Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I'd like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thank you, sir. Good morning, and welcome, everyone, to U.S. Physical Therapy's Second Quarter 2023 Earnings Call. With me on the line include Carey Hendrickson, our Chief Financial Officer; Eric Williams and Graham Reeve, our Co-COO; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President of Finance and Accounting. Before I provide a little color on the quarter, we need to cover a brief disclosure statement. So Jake, if you could take that, please.

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. So this morning, I'm going to keep my commentary kind of at a high level, and then we'll turn it over to Carey to go through the financials in more detail. I want to start by thanking our partners, our operations leadership team, sales and marketing directors and our digital marketing support and development teams, all of whom are working hard every day to drive patients to our door, we can effect life-changing care, allowing them to quickly return to work sports into all those activities that support families uplift parts as well as communities. This would not be possible if not for the care, connection and dedication of our front line caregivers. Many therapists across our more than 150 individual partnerships. In these first 6 months, first 2 quarters of 2023 as a result of the excellent care and outcomes, you continue to provide our patient -- you continue to provide our patient demand has been greater than ever before in the history of our company. Quarter 1 delivered record visits per point for that, the highest ever for is normally a seasonally slowest quarter at 29.8. March gave us the best single month at that point at 30.7 visits per point per day. I'm pleased and proud to say that despite challenges in the labor market this past year, we were able to continue that quarter 1 momentum. In fact, we've turned it up even more in the second quarter new record volume in April and May at 30.9% for both months and overall Q2 volume at 30.4% visits per clinic per day on average. We produced some very good additions, both acquired and de novo since quarter 2 a year ago. We've added 48 clinics in total this year 22 de novo clinics through the…

Great. Thank you, Chris, and good morning, everyone. We had an excellent second quarter in many respects. We had all-time high patient volumes. We had strong growth in revenue, continuing downward trend in our salaries and total operating cost on a per visit basis. We had growth in our physical therapy operating income and our physical therapy operating margin percentage and year-over-year growth in our total company's adjusted EBITDA. And in addition, as Chris noted, we completed a successful equity offering that further strengthened our capital structure, providing significant capital for future growth initiatives. The equity offering provided us with approximately $164 million in net proceeds for the issuance of 1.9 million shares. We used $35 million of those proceeds to pay down the debt on our revolving credit facility which at the time was at a variable rate of about 7.2%, leaving approximately $129 million. They also lowered our leverage ratio, resulting in a 25 basis point decrease in the rate on our outstanding $150 million term loan based on our leverage grid. We've invested that cash at this point at a high-yield savings account prior to deployment into acquisitions. The savings and interest expense and the interest income on the net proceeds makes the offering immediately accretive even with the issuance of the 1.9 million shares. And of course, the return on those net proceeds will increase substantially when we deploy them into acquisitions. We reported adjusted EBITDA for the second quarter of $21.7 million which was the second highest quarterly EBITDA amount in our history and an increase of $0.4 million over the $21.3 million we reported in the second quarter of 2022. Our operating results, which includes the impact of higher interest expense, was $0.76 per share in the second quarter of 2023. Our total company…

Thanks, Carey. I appreciate that. Operator, let's go ahead and line up for questions.

[Operator Instructions]. And we'll go first to Brian Tanquilut with Jefferies.

I guess, I'll ask the question. It sounds like based on the metrics that Carey shared with us this morning, whether it's productivity of the clinic, cost per visit and all these KPIs, it looks like you're executing very well. But as I think about some of those key points, right? I mean the productivity of the clinic and the cost to do deliver care how much runway do you think there is left to drive some of those metrics?

Yes, it's a good question. So I mean individual clinician productivity, there's not a lot of elasticity there. Individual clinic throughput, I wouldn't call it out productivity, but just being the number of patients that we can get through an individual clinic. We've got as much room as we had probably 4, 5, 6 years ago. I mean we constantly adjust our hours. We can expand our hours most of our clinics are not open on Saturdays. A lot of our clinics, I think to say this, that a lot of our clinics in certain markets closed early on Fridays. We've got capacity on a per clinic basis, to continue to have that number increase. So that's not going to be a limiting factor. And we certainly have room to move this in that rate this quarter, a little bit of a disappointment as we've really got extremely granular with where that issue is, I think the fact that we had the turnover that we had and the scarcity we had in '22, particularly at the front desk. This caused us not to be as valid in as we need to be from a scheduling perspective. I'm actually encouraged by the fact that it's, I think, addressable the team, the clinical services team in conjunction with our operations group is on top of that, and they were holding out some very, very detailed training, not just on that and a couple of other areas that I think will help us as we going forward. So on one hand, for the quarter, a little better -- but we have made progress, as you pointed out, in all of the areas that we've been focused on. I think we'll make progress there. We know what to do.

