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

Thank you, Gretchen. Good morning, and welcome, everyone, to U.S. Physical Therapy's Fourth Quarter and Full Year Earnings Call. With me on the call this morning include Carey Hendrickson, our Chief Financial Officer; Eric Williams and Graham Reeve, our co-COOs; Jake Martinez, our Senior Vice President and Controller; and Rick Binstein, our Executive Vice President and General Counsel. Before we begin to discuss our results here this morning, we need to cover a brief disclosure statement. Jake, if you would, please.

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

Thanks, Jake. So, we have a lot to cover this morning. I'll start by discussing demand. As we look at volumes, which finished the year in really in a nice fashion. We were steady in the quarter with October and November, coming in at 29.4 visits per clinic per day for both of those months. Then we started December really while averaging just above 30 visits per clinic per day for the first two and a half weeks. As you might recall, the country got hit with an extreme polar temperature and weather event just before Christmas and threw a little damper on volume going into the holidays. But otherwise, we look very good throughout the quarter. Finish December with 20.6 visits per day, which by the quarter and a 29.1 and then overall for the year at 28.7. These were the second-best volume per clinic per day numbers in our company's history, both the fourth quarter as well as the year. Considering staffing challenges this year along with everything else, very proud of our partners, clinical teams, and all the many people who work to make sure our patients get taken care of and have a tremendous experience. They've worked extraordinarily hard these past few years under difficult conditions and continue to produce incredible results over nearly four and a half million visits this year. And I'll just mention that volume out of the gate starting this year has been ahead of expectations, it's been nice. Shifting gears on the injury prevention side of the business, with another strong growth year, with revenue up more than 75% on the year and 37.6% for the fourth quarter. Despite the strong results we were impacted throughout the year with open positions that were difficult to fill in some markets due to…

Great. Thank you, Chris. Appreciate it. And good morning, everyone. We noted in our earnings release that we're still evaluating our income tax expense, just wanted to address that here. Our financial statements as presented represent where we currently believe they will land. There was a matter that came to our attention late in our valuation of tax that we had to consider and we simply need a little more time to fully evaluate it. We expect to have that vetting process completed in short order and certainly by the time we file our 10-K next week. Now turning to our results, we reported just EBITDA to the fourth quarter of $17.9 million, which was an increase of 2.8% over the $17.4 million that we reported on a comparable basis in 2021. And our full year adjusted EBITDA was basically flat with the prior year. Our operating results which include the impact of higher interest expense was $0.58 per share in the fourth quarter, and it was $2.70 for the full year of 2022. Our total company revenue increased 11.7% this year growing from $495 million in 2021 to $553.1 million in 2022. Like all companies, we're continuing to deal with some inflationary cost pressures, but our volumes remain strong. 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 clinic pre-date finished at 29.1 as Chris noted for the quarter, which was the second highest per day volumes in fourth quarter in our company's history, bested only by the fourth quarter of 2021. By month our average visits per clinic per day were 29.4 in both October and November, and then 28.6 in December, which…

Yes, thank you, Carey. Great job. Operator, we're going to go ahead and open it up for questions now.

We'll take our first question from Brian Tanquilut from Jefferies.

Good morning. Chris, maybe the first question for you, as we think about the environment in the visual therapy space, I mean, some of your bigger competitors are clearly struggling with over levered balance sheet and tough operations, high turnover rates of clinicians. So, as I think about market share opportunities, from some of those disruptions or distractions, and then M&A opportunities, I mean, how are you thinking about, you know what was in front of you and when, what you guys can do to make potentially gain market share as a result of all this?

Yes, I appreciate the question, Brian. So, you know, anytime, you know, I'm going to speak broadly. Anytime there's, you know, a tough operating environment, let's call it that, it affects certain providers more than it affects other providers. And because we do have, you know, a really nice balance sheet overall, our interest rates are up as well. But, you know, we started with a great balance sheet and so we have more flexibility. We've already seen and I don't want to be too specific. But we've already moved some key people, you know from will call assets that are more distressed. We've seen opportunities to pick up some clinic, and we've done that. And we have a really good development plan for around our top 30 to 35 partnerships, which make up basically about 80% of our overall earnings, and those include De Novo and Tuck-in acquisitions of smaller practices in existing strong markets. And so, I expect as we've seen in the past that although, I would love for the market to have a great tailwind for all of us, it's not that way right now. But for us, there'll be some opportunity in here for us on the development front, for sure.

That makes a lot sense. Carey, you called out how your cost per visit is down slightly, but as I think about the labor market, I know in your case, the challenges last year were more in the lower end of the labor or the skilled spectrum. Maybe just any color you can share with us on what that looks like right now?

