Good day and thank you for standing by. Welcome to the U.S. Physical Therapy Third Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s 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, Chairman and CEO. Please go ahead sir.

Thank you. Good morning. And welcome everyone to our Q3 2024 U.S. Physical Therapy earnings call. With me on the line this morning I’ve got our executive team including Carey Hendrickson, our CFO; Eric Williams, the President and COO; Graham Reeve, Chief Operating Officer, West; Rick Binstein, our Executive Vice President and General Counsel. Also with us on the call Jake Martinez, our Senior Vice President of Finance and Accounting. I’ve got a lot to discuss with you this morning but before we begin we need to cover a brief disclosure statement. So Jake if you would please.

Thank you, Chris. This presentation includes 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. This presentation also contains certain non-GAAP measures as defined in Regulation G and the related reconciliations can be found in the company’s earnings release and the company’s presentation on our website. Chris?

Thank you, Jake. So we’ve got a lot to unpack here, a lot of things going on in this quarter, but I want to begin by thanking our partners and all of our operations support for the focus around care and the grind in general on what has been a little bit of a challenging market for a while now. The good news that in a number of key areas we’re making steady forward progress. First visit volume which directly correlates to our referrals ties most closely with the tremendous care that our partners and clinicians deliver every day in more than 700 locations around the country. It’s continued to be very strong. We’ve seen solid demand all year. This Q3 our patient visits increased 6% and our visits per clinic per day which is really our measure of local clinic demand hit an all-time high for any third quarter with 30.1 visits. Coupled with that our net rate continued to climb year-over-year to $105.65 versus $102.37 in the prior year quarter. This combination drove revenue 9.3% to $142.2 million for Q3 and adjusted EBITDA up 13.4% for the quarter. All of this during a time of sequential rate pressure from Medicare and wage and other inflation overall. On the cost side we made some decisions this quarter which will have an impact next year particularly as we look ahead. We closed and we’ll sell some of our underperforming facilities in secondary markets which are no longer working for us and creating a disproportionate investment in time. This is never easy but with recent incoming investments in great markets like Wyoming, Oregon and most recently New York we have to focus our time and attention on where we can create the greatest return. So net of closures we are operating…

Great. Thank you, Chris, and good morning, everyone. I will start with a few highlights and notes inside of our third quarter results. Our net rate, as Chris mentioned, increased again in the third quarter to $105.65 per visit. That’s the highest our net rate has been since late 2020 which was prior to the four consecutive years of Medicare rate reductions by CMS which also at that time benefited from a 2% sequestration rate relief. Our average visits per day in the third quarter were a record high for a third quarter at 30.1. Our contract labor costs decreased by $600,000 from the second quarter to the third quarter and our PT margin improved by 90 basis points over the third quarter of last year. We optimized our portfolio with the closure of 32 clinics which will improve our metrics going forward and will also allow our ops team to focus on growth initiatives and acquisition opportunities. And then our IIP business grew more than 13% in the third quarter even before adding the acquisition that we made earlier this year. We reported adjusted EBITDA for the third quarter of 2024 of $21.1 million, compared to $18.6 million in the prior year. Our adjusted EBITDA margin was 15.5% in the third quarter of this year which was up slightly from 15.3% in the third quarter of last year. Our operating results were $10.4 million in the third quarter of 2024, an increase of $1.2 million or 12.4% over the third quarter of 2023. On a per share basis, operating results were $0.69 in the third quarter of this year versus $0.62 in the third quarter of last year. Our average visits per clinic per day, as I mentioned, was 30.1. That was the highest volume for a third quarter…

Thanks, Carey. Okay, Operator, we’ll go ahead and open the line for questions.

Absolutely. [Operator Instructions] We’ll take our first question from Brian Tanquilutit with Jefferies. Please go ahead. Your line is open.

Good morning, Brian.

Good morning, guys. Good morning. So maybe, Chris, I’ll just ask you about these moves that you’ve made, exiting some markets and some of the labor initiatives that you’ve put in place. So how should we be thinking about the flow-through impact of these over the next six months to 12 months, number one? And then are you thinking of any incremental moves, whether it’s further evaluations of markets and clinics or anything else in the labor front that you can walk us through in terms of what those moves exactly are?

