Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I'd now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thank you very much. Good morning, and welcome everyone to our U.S. Physical Therapy first quarter 2023 earnings call. Joining me on our call this morning from our executive team, I have Carey Hendrickson, our CFO; Rick Binstein, our Executive Vice President and General Counsel; Eric Williams and Graham Reeve, our COOs; Jake Martinez, Senior Vice President, Finance and Controller. Before I make some opening remarks, I'll ask Jake 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, Jake. I'm going to make some brief high-level comments this morning on various aspects of the business, and then I am going to turn it over to Carey to cover the numbers. He does a great job with that. I wanted to start out by just thanking our team, middle of last year, really probably beginning in late May into June, seemed like the world changed. Having come through a couple of years of the pandemic and working our way through that well and then we got hit in the head with massive inflation. It affected everybody. Employee scarcity largely affected everybody. It was a tough year. I just want to thank our team for keeping their head down, working their way through it, being very positive. Our partners, our staff, our leadership team, marketing support group, everybody has just done a phenomenal job, and I really think that showed up quite well this first quarter. Volume has been excellent. It's been as strong as it's ever been and, interestingly, this time first quarter and 2022, at that point, was our best-ever first quarter visits per clinic per day quarter, in the history of the company and we blew last year's first quarter away. So, our partners, our staff, the care that they're giving to patients, marketing folks, all of the support that is helping us drive strongest volume ever in the history of the company. It's just exceptional right now. We've made progress, we're not done. We've made progress in our salary, in our total cost per visit. Carey is going to share some of those numbers, progressions with you. Again, this is helped by volume, still in an inflationary period, but we're making progress as you'll note in a couple of the key areas that definitely I…

Great. Thank you, Chris, and good morning everyone. As Chris' remarks reflected, we had an outstanding first quarter by almost any measure: we had record high volumes; we had strong growth in revenue; we had a continuing downward trend in our salaries and in our total operating costs on a per-visit basis; we had growth in our physical therapy operating income and in our operating income margin; and year-over-year growth in our total company adjusted EBITDA. So, a really good start to the year. We reported adjusted EBITDA for the first quarter of $18.5 million, which was an increase of $1 million over the $17.5 million that we reported in the first quarter of '22. Our operating results, which includes the impact of the higher interest expense, was $0.59 per share in the first quarter of '23. Our total company revenues increased 12.8% in the first quarter, growing from $131.7 million last year to $148.5 million in the first quarter of this year. And our total company operating income increased $2 million from $15 million in the first quarter of '22 to $17 million in the first quarter of '23. Our average visits per clinic per day in the first quarter was 29.8, that's the highest first-quarter volume in the company's history and it's the second-highest volume for any quarter, bested only by the second quarter of 2021, when our average visits per clinic per day was 30.0. And each month in this first quarter was a record high for that respective month. Our average visits per clinic per day was 28.9 in January, it was 29.8% in February, and then 30.7% in March. And that 30.7% in March was the highest volume for any month in the company's history. Our net rate, that Chris referred to, was $113.12, which…

I'm sorry, Carey. I was muted. Operator, go ahead and open the line for questions.

Certainly. [Operator Instructions] We'll take our first question from Larry Solow with CJS. Please go ahead.

Good morning, Larry.

Good morning, guys. I have a problem with the mute button sometimes too. So really good start to the year. Obviously, I think weather or lack of bad weather across most of the country -- some parts have some bad weather, but probably certainly helped you guys, it was a good guy for you. But again, 6% same-store volume growth is really remarkable coming off with a great comp too. So, just looking at, I know you don't guide quarterly, but we're kind of in the heart of a good part of the year, right? You did almost 31 visits per day per clinic. Any reason to think that wouldn't continue at least assuming weather remains fairly on your side?

Yeah, I'm not going to -- I'll say this, volume continues to be very strong. I'm not going to go out and predict. We -- yes, we certainly shouldn't have major weather events, certainly not owing to weather events going forward. And I am hopeful that we can continue to grow as we have most -- every year since I've been here with the exception of the second half of last year. And so we're certainly going to work to do that. We'll have to see how it shakes out, but we like where we sit right now.

And do you think labor -- obviously, labor still a higher price, of course, but it feels like your access to and availability is a lot better. Has that -- did that help -- were you leaving some revenue on the table just enabled to serve as many patients per day just because of labor issues that are -- that have gotten better, is that part of the year-over-year improvement do you think?