Yes. I mean just as our total operating cost did, our salaries and related costs also came down in the fourth quarter versus the third quarter. And Chris talked about how we're seeing more success in finding and hiring qualified candidates. I'd say there's going to continue to be some labor pressure for sure, but we feel much -- we're in a best better position as we begin 2023 than we were in the middle of 2022, particularly. And Chris, I don't know where Eric or Graham, if you have any comments on that.

Just Brian, we're not seeing rates come down yet. We don't think, we're going to continue to test that. And I'll let either Graham or Eric discuss the rollout of some automation at the front desk and speak on that just for a minute

Yes. Chris, this is Eric. I'll tie in a couple of comments here. So, no question, rates have not come down yet for clinical staff or front office staff as it relates to replacing positions, but it was a little bit easier there in Q4 in terms of hiring people. So, the time to fail open positions got shorter. And without a doubt, the biggest challenge we saw last year from a rate side was on the non-clinical side, very competitive environment. Those folks have the opportunity to work anywhere besides health care. So that was top. And so, we realized that we needed to bring automation into our environment that help and so last year, we upgraded our EMR system of our databases in order to take advantage of automated functionality which is available on the platform. And this is really going to help us on the front office side. So examples of that automated functionality would be appointed reminders going out to appointment on-demand messaging, things that we weren't doing everywhere before and the ones that we're the most excited about that we think is really going to give us some leverage here, our check-in kiosks for patients, allowing them to check themselves in for the appointments, complete forms, questionnaires, medical history, where we don't need front office people doing that anymore. And then there's a patient port that offers patients the ability to request appointments, message the clinic, and provide access to the medical record, things before that our front-office would have to do. So, we're in the process of rolling that out right now with our largest partnerships. We're going to gain significant traction over the year across the portfolio, and we think that's going to allow us to leverage our front office costs as a whole.

Awesome. Thank you, guys.

Thanks, Eric.

Our next question comes from Larry Solow from CJS Securities.

Good morning, Larry.

Good morning, Christopher. Thanks for taking the question. I guess just on looking on a sort of high level same-store sales volumes, we are very good and some at the end of the year well and strong excluding the holiday season and started this year strong. Full year last year obviously, it feels like you hit kind of a wall, I mean, you had really good 2021, of course. And I think last year, some, just staffing issues and maybe a little step back from COVID or whatever you kind of let down a little for the year. What do you look at over the back half of the year at least, how should we look at 2023? Do you feel like volumes should growth and volume should return or are there some things that will still hold you back, before we even get into the pricing discussion, but just in terms of volumes on a same store sort of level?

I can tell you we're out of the gate pretty well, really well. That month, month and a half, two months doesn't make for a year yet. But our plan for the year is certainly up volumes this year. As you mentioned, last year, we were impacted on a couple of different fronts. While COVID is kind of for everybody in the rearview mirror, what happened last year was people had not taken vacations in a really long time until that in combination with just a really tight labor market, increased our time to fill positions. And the pullback from a record year, which was 2021, which was really strong, was fraction of a visit. And so, we're working hard to deliver a good year. We're out of the gate, we're out of the gate and good fashion and we hope we can certainly do that through the year. As we mentioned, we've made some improvements in staffing. It's beginning to feel better. And I hope that continues. We'll see, but – so far so good.

Okay. And Chris, I have never saw you – you sound very encouraged just about pricing. I know even for over the last few quarterly calls. It sounds like at least in the near-term, hopefully the increase in commercial rates will be maybe even more than offset the government comp, but it does sound like at least qualitatively that I know you can't get into specifics, but it sounds like you're starting to get better things that come in your way and hopefully over – I know you can't move the needle too fast. But hopefully the next several quarters the needle will keep moving it in your direction, it sounds like.

That's the goal. Frankly, Larry, this is overdue. We've taken – we've taken contracts probably in the past and accepted them that we should have pushed back on par frankly, we're just not going to continue to do that. And we're getting some good results from the efforts it does take time, as you mentioned, and in our structure, we don't just have one big contract for everybody because we have lots of regions and lots of partnerships, but working our way through. The team has done a really good job. It's going to take some time, but do think we can offset some of the some of the Medicare pricing things for this year and we continue to move the ball forward.

Great. If I could just squeeze one more in just in terms of just acquisitions and it sounds like you probably have maybe an upper hand or certainly a better position than a lot of your competitors on that front. What about just leveraging? You're not super levered, but you're more levered than you guys have in store to about a little less than about two times? So, would you consider taking that up higher? I mean, is there – I mean, still not being all that high, especially for business that generates pretty good cash flow? Any thoughts on that?

Yes. Carey, you want to start with that and then I can jump in if you needed.