Sure. I would say give us a little time to let some of these changes kind of flow through. So I think the bigger impact is next year, particularly, well, in two areas. One, we won’t have any of the aggregate drain of those facilities, but more importantly probably than anything is that we’ll have the time and attention freed up from our very important ops team, so they can focus on our partnerships and our partners who are better positioned to grow. So that’s kind of the overall view. In terms of will there ever, is there ever, could there be other markets and times where we make adjustments, and the answer to that is absolutely. This is an evolving thing and we have to respond. People business, number one. People aren’t like numbers. Things ebb and flow, and sometimes they change over time. The good news is with many of these facilities, we’ve had them for many, many years, and they’ve been with us for a long time and they’ve done well. And at this point, you know, we see a better opportunity to carry forward with time and focus in other areas, but we’ll continue to have what we think is a disciplined pruning process, if that’s the right term. And -- but I think we’ve gotten a heavy lift of that done and some of these facilities will sell and we’re in the process of doing that, and so that’ll further help us just as we position ourselves for the right resources as we go forward.

That makes sense. And then maybe just on the Metro acquisition, Carey, number one, is that going to be consolidated going forward? And then maybe, Chris, for you, given the size of that deal, it’s larger than what you’ve normally been doing, how should we be thinking about your appetite and capability to do chunk deals at least for the next 12 months as you work on the integration of this asset? Thanks.

Yeah. Brian, I’ll just say, yes, we do expect to be able to consolidate Metro into all of our metrics, our revenue, expenses, all along our P&L. Yes.

And then, the answer to the question, Brian, is really about what’s the right fit. So, I think, we’re going to be well-positioned because the Metro team’s in really good shape. They have a great team. They have a great plan on the year. We certainly are in the middle and have been in the middle of integration-related things even before the deal closed. We were on the ground, had people on the ground working on some key things. So, it really depends on what becomes available, I think. And we don’t have anything today, immediately, that we’re working on that’s of the same size. But if there was something that came along that ended up like Metro, will be and is, which is a great fit, then sure, we have the resources and I think the appetite to tackle it. Now, whether that happens in the next 12 months or not, we’ll have to see. But we’re still working on good things. We have other things that we expect to get done this year and into the early part of next year that are kind of typical for us. And certainly de novo expansions and a lot of planned expansion within the Metro partnership as well. So, I don’t see us changing our tact. It’s just about looking for the right fit at the right time.

I agree with that. Thank you.

Thanks, Brian.

We’ll take our next question from Joanna Gajuk with Bank of America. Please go ahead. Your line is open.

Good morning, Joanna.

Hi. Good morning. Hi. Good morning. Thanks so much for taking the question. So, first, I guess, just to make sure to confirm this, since you did not mention the guidance or should I read it as no change to your EBITDA guidance for the year?

That’s right. Yeah. We still expect it to come within the range we previously provided of $80 million to $85 million.

And also to confirm, this Metro acquisition we were talking about, was that already contemplated in this guidance range?

Yes. It was.

So, if I do the math, the rough math, I guess, for EBITDA versus NIC [ph], right, so adjusted EBITDA number, so this deal adds maybe a $1 million or so, right, and you still have some clinics in there, but it sounds like you’re including that deal. So, I guess, that’s why no change in the guidance rate. And if I may just follow up on the Metro acquisition. So, you mentioned, clearly, better metrics. We know the margins here are higher than USPH. Can you give us a little bit of color what’s driving that? Is it because they are management companies, there’s a cost structure or there’s something market-specific that’s driving the better metrics for that asset?

Yeah, Joanna…

We are -- go ahead. Go ahead.

Go ahead, Carey.

Yeah.

No. I am sorry.

I was just going to say, they have larger clinics than us, for the most part, so than the rest of our portfolio on average. So, they run somewhere between 45 visits per day and 47.5 visits per day. So, that’ll obviously have some upward pressure on our average visits per clinic per day. Their net rate is pretty similar to ours, so there won’t be a whole lot of change there. Their margin, they have a full support system at Metro that, with their support team from a finance perspective, their billing and collections, and all of those things. So, the margin is actually pretty similar to ours from an adjusted EBITDA margin standpoint and that’ll all be in our PT line. So, it may -- it’ll be pretty similar to the rest of the margin for the group.

Okay. Thank you. And I know you don’t have a guidance for next year, but our next question will be, so now we know this acquisition at a close, so that’s good to know it now. But other than that, any, I guess, tailwinds and headwinds to think about as we think about next year? I guess we have the final Medicare date update, but anything else we should be thinking about to think about next year? Thank you.