Got it. And then maybe since you mentioned rate, obviously, 1% net rate growth on the commercial side being offset by some of the Medicare stuff. But as we think about maybe the number of contracts that you have, without going to percentages, right? I mean how much opportunity is left to, number one, drive positive rate trend within the portfolio of contracts? And maybe the second would be to push our rate increase above, say, a 1% number.

We have so many contracts to happen any as we do just because of our companies configured across more than 150 partnerships. But we've got a lot of contract negotiation left in us to do Carey, I don't know if you want to comment further.

No, I agree. We have lots of contracts. It's a constant focus for us, Brian. We're up -- and we're having good success. I mean we're having success in these rate negotiations I'd say the big payers are the ones that just takes longer to get -- make progress with them. And so we're continuing to work at it every day.

Brian, some of these contracts we're getting increases now, but we have been sequential annual increases that are yet to come even on the one you've completed already.

Yes. We're working to build in 3-year step increases for the most part. So we'll have less to touch each year. We know we're going to be getting those contractual rate increases as the year goes along. So that's the move to...

Last question for me, Chris. I mean, obviously, you guys did the raise, you're sitting on a bunch of capital right now, a lot of balance sheet flexibility. I mean what does the market look like? I know your space is obviously dominated by a bunch of PE-backed players. And I know your appetite has been more on the smaller side rather than the big platforms. But what does the market today look like in terms of either competition for deals or opportunities popping up that probably are more scaled given your capital availability?

Yes. I think the opportunity is still strong. I think what we're seeing right now is a lot of the PE-backed companies have been decidedly more flat this year, particularly because a number have either done significant deals themselves or gotten to the point where I think interest rate increases were leverage is high and I think, to a certain extent, the reality that many of these individual operators have kind of missed the peak as said in this year. I mean we're not in 2019 anymore at the height of this or even early '21 when things were still really, really hot and I think there's a little timing remarks in the market. Having said that, we're busy. Now for us, sometimes, we're ready to go and then the partner has something and things push a little bit. And that's happened on a couple of occasions this year. We'll still get those things done. It's just taking a little bit longer. But we're looking at bigger deals too and opportunities not just in PT, but in injury prevention. So it's going to be lumpy. It's always been lumpy, but we're going to get good things done.

We'll take our next question from Joanna Gajuk with Bank of America.

So in terms of this commercial rate increases, if I can just follow up there. So the 1% I guess experiencing right now. Are you kind of suggesting that as you negotiate incremental the additional contracts that rate increase could actually accelerate into next year?

Joanna, it's just going to depend on the timing of it kind of like M&A, it's lumpy, it's which ones you get and the timing of those. I certainly expect those commercial rates to continue to increase over time. We're working hard at that as far as the rate of increase, it's hard to say.

These contracts last and they go on for years and every additional one builds on what we've done previous.

Yes. As we just mentioned, too, we also have step increases built in for -- on the ones that we renegotiated. So those should continue to help us as we go forward. So I think -- I mean, I feel there's always a lot of work to be done at commercial rates because there are so many contracts. So we've got -- we've still got a bit of work to do, but we've made good progress, and I think we're going to continue to make good progress. I know we are, and we should see those rates continue to grow as we go forward.

And Carey, when you say the increases that we're seeing, the not 1% increase there, in some cases, double-digit price increases. Or 3% to 5% or 6% increase. We're just not touching the whole portfolio, yes.

That's right. We're getting 3% to 5%, 6% increases in year one. And over a 3-year period, a lot of times, it's like 10% to 12% increase over that 3-year period that we've got built in. And I also say we're also making progress on some of the other Medicare Advantage contracts because those are a focus for us as well. And those we can impact and we've terminated a number of those contracts I mentioned in my remarks, but there are other ones that we can still renegotiate, and we're working on those as well. Because Medicare Advantage is becoming a bigger portion of our Medicare visits overall. And so we've got -- and that we can address somewhat. We can't address what CMS hands down, but we can address at least to a certain extent, those Medicare Advantage contracts and how they relate to those CMS rates.

Okay. So you say on the commercial, it's just kind of accumulate over time because you obviously have a 3-year contract, so you renegotiated like 1/3 of your book and then you're negotiating another 1/3, so kind of like over a 3-year period, are you going to have a the slowing through the book. So eventually, it's going to be more effective on what's going on in all of the contracts versus now only 1/3 of this contract. So that makes sense and on this last comment on the MA part of the business. So is there a way to think -- I know it's a small portion, but to your point, is because the Medicare . So how -- I guess, how to think about the portion of that business that already kind of was reset and a portion that -- how big is the portion that kind of you're still trying to either renegotiate or drop these contracts?