Yeah, sure, absolutely. Now, I will say this. First quarter of last year, we weren't feeling the labor issues that we began to feel late in the second quarter and certainly into the third and fourth quarter. And so, I think the quarterly comparison access to labor was not as much of an issue a year ago. I will also say that right now, our time to fill open positions has decreased dramatically from where it was in the second half of last year. It's improved a lot. I think it will continue to improve, that's my sense, and that's both for clinical positions as well front-desk positions. And I have to believe that some of the 20,000 people who left the profession at some point in the pandemic or during the pandemic, a lot of those folks, I think -- I said early on, I thought they all wouldn't stay out forever. I think, a lot of those folks will come back. And, yeah, certainly I think that will help us as the year progresses on a comparative basis.

Got it. Just last question, one follow-up. Just on the total clinic, it looks like, I think you grew seven sequentially. I think there's only one acquisition of the one larger clinic, right? So, it looks like, six net new clinics, if I am not mistaken, so that's pretty good de novo activity at least to start the year, if my math is right?

Yes, we've got good de novo activity. We've got across a swathe of great partnerships. We've got more acquired activity which is coming and it should be another very good year, at least that's what we're working to produce, and expect that will happen by the time we lap this year. So, development right now we feel confident that we can deliver a good year, both de novo as well as acquired.

Excellent. Thanks, Chris. Appreciate all the color.

Yeah, thanks, Larry.

Thanks, Larry.

And we will take our next question from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Congratulations.

Good morning. Thank you.

Good morning.

I guess, Chris, I'll start with, obviously, strong quarter here. Larry said strong start of the year. It's really nice to see that. Do you think you're gaining market share? Or is the whole industry is seeing kind of a recovery and an uptick in demand for physiotherapy services right now?

Yeah, I don't know yet, Brian. I mean, I think Select reports tonight after the market closes. I think ATI reports next week. We'll see how they do. I have a lot of friends who are CEOs of these other companies, but we tend not to put each other in a position where we're sharing details inside baseball. Look, I think last year was a tough year, and last year was one of the first years we didn't grow our visits per clinic per day. It was a little bit more muted, more flattish. And so, I think with staffing improving, we're seeing some pickup. Whether we're moving that from competitors or not, I got to believe in some cases, we are. Look, when we do acquisitions and we bring on really good companies to begin with, one of the reasons that people come with us is because the resources that we can provide. And some of those resources are directionally enabling these companies to grow at a faster rate than they would have otherwise. And so, I think that's coming from market share, but I don't have a good way to measure it to be absolutely precise, and so it's just my guess.

And then, Carey, as we think about rate, just curious, you talked in your prepared remarks about how you're going to walk away from some of these under-paying contracts. You've already been vocal and public about it since the last quarter or so. So, just curious what those conversations are like or what the feedback reception has been from those payers as you're having those conversations?

Yeah, I'd say it's mixed. In some cases, they're willing to come back and renegotiate rates with us and sometimes they're not, and that's fine with us. And we're going to move forward. It's not good business for us, and as Chris noted, we're just not going to -- we're not going to take that any longer. So, we're fine with walking away from it. We have -- they don't represent that much volume for us and it's a volume that we can easily replace, especially with the strong volumes we're having this year. So, we feel good about it.

And look, in the tight labor market -- no, I'm sorry. In the tight labor market and it is still a little tight, it's getting better, but it's not easy, you can't -- you just can't afford to be looking and hiring staff to take business where you don't have a margin profile. And so, when we talk about market share movement, we're going to move that market share to our competitors. We're going to let them take it at $0.60 on $1.00, and there's going to be no margin there. And so, we're going to replace that with much better margin business. And so whether they come back or not, they have in some cases, they haven't in other cases, I'm okay with that right now.

Yeah. No, actually, my last question, Chris, was related to that. I mean you called out in your prepared remarks, your turnover at the clinician level is -- that it's lowest. And so just curious, I mean, I know you're very in touch with a lot of folks in the industry and we're hearing turnover rates that are higher, notably higher than yours from some of your competitors. So just curious, what are you hearing from your own clinicians as maybe you do survey work that allows you to maintain this industry-low turnover rate for clinicians?

