Good day and thank you for standing by. Welcome to the U.S. Physical Therapy Third Quarter 2021 Earnings Conference Call. Operator provided instructions on how to ask questions. I’d now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thanks, Priscilla. Good morning, and welcome, everyone, to our U.S. Physical Therapy third quarter earnings call. With me today on the line include Carey Hendrickson, our Chief Financial Officer; Graham Reeve and Eric Williams, our Chief Operating Officers; Rick Binstein, our General Counsel; Jon Bates, our Controller. Before we start our discussion around our earnings and operating performance this quarter and year-to-date, we need to cover a brief disclosure. Jon, if you would please.

Thanks, 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 and the company’s actual results can vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Thank you, Jon. We are going to change things up a little bit from how we typically do them. Rather than start out providing select points of performance and color, I’m going to ask Carey to walk through the entirety of the financials in detail. We have the complexities as a result of this pandemic and some of the related secondary issues where we feel like we need to spend three years in order for you to have the clearest possible picture, which is certainly what we want to have. I will say I think Carey and the team have done a wonderful job trying to present this information in a cohesive way that provides the most clarity and really in the linear continuity so that you can see how we did on a pre-pandemic basis in 2019 right through the current period. Then following Carey’s review, I’ll provide some brief comments related to our performance along with a few key points of interest that I think you want to hear about. So with that, I am going to turn it over to Carey.

Great. Thank you, Chris. Good morning, everyone. Our financial performance in the third quarter of 2021 and through the first nine months of the year has been very strong, as outlined in today’s earnings release. We reported third quarter 2021 operating results per share of $0.85, which was 21.4% higher than the $0.71 we reported for the pre-pandemic third quarter of 2019, and it also equaled our record high third quarter operating results per share of $0.85 in the third quarter of 2020, excluding relief funds, which, as we noted in the release, benefited from significantly reduced costs related to the COVID-19 pandemic. Due to the impact of the pandemic on all of our 2020 results, I will provide comparisons of our key metrics to pre-pandemic periods in 2019 in addition to comparisons to 2020 periods. We reported adjusted EBITDA of $19.9 million for the third quarter of 2021, which was $300,000 higher than the $19.6 million, excluding relief funds, that we reported in the third quarter of 2020, and it was $3.0 million or 17.6% higher than the pre-pandemic third quarter of 2019. Revenues in the third quarter of 2021 were $125.9 million, which was an increase of $17.0 million or 15.6% from the third quarter of 2020. Our third quarter 2021 revenues were $8.6 million or 7.4% higher than the third quarter of 2019. Our physical therapy patient volumes per clinic per day were 29.5 visits in the third quarter of 2021, which is the second-highest volume level in the company’s history, bested only by the 30.0 visits that we reported last quarter. It’s also a record high third quarter volume level for the company. Our previous third quarter high was 27.5 visits in the third quarter of 2019, which we beat this year by 7.3%. Our visits per clinic per day were 14.3% higher than our 25.8 average visits per clinic per day in the third quarter of last year. Our average visits per clinic per day exceeded 29.0 visits for the first time in the company’s history in March of this year, and they have continued at that level or higher for seven consecutive months now. Based on the activity levels we’ve experienced in October, we would expect that to be the case again for the eighth consecutive month. Our net rate for our physical therapy operations was $102.93 in the third quarter of 2021, which compares to $105.91 in the third quarter of 2020. Our third quarter 2021 rate reflects the 3.5% Medicare rate path that went into effect in January of this year as well as some shift in the mix of our business. We’ve had increases in all categories of our business from the third quarter of 2020 to the third quarter of 2021, but some have increased at a greater rate than others. Our total visits increased 19.9% from the third quarter of 2020 to the third quarter of 2021. Notably, our workers’ comp visits increased approximately 9.2%, while Medicare visits increased approximately 27.3%. As a result, higher-rate