So within Medicare, the commercial advantage Medical Advantage. So right now, I'd say the Medicare advantage -- I mean it's grown as a percentage. It's around 40% to 45% of our total Medicare bucket. So if you look at all the Medicare visits, it's about 40% to 45% of it and that's up from where it was in the upper 30s last year at this time. So that piece, there's been a push to get people to Medicare Advantage. I'd say we're still early innings on that, too. We've done some really good work as it relates to identifying some of these contracts that we just know are not -- they're not they're not suitable. And so we've terminated those. So we've identified the primary ones that are in that situation. We've got still others that address. Again, we've made progress on those as well, and those are the same kinds of increases we're seeing. A lot of times, those are double-digit right off the bat because we're going from -- it could be where they paid 80% to 85% of Medicare and bumping them up to 100% or it may be from 80% to 90%, but those are really nice sizable increases on some of those contracts we're making.

That's good to hear. And the last piece, I guess, on the pricing workers' comp. So what do you spend now in terms of your mix? And I guess because that's the highest rates of all the different payers, right? So what's the mix there? And kind of -- I know you kind of -- the bucket, so to speak, the client are in the pandemic, and I guess was there was some work being done to kind of bringing back maybe to the 14% pre-COVID of any update on that front?

Yes. So for our mix -- go ahead. I'm sorry, Eric, are you going to say something?

Yes. I was going to weigh in. This is Eric Williams in terms of where we're headed on the work comp side. So yes, we started putting in a lot of efforts second quarter of last year to rebuild some of the relationships with the networks we brought back in the individual who actually built the work comp program for us years ago. And in second quarter of this year, this is the third straight quarter where we saw an uptick in volume, still a lot of opportunity. The volume we actually saw in Q2 was the highest volume we've seen over the course of the last 6 quarters. So we signed some new network agreements here beginning of the year. We've got a number of additional contracts in play right now, and we feel optimistic in terms of our ability to continue to drive this as a higher percentage of our mix it was just under 10% here in Q2 of this year.

And I would just say for workers' comp increase as a percent of the mix, is really notable because, as you know, our volume has been increasing pretty significantly. So they're increasing at a pace that is greater than our overall increase. So that's -- that's good. And they were closer to 9% in the first quarter as part of the mix and workers' comp is about 10% in the second quarter. To address just kind of the mix overall. Joanna, commercial is about 47% in the second quarter. Medicare is 34%, workers' comp is 10%, Medicaid was about 3.5% and then there's just everything else, which is maybe 6% or so.

Great. And so helpful, if I may, just squeeze last 1 on pricing and I guess the outlook into next year. So the America proposal calls for, call it, all in, 3.25% which that was finalized, would be worse than 2023 rate cut. So what's your take on that proposal? And how much work, I guess, is being there? And what's your visibility to Congress, stepping in again and trying to lessen that cut here.

Obviously, does that proposed rule came out middle to the end of July as it does every year. So we're early in that process. Again, I mentioned APTQI in my prepared comments, our delivery partner, lobby group leadership in APTQI, all of our individual member companies who are very active in Washington are all putting a full court press. We just unfortunately, it's difficult in when we get finalized in December on a short runway changes necessary to immediately come out of the gate and over companies, and this is now a few years overall. We think it's very misplaced these reductions they're picking on probably the greatest value in health care for returning people to function from significant injuries and surgeries, which sell work without physical therapy, but it's early. And in summer, and so we've got not as we have in the past, a lot more work to do. I'm hopeful we'll make progress. I'm not going to give you much more than that on a crystal ball because I don't know yet. But we're going to -- the effort is massive directionally in that regard.

We'll take the next question from Larry Solow with CJS Securities.

My question was answered already, but go to see, I guess, the topic to that on the pricing. But it does feel like, I guess, just in terms of your guidance just on the shorter term, you didn't -- it feels like you have a little bit of a tailwind, at least going to the back half just from fixing up some of the scheduling misalignments and walking away from some of these Medicare agreement that you just spoke to, right? So again, not asking you to do it as guide on the back half of pricing, but perhaps this is at least a low watermark for the year, it could slowly work our way up in the back half. Is that fair to say?

We do believe there's potential to move that rate out, yes, based on the things that we've talked about today, the things we think it's addressable and related to the work we've already done. Yes.

And obviously, the negotiation is much more of a multi-yield thing, and you touched on sort of gas just like not getting 1% price increase you're getting probably more than that or a lot more than that mid-single digits or whatever, but you have so many contracts, right? So I [indiscernible], that you're only moving 5% of the time or whatever, right? So it gets divided by 20% or maybe not that much, but a multiplier effect. But so fair to say that you still probably haven't worked through a lot or majority of your contracts haven't changed.

Yes, that's right. That's not even close. We've got a lot more to do.

Okay. Okay. Great. And just in terms of volume. Obviously, a really good, strong first half, really back half of the year. Is there anything sort of incorporated you kind of -- I think the average volume in the first half was like up we look at both quarters. Do you expect those trends to continue in the back half or more historical rate on or 2% to 3%, which is what we actually saw this quarter, but any thoughts on that?