Yeah. Not that I know of. I mean, the most recent thing is the Medicare final rule update, which, as you know, we know all too well, has been typically on an annual basis and further modified by Congress, all of which is in motion and shifting sands, as we speak right now, as a result of the election last night. And so, that’s all going to have to shake out. Other than that, I don’t know of anything that is on the horizon, plus or minus that is material for next year.

Right. And of course, we’ll benefit from the full year’s performance of some of the acquisitions we’ve made. And Metro, in particular, we have two months this year. We’ll have 12 months next year and that’s a significant acquisition. So, that’ll be an add to our 2025.

And let me -- Joanne, let me add one thing, and Carey made a couple of good points. One of the things that’s really helped us a lot this year and it’s taken us a little time, but we’ve really made good progress around net rate. The team’s done an excellent job. We continue to get pretty meaningful increases in key contracts that haven’t started yet. And so, we continue to be hopeful that we can see rate lift. The other area that’s been particularly strong, and I just really want to give a shout out to the people who’ve worked on this, they’ve done an excellent job, is in our work comp area. Carey shared with you some of the% change numbers, and I think in those, while those were 100% accurate, I think it gets lost in the shuffle a little bit. Our work comp visits increased on a year-over-year basis a little more than 16.5% compared to third quarter last year. It’s a pretty strong increase. Our revenue for work comp increased just under 19% on a year-over-year basis, because the rate in the work comp space also increased as a result of the work that the team has done. And so, we’re hoping that combination, obviously is giving us some continued, giving us the lift that we’ve enjoyed so far and will continue to give us some continued lift as we go forward.

So, if I may, a last follow-up on the last comment, because it just begs the question there. So, where should we expect these workers comp next year to get to, I guess, there was a time, years ago where you were maybe more like 14% workers comp, so is that achievable or should we just kind of continue to grow from this goal at 10.5% going forward and maybe over time get there, but maybe not? So, any color, I guess, how do you think about where it could get to? Thank you.

I wish I had a really, really clear, great crystal ball. I don’t. All I can tell you is the team has been focused on it. We’ve discussed it with all of you that it’s a focus. We put it out there that we were going to move the needle. The needle’s definitely moving and it’s moving in the right direction at an outsized rate, and where we end up, I don’t honestly know. I’d be making up a number, which I’m not going to do. So, I think for now, where we are and that it’s changing slowly, and there are going to be things that happen in between in lots of different areas, some expected, some not, and so, just kind of mix it all together and I think the net overall is definitely more progress to be made.

Thank you.

Thank you.

We’ll take our next question from Larry Solow with CJS Securities. Please go ahead. Your line is open.

Hi, Larry.

Hey. Good morning, Chris.

Good morning.

Hey. Good morning, Carey. I guess, just a few follow-ups on the pricing. So, the net rate this quarter, you said up 3%, and that obviously is not of a CMS decline. As these rates continue to pick up nicely sequentially, it feels like you’re building some good momentum, right? And it’s fair to say that, like you said, you have, I assume, annual kickers, too, in these things. So, is there -- are you more comfortable that we’re entering a period now where these, at least on the commercial side, rates should grow 2%, 3% a year? Is that like a fair multiyear outlook?

Carey, let me start with this, and then you can jump in. So…

Yeah.

… I would say, Larry, the rates that we’ve, just to be really clear, the rates, most of the rates that we’ve re-contracted, many have been a multiyear contract. So, it might be 4% or 5% in year one, and then 2% or 3% for two years or three years thereafter. I don’t know that many of the contracts have a perpetual annual increase associated with them. They’re contracted for a period of time and then they just renew after that, and we’ve got to go back and get after it again before these contracts expire. But for the near-term, many are going to have additional boosts, not all, but many. And so, that is helping us to offset the continued pressure, unfortunately, that we’re feeling from Medicare, at least for this one more year.

Right. And on that Medicare, so the 2.9%, right, I think it’s a 2.9% cut for you guys, right, or something like that. Is that what it works out to?

Yeah. It’s just under 3%...

Around there I think. C Right. So, it’s very code-specific, so.

Right. And assuming, there may or may not be some congressional action, obviously, there’s been in the last few years. I feel like there probably, there’s a good chance, reasonable chance there will be, but let’s just assume it could be a similar rate decline to what we’re seeing this year. Any thoughts, from a high level, I’ve heard from various sources that this should be the last year, right, on the physician fee schedule and any thoughts as we look out, 2026 and beyond, that hopefully Medicare, which historically has been more of a little bit of a good guy for you guys, at least becomes neutral?

