each of us directly here on the exec team, but we made some bonus accrual adjustments in this quarter. And we will have some lower bonus accrual just as a result of the reality of our guidance for this year. And so I think that’s the biggest driver. We are already leaning to [ph] folks that are working hard. And so that is something I hope that as we go forward outside of this year, I would expect more normal accrual pattern to happen with more normal, predictable growth and as we go forward.

Mitra, that’s typically been in the 9% to 9.5% range of revenue. I think for the second half of this year, it’s probably going to be closer to 8.5% to 9% range as a percent of revenue and then probably back to more normal patterns in 2023.

Okay. That’s great and thanks again for taking the questions.

Yes. Thank you.

[Operator Instructions] And it appears we have no further questions at this time.

Okay. Listen, thanks everyone for your time and your questions this morning. Carey and I are available if you have any follow-up, and I hope you have a good day. Thank you. Bye now.

This does conclude today’s program. Thank you for your participation. You may now disconnect. Have a great day.