I mean if you look back to last year, to the front part of the last year, we didn't have the scarcity that we really became acute in, I would say, probably in June of last year and forward, we didn't have the question of all the other things. And so -- the first half of this year, actually, the part that we're in are just completed had tougher comps, the second half of a year ago in '22 we actually. We couldn't address all the volume that we might have just because staffing was so tight. And so I can tell you, staffing's not easy right now, but it feels a lot better than included a year ago, we made adjustments. Our team has done a really good job and so I'm hoping we can expand some of those same-store numbers just because in part, volume has continued to be strong, but our comp is a little bit weaker in the second half of the year.

Yes. The weakness comment I would say that the first quarter was such a big jump because it was -- we just -- we've never experienced volumes like that in January and February, particularly. And so that was a really nice jump in the first quarter. I wouldn't expect it to get back like the 6% mature clinic growth in the second half of the year. But as Chris mentioned, the comps are a little bit -- are not quite as strong as we go into the back half of the year.

Got you. And you probably -- obviously, like you said, what better position at the beginning of this back half anywhere last year to in terms of your staffing. Okay. Just last question, Carey, while you're here. Just you mentioned you've done a really good job and costs on a per visit basis or down overall cost really hung in that overall margin in the last few years has actually been pretty steady despite rapid inflation and price pressure, which we really commendable to you guys. Can you just explain to me how come on a -- if I just look on a year-over-year basis, your margins, salary as a percentage of revenue and it's still up. Is that just more of a function of the acquired clinics pricing? Or what's kind of driving that?

Yes. It's a combo because when you're looking at those percentages, you're looking at -- there's a double impact, right? There's the impact of volume and there's impact of rate. And so I think that the rate and how that influences revenue when you're looking at those costs as a percent of revenue is really -- is what impacts that.

Yes, I still agree with you. It's driven off. It's a driver. It's reflective of the pressure that I think we've done it pretty well with the pressure on that rate.

Yes, and that's why the best metric we believe to look at for those costs is looking at on a per visit basis.

That's all. I totally understand why you do that, appreciate that color.

We'll take our next question from Matt Larew with William Blair.

It's Madeline Mollman for Matt. Just one on the segment. I know it was down slightly this quarter, and you mentioned that some contracts -- you talked to some customers about delaying contracts or pushing them back or putting pause on them. With the macro environment starting to improve -- have you seen these customers reengaging, wanting to restart contracts, beginning discussions for that at all?

No. I'm going to tell you, and I don't know that, that today, close to know if we have certain contracts where people were concerned and now that they're not. I honestly -- I think things are coming still with those few customers, not a lot, and it's heavily weighted on the tech side of the business. What their business is heavily tech influenced. I still think they're kind of same outlook as they were before. Having said that, we've added a lot of good customers this year and across both partnerships, we further diversified our client base. But to my knowledge, and Eric, you might speak to it. I don't know if we've seen any big reversals that are meaningful yet.

No, I would agree with that. I think you summed that up perfect, Chris. I mean the IIP businesses have done a nice job of trying to diversify their portfolios. But the tech sector and the automotive sector got hurt really hard. And that was a business that we saw fall away tail end of last year. We've seen other customers on the retail side and distribution side actually increased. So on a macro basis, I think things have stabilized. And I think there's opportunity for growth here going forward, but not near as robust as it was in 2022.

Great. And then again, on IIP, can you talk a little bit about what you expect past 2023? I know this is a more muted year, the long-term growth for that segment to be? I think last year, same-store growth was in the 20% range for the first 3 quarters of 2022. So just what can we expect that segment to grow over time.

Look, we haven't had IIP all that long, and the growth has been extraordinary. So for me, right now, it has many moving parts as we're in between politics and the economy and interest rate environment and the fed all the many things that influence. CEOs and CFOs to make decisions they aren't uniform across the country because different sectors, as Eric mentioned, recover at different rates or get hot or cold at a different times. So expect us to be ahead of our PT growth and to be very positive as we go forward. All other macro things being relatively stable and equal. We've demonstrated that we can grow this business through acquisition. Our clients, generally speaking, are very, very sticky. They stick with us, most clients expand, particularly those clients that have numerous operations positioned around the country. But I'm not going to be able to take a growth rate at this point because I just don't have topics that are clear enough to do that.

At this time, we have no further questions in queue. I will turn the call back to Chris Reading for any additional or closing remarks.

Yes. Thanks, everyone. We know we covered a lot. We appreciate your time and attention this morning and Carey and I are available today and rest of the week and next week, we've got board meetings come for next week. But after that, we'll come back up for air. So if you have any questions or any follow-up necessary, please give us a call, and have a great day.

Thank you all. This concludes the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.