Yeah. I think so. I mean, look, trying also to predict what the government’s going to do is, it’s been kind of a foolish business, but yeah, this should be the last year and we believe it’ll be the last year, and nobody we talked to in Congress thinks these cuts were right to begin with. In fact, they were based on all the assumptions that medtech now admits erroneous assumptions that were unintended. We ended up with the unintended consequences, and so I can’t see that they’re going to perpetuate that, but we’ll have to wait and see. Unfortunately, Medicare is a year-to-year thing and really should be probably a two-year or three-year rolling kind of a look so that companies like ours had the opportunity to know what the landscape was going to look like. It’s not that way yet, but we’re expecting this to be the last year that, we have a headwind there, for sure.

Good. Good. We’ll cross our fingers there. On the volumes, Chris, obviously, at a record high, so I can’t complain, per se, but only up about 1%-ish in the last couple quarters and I think flash for the year. It was a little bit of a difficult comp in the beginning of the year, but is that more like what you’ve had bigger volume growth as we look over the last 10 years, probably average more like 2% to 3%? Does that just kind of move around a little bit? I know you had some staffing challenges, too, which may be led to some inability to meet all the demand, but just any thoughts on volume as we look forward?

Yeah. And Larry, I don’t have it at my fingertips, and I’m trying to remember what same store was this quarter. I thought it was two-something. But, yeah, you’re right.

Okay.

Go ahead.

No. It was about 2.5% of the volumes.

Yeah. No question. I’d love for that to be 3.5%. Staffing, it’s tight right now.

Right.

It’s tight everywhere, and at the same time, as you heard, we’re trying to balance, not having resources that are standing around with good patient demand and trying to hone that in because small dollars aggregate pretty quickly and so it’s a little bit tricky. But I can tell you the team’s working very, very hard to create that, to keep that demand up and to create that growth. We are where we are right now and we’ve had a lot to deal with in terms of rate pressure and response on that side and cost pressure and response on that side, and I think, all in all, it’s been perfect. It’s not perfect, but not too bad, either. It’s been pretty good, net-net, so we continue to work hard at that and none of us are satisfied with where we are. We have things that we can do better and we’re working hard at, so that will continue to be one of them.

Great. Thanks. I appreciate the color.

Yes, sir. Thank you.

[Operator Instructions] We’ll take our next question from Mike Petusky with Barrington Research. Please go ahead. Your line is open.

Hey, Mike. Good morning.

Hey. Good morning, guys. Hey. Could you all give, just real quick, on housekeeping, the payer mix breakout, if you have it?

Sure.

Yeah. Hold on just one second. Let me get up in front of me. The third quarter is pretty typical. Commercial is 47%. Medicare is 33%, which is right in line with where it has been. As I mentioned, workers’ comp went up. It was 10.4%, and then, there’s everything else. There’s Medicaid, personal insurance, health pay, so pretty consistent. It’s very consistent with the second quarter, other than, workers’ comp inching up a little bit.

It was Medicaid somewhere around, like, 6%, something like that, 5%, 6%?

No. It’s about 3.5% right now.

Okay. Great. So…

Yeah. 6.5% Medicaid.

Okay. So, curious on the, injury prevention business, Chris. This, obviously, the topline is great because of the M&A, but it’s also great ex the M&A double-digit growth and I’m just curious, I mean, is that new business? Are you getting deeper with earning customers? What’s driving that?