Look, again, I can't say absolutely with precision, but I definitely feel like it has to do with our partner model. It has to do with what they hear from leadership in terms of our values and what's important. And I think that resonates with people and helps people be stickier in terms of understanding the big picture. I think when we have challenges, we go about those challenges in a certain way, we're not beating people up, we don't want slamming fists on the table, and it's not a threatening environment, it's a supportive environment. And I think all that ultimately filters through. And I have to believe some of it is the fact that when you look throughout the organization from a leadership perspective, whether it's our Regional Presidents or COOs or even maybe, to a lesser extent, me having long-term industry experience and not just coming from another business segment or working with the private equity groups that flipped the business in another totally different kind of an area. I think it resonates with people that were about this from a care perspective first and foremost. And, I think I have a good team, and they do a good job carrying those messages and then embodying those things that are important, and I think ultimately it makes a difference. I hope that's what it is.

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

Thanks, Brian.

Thanks, Brian.

[Operator Instructions] We will take our next question from Matt Larew with William Blair. Please go ahead.

Hi, this is Madeline Mollman on for Matt.

Hey, Madeline.

Hi, Madeline.

Hi, guys. On the net rate, I'm trying to think about how do you expect the net rate to change throughout the year, especially as like sequestration impact rolls off in the second half of the year? I think in the past you said you expected it to be kind of roughly flat with the fourth quarter, and wanted to see if you're still thinking that way.

Yeah, I think for the full year, Madeline, that's where we would still expect to be. We will grow from where we -- we would expect the rate to move up from here, for sure. I mean we feel really good about the fact that our net rate was up over the first quarter of the prior year despite that 4% cumulative Medicare rate differential year-over-year. So that's good. Our commercial rates were up over last year by 3.2% in the first quarter to first quarter. They were relatively flat from the fourth quarter to the first quarter. But we will -- they are always a little lighter in the first quarter of the year and then we'll grow from here. So, I think we're still in good shape on the rate -- from a rate standpoint. But we've got a lot of work to do, as we've mentioned. I mean, this is not easy work, doing these rate negotiations and pushing for increases. And you'll push for them, you'll get them, but it will take a little while for them to come into effect. So, we're on a good trajectory, I think, Madeline.

Great, thank you. And then I think you mentioned last quarter that your group purchasing order was rolling out in February for your pilots. Any insights from the pilot or takeaways that you can apply as you roll it out more broadly?

Graham, do you want to take that?

Yes. So we've got it active right now in about 200 locations, and it's really too early yet to give you any analytics feedback on it. That would probably be more at the end of this quarter to the end of third quarter. But we're rolling it out in a systemic fashion and we're going to continue to do that.

Great. Thank you.

Thank you.

Thank you, Madeline.

[Operator Instructions] And it does appear that we have -- I do apologize. We do have a question from Mike Petusky with Barrington Research. Please go ahead.

Hey, Mike.

Good morning, Mike.

Good morning. And I had pressed star one three times, so -- and was about to hang up. Anyway, I got it, okay. Now that I've learned to operate a phone, let me ask a couple of questions.

Yes, me and you both. So, we both learned...

That's right, I am in very good company. All right. So, on rate renegotiations, Chris, you know I am a baseball fan. I mean in terms of just the nine-inning baseball game, how far along are you guys in terms of what you're trying to accomplish there?

We're early in the second inning I think.

Yeah, that's what I think, yeah.

It's -- we're a little farther along than we were nine months ago, so I can't continue to say first thing, but I think we've got a lot of baseball left to go.

Yeah. I mean, considering you sort of called out a 3% up comparison in your commercial rates, I mean that's great, but is there still much left to get after?

Well, we have a lot of contracts. We have a lot of partnerships with individuals across the 40-state network, and so it's a lot to get through and we are still early. So, that's the reality. But it just means that we're going to be at this for a longer period of time and it should have an effect for a while.

I wanted to ask on the revenue that you guys are sort of willing to -- I know you don't want to, but you're willing to walk away from on certain MA contracts, may be some other contracts as well? I mean, Carey, I think you may have alluded to, hey, it will start to impact second half. I mean, is there any way to sort of think about magnitude? I mean, we're talking a few million dollars, we're talking more than that? I mean, what -- just from a modeling perspective, I don't want to not sort of take that into account. Is there anything you can say to help on that?