Yes, Larry, as you noted, our leverage ratio at the end of the year is 2.0 times. I mean, I think we would be comfortable moving that from there. Certainly, it just has to be the right deal and at the right price. I mean, that's what we're really focused on right now. We do have the available capacity. We have $31 million drawn at the end of the year on our $175 million facility. So, we obviously have plenty of capacity there. And it's really about just – and we have a lot of good deals in the pipeline. And Chris, you may want to talk about that. So, there are deals in the pipeline. And we're just going to have evaluate them each one individually and make sure we do – do smart deals.

Yes. I don't really have anything to add. I don't want to talk too much about, what's prospective because it's not done till it's done. Too high, but we're trying to be smart about how we deploy capital. Part of that is in our a dividend increase this year and we expect to continue to do deals. And we're hoping we can get those done at pricing that makes sense for everybody.

Excellent. I appreciate all the color. Thanks, guys.

Thanks, Larry.

[Operator Instructions] We'll take our next question from Matt Larew from William Blair.

Good morning.

Hi, Matt.

Hi, Carey. I wanted to go back on CAGR issue one more time. You referenced obviously some contracts pinned below your cost of care directionally. Could you maybe just size up with that? Passing contract looks like as a percentage of your revenue? And have you given hard date guidelines for when you expect people to compensate you appropriately? And then the third piece is, do you have a sense of other operators in your markets are starting to take a similar tact in their approach or sort of the distressed nature of some of those assets might make them more willing to straddle along?

Let me start with that, Carey. I don't want to get into too deep of detail into some of these discussions. They are sensitive the percentage of our reimbursement on some of these lower contracts isn't particularly great. It's low single-digits. We have a lot of contracts that we are renegotiating across the commercial spectrum. And contracts that are much higher paying contracts where we haven't gotten increases as well. In some cases, we have given notice and that is according to the terms in individual contracts. And so those do vary. And with respect to other you know, providers, other competitors are in the market. I frankly I hope everybody's going to do what we've started to do and I would encourage them to look hard. Volume that cost you money to see it isn't volume that any of us should be staying. And the world changed last year in terms of inflation in a lot of from areas and certainly employee inflation was one of those. We do tremendous. We provide a tremendous service to our patients it bends the downstream cost curve for the entire healthcare system when a patient comes through a completed course of physical therapy that's well documented now in some independent studies and some use that information to get ourselves not an extraordinary rate we -- we don't need to be greedy but, we shouldn't be paid certainly not below our cost and we should be paid to have an adequate margin because these payers have adequate margins more than adequate in some case is in love of you. And so, my encouragement is for everybody to do this. And, we'll see what happens. All I can control is what happens here, but we're focused on it here, right now.

Okay, understood. If I can switch to IIT, a good number of acquisitions in the last couple of years, what do you think about the same store outlook for that business? How are you viewing it for 2023 versus in years past? And is there a similar environment with some of that are operated in this space, potentially being over levered or stressed where opportunities might come up or given the field you've done pressure rate to digest those and move forward organic growth at that point in time?

Yes. Well, I mean, we have a very good organic opportunity in injury prevention, that business in general just by the nature of it where companies have many, many, plants and maybe we start with one, but we expand services to others and so kind of an embedded natural organic opportunity there. We continue to look for deals. There aren't as many as many providers in this space. We actually have a call. I think its early next week, Carey, you know, with some bankers who are helping us look and think about and consider similar and potentially adjacent opportunities, in some cases, slight expansions to the portfolio, similar acquisitions. We don't have anything ready to go yet for sure. This year, I'm going to say that this year I expect that just by virtue of the size of that business that organically we had just an incredible year in this last year. I hope we can produce another good year, but we haven't necessarily budgeted that way. We've been a little bit more conservative. I think it'll depend a lot on whether the economy gets into recession, we're seeing some caution begin to creep in in some sectors. We know the auto sector has been beat up for a while, just between chip shortage and the pivot to electric cars, and that's kind of frozen people, in a lot of cases in terms of their purchases. And so, there are certain industries, I think we'll continue to do well. There are other industries where I think things will slow down a little bit. We'll slow with them likely. And then as things pick back up, we'll pick back up accordingly. So, this year, I think we'll be a little bit more muted than years past, but we're working hard to -- as we have to overcome any headwinds into at the end of it to lay down a good year when it's all said and done.

Okay. Thanks, Chris. Maybe for Eric, or Graham, a follow-up to your comments around automation and other tools you can use on the patient in their actions out of the front end where do you -- are you piloting those tools? You mentioned rolling out, maybe just curious what kind of time frame does it reflect a lot of the tools that you've evaluated? You feel like they're adequate relative to what you want or the things that you need to tweak the big difference for more that strategy, you got to make a strategy. Can I first find that if you?

Sure. We're rolling it out. So, we rolled it out and on the process of rolling it out at our first partnership right now is our largest partnership in the portfolio. Learning from that, it's always partially implemented in that portfolio right now, really, really well received, by the way, by the front desk as well as the patients who are utilizing those. And our learnings from this first partnership that we're rolling out will allow us to roll it out concurrently at other partnerships. So, we should get, have a fairly fast implementation as we -- a faster implementation as we move through the year. But we'll have a better idea in terms of the timing for our top 40 partnerships, which is where we're focused to start within the next -- by the end of April, April 30th.