Yeah. Yeah. I would say yes and yes. So, new business and deeper with existing customers. The nice thing about this business is, and this is true of anything, it truly, truly works, and so it’s designed to save companies money. It does that. It does that on a very consistent basis and so typically, we’ll start with the company, maybe a national company, but we’ll start with one or two locations, and they tend to be the hardest, worst locations in terms of injury management or injury exposure, and we start with that and the team does a great job, and then we get embedded organic expansion kind of opportunities with that company based on the great job that the team has done. And then there are new companies, risk managers, and certain industries move between companies. They’ve had experience, and they’ve heard about us, and so we get brought in either on a direct basis or through an RFP process and win those opportunities. And again, I’m really proud that both teams have done a really good job this year. Our core team, our legacy team, their largest customer has decided to put us in every one of their locations around the country, and so, that’s been, we’re already in hundreds of locations, so that’s been a fantastic relationship. And then the other team, we have a lot of auto industry business. We’ve displaced one of the biggest providers in the injury prevention industry in their home state with a major auto manufacturer and that’s a 50 FTE book of business where we have 50 people now on site full time or nearly so within a given footprint. And so that’s a big win. That’s a new win. And so it’s really both. And so as you point out, we’ve done some very good acquisitions that have worked out really well for us that have opened and broadened not only our service delivery, the products and services that we are able to sell to industry, so it’s created more cross-selling opportunities, but it’s also increased our exposure in different industry verticals, so it may be that we were primarily in distribution and warehousing and now manufacturing and now auto manufacturing and now construction and transportation, and so once you get a footholder or a customer in each of those industry verticals, you open yourself up to a world of other people who think, okay, they understand my business, now maybe we can talk and so it’s been great overall. Like I said, really proud of both of those teams.

That’s fantastic. In terms of the Metro deal, I’m just curious, is there any ability for you guys to, I think, Carey may have said that the net rate is pretty favorable for Metro, but I’m just curious if there’s anything on the contracting side that you guys can bring to them where maybe your contracting is a little bit more favorable to certain insurers, just curious if there’s any opportunity for some uplift from your contracts? Thanks.

So, I will tell you that the Metro team did a great job historically and even leading up to our acquisition in terms of what they’ve done with their own contract rates. Now they have some additional resources that we can bring to bear with and for their team. Some of the rates that Metro has re-contracted haven’t really kicked in yet or just now kicking in or will kick in shortly. And so, yeah, I think there’s some additional lift and we’re looking at that whole New York market very strategically to see how we can continue to add to that and time will tell based on our ability to execute on this, but I feel pretty confidently over a period of time, we can do really good things. But I will tell you that they themselves did the heavy lift so far and we’ll see if we can help them with that as they go forward. Very good. Last question for me, just in terms of the election results last night, is there anything that came out of that last night that makes you think that the U.S. Congress would be more or less likely to sort of do their typical week before Christmas action on the proposed reduction in reimbursement?

Yeah. That’s an interesting question and I kind of expected it, and I don’t really know how to answer it. We’ll see if both houses of Congress end up being Republican controlled. It looks like that’s going to happen. Look, I’m not going to predict. I don’t know. I think they’re on the road and this isn’t a political statement by me in any way, shape or form, so I don’t want anybody to read into it. I think most of us understand that Republicans are more deficit-focused and smaller government-focused than their counterparts on the Democratic side of things. So we’ve been in kind of a little bit of a more balanced relationship the last couple of years. That may change a bit as we go forward, and any time you have change, pieces get moved around, so I don’t know that I can predict. We’re prepared for the cut that’s been announced, regardless of what happened last night and we’re going to be working to try to get that cut that was announced here a week or so ago, mitigated as we have over the last number of years. And I feel reasonably confident that, let me say, I feel reasonably hopeful that we can get that done, but the political landscape, it’s hard to predict.

Can I just ask a quick follow-up to that? Are you aware of any…

Yeah.

… folks that were particularly, in Congress that were particularly friendly to outpatient PT that will no longer be part of Congress going forward? I mean, did you all lose anybody that’s been particularly helpful in terms of your advocacy for PT and the industry in general?

I think the folks on our side through APTQI, which I’m very much part of and proud to be a part of, have done great work. Liberty Partners has done great work to help us long ago understand that we have to have broad connectivity on both houses of Congress and across both parties. And so I think we’re pretty well positioned. Many of our primary advocates are key people that are very secure on both sides, again, both parties and both sides of Congress. And so I think we’re okay there. I definitely don’t think we’re starting over, if that’s the question.

It was. Thank you.

Thanks, Mike.

[Operator Instructions] And there are no further questions on the line. I’ll return the call to our speakers for any additional or closing remarks.

Yeah. Thank you, everybody. I appreciate your time today. Again, team’s working very hard. Give us a chance to finish out this year the way that we have described to you and we’re focused on delivering continued growth next year with some of the capital deployments that we’ve made and some of the adjustments that we’ve made ongoing and even the ones here more recently. So again, we thank you for your patience and your trust and we hope you have a great day. Take care. Bye now.

This does conclude today’s program. Thank you for your participation and you may now disconnect.