I mean they're not big dollars, but there is -- I mean it's, I would say several million, something like that in revenue. But on every one of those dollars, the margin is zero to slightly negative, right? And so, I'm absolutely willing to walk away from that. And, as Chris has noted, and we've talked about, we're going to be able to replace that volume with better-paying volumes, and that will make a difference. So -- but that's all kind of baked into, if you will, into our guidance and kind of our expectations for the year. It takes a little while for the termination notice, once you provide the termination notice, for it to take effect, usually about 90 days. And so that's why I said, we'll probably see more impact from that in the second half of the year, because we've done that in the first quarter. It will mostly be effect -- in effect by kind of June, July, where we're no longer taking that business.

And I know why you didn't want to predict blue skies for the foreseeable future, but just in terms of what you guys said about April, would you be willing to share, did volume -- did patients visits day above 30 or near 30, if you have that data?

Yes, I mean, we've seen -- we do weekly visit reports and it's been, I'd say, [Chris] (ph), pretty similar to what we saw in March.

Above 30.

Above 30.

Okay. Fantastic. Outstanding. And then I guess I just in terms of your commentary around the injury prevention business, I mean, does the sort of the state of things make it less likely that you guys might engage in any kind of M&A in that area or does it make it more likely maybe there are some opportunities that open up? Can you just speak to that?

Yeah, I don't know that I can hand it, certainly it doesn't make us less likely. We love this business. We love the teams. We love what it does. Understand that over the last six years that we've had it, we've added programs and products and services in a pretty considerable way and some of those are cyclical, some of those are countercyclical. So right now, for instance, in last year even our testing business, which the year that we bought the testing business, which I want to say was 2019, the year we bought that business, testing was slow, and everybody was kind of nervous. And we just asked everybody to hang on. We knew there was going to be some cyclicality with this. Since then, last year and this year, testing has been on fire. Our injury prevention business by virtue of some expansion that we've had among existing clients has been really strong. But there are parts that have been affected that we've got to make some adjustments for. One of those is office ergonomics and it's lost on nobody that -- their offices right now, many are not full anymore, at least not on a five-day-a-week basis. And so, we're making some adjustments there to be able to do more things remotely and in people's homes and adjust that business a little bit. Nobody can control -- when I say nobody, I mean us, we can't control what the Fed does, and we can't control whether this ends up being a plane that lands softly or a little bit of a harder landing in terms of the economy. And so, CEOs and CFOs, they are trying to judge for themselves what that looks like in the coming period. So, people are kind of waiting to see before they make big investments in some cases, particularly newer customers. Existing customers' business has been pretty strong. So, we continue to look for, we're having discussions with, opportunities in this space. We like it just as much as we ever have. We're just trying to guide you toward our expectation for this short-term period, which we think will be a little bit more tepid than it has been. It's literally since the time we acquired it kind of been on fire. It's grown kind of really, really fast pace. This year will slow a little bit, it doesn't mean it's bad business. And I think we'll get it to pick back up again, but for right now, it's going to be a little slower.

Can I just ask real quick. On the agreements that you have in place in that business, are they annual renewals or how does that work?

Yes, they're mostly annual renewals. But look, the reality is when things happen and a company that you've had a good relationship with actually paused, and I'll give you a great example. This beginning of the pandemic, we were to roll-out a big contract with Uber, and we all know that Uber kind of disappeared in that first year in the pandemic. Nobody was out ride-sharing a whole lot. And so, we paused it. We had a contract, but it doesn't make sense to force the customer into something if they don't want And so there's definitely a balance there. These are longer-term contracts, usually annual, but when there are major points of inflection, we tend to defer to the customer and make adjustments accordingly, and that keep business around for a long time. That Uber story, which got paused at the beginning of '20, was massive for us in '21 and '22. And so, again, we're trying to do the right thing and trying to be good stewards, and so we have to make adjustments when the customer wants to make adjustments. We may not have to, but we do.

That story is a perfect example of why you guys have been as successful as you have in the last 20 years. Great job. Thank you.

Thanks, Mike.

Thanks, Mike.

And there are no further questions at this time. I'll turn the call back over to the speakers for closing remarks.

Okay, thank you very much. Thanks everybody for your time today. Appreciate all the questions. Sorry for my early fumble on the phone. We look forward to talking with you. I know we have some post-call follow-up with some of you. If you have any questions, just give Carey and I a shout, and we'll be happy to tackle those offline. Thanks, and have a great day.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.