Okay. Thank you for the question.

Yes. Thank you.

Our next question comes from Mike Petusky from Barrington Research.

Good morning, Mike.

Good morning. Good morning. Hey, so slightly distracted here, five earnings report. So, if you've covered this, forgive, but I'll ask it anyway. Have you guys given any update on progress with the GPO and how partners are either driving the attraction with that or not so much?

Graham, do you want to take that?

Chris, I didn't hear the question.

GPO progress. GPO progress and how it's being received?

It's been well received, but we're actually going live on the 27th. We're rolling it out at 180 locations starting on the 27th of February. It's been worth getting all of the items that we need in our different partnerships located in the warehouses. They're going to be adjacent to their practices, but we are delighted on that next week.

Great. How many partnerships does that represent the 180?

I don’t know. 30, probably. We tried to do it in geographic diverse areas to test the program. And after the first group partnerships go live, we'll be rolling it out in further partnerships. I can get the exact number for you. I don't have in front of me.

All right. Great. That is meaningful progress. That's great. Chris, I'm just curious because so much, I guess, your commentary started with the sort of contract in negotiations and some commentary in Q&A. Is there a chance that ultimately some of these payers to sort don't get it and you end up saying, well, I mean, obviously, there's a chance, but I guess, realistically, as you think, like the tone of these conversations, I mean, do you think revenue could actually shrink? Or do you think ultimately everybody sort of is going to get this? And it's just a matter of do you get this bump or that bump?

I don't think anything happens uniformly. But look, we're prepared in fact in some markets where we have given notice. And they've said fine. We have other providers. We'll use other providers. We're able to fill those slots with better paying patients, frankly, better paying plans. And so, we may lose some of these in the short run now interestingly in one of our big partnerships where they said fine, we don't care. We were not going to move within two months, they came back and offered a very meaningful increase, so, right, but we had to play chicken. And we're prepared to not take the business and we think we can replace that business, let that go frankly to the market to our competitors and if they want to take it, let them take it.

Yes. And sort of on a related note in terms of pricing. And I know its way, way early, but in 2024 in terms of CMS. I mean, is the industry lobbyists and the association of APTA and others that sort of get this. I mean, I guess what I'm trying to get to is, will there be any kind of a retrieve from sort of what industry has been sort of going through the last few years in terms of these headwinds because the difference between inflation and the pricing is it made it awfully difficult for smaller operators, particularly or leveraged operators to do business?

Yes. I'm trying to get out of the predicting what CMS is going to do business, because what they do doesn't make a lot of sense, and in fact it doesn't make a lot of sense to our lawmakers and others were our efforts in APTQI and with APTA and other constituencies are focused really largely outside of CMS. So, I won't predict what CMS does. I will say that we've made headway I think in helping key constituents in Congress, understand what it is that Physical Therapy does between balance and fall prevention, falls are a massive, massive cost to the healthcare system and to individuals and their ability function opioids. Again, don't hear about it as much, but it's still a massive problem. And there's some great studies out that just indicate a massive cost differential when people start with the primary care on musculoskeletal care, which is really Physical Therapy. And so, we're trying to pound that message and drive it home. Washington's a little dysfunctional for these days. And so, again, my ability to predict what happens, but I think we have a great story. I think we have good data, and we're going to continue to bang on it. And at some point, it's got a turnaround I think in my view.

One more quick one for Carey. In terms of the borrowing capacity, I mean to me it looks like you could go to four times if you wanted, but is there probably maybe a comfort level slightly lower than that or for the right deal would you go to four times or right series of deals? Can you just speak to maybe where the top end realistically in your view is as far as your comfort level? Thanks.

Yes. Well, right now, our covenant is at three times. So, but not to say that we couldn't go to our banks, which we have great relationship with and if it was a right deal and the right timing, we could go higher than that. I don't think that we would necessarily be comfortable much above three, though, for very long. If we went above three, it'd be something that we would bring down pretty quickly. That's my perspective, yes.

Makes sense. Thanks, guys. Really appreciate it.

Thanks, Mike.

Thank you.

[Operator Instructions] And it appears we have no further questions at this time. I will now turn the program back over to our speakers for any additional or closing remarks.

Okay. Thanks, Gretchen. Listen, I just want to thank everybody for the questions, for the time today, for the ongoing support. We greatly appreciate it. We've got some follow-up calls scheduled with some of you so for those we don't talk to, I hope you have a great day. And that concludes our conference call this morning. Thank you.

This does conclude today's program. Thank you for your participation. You may now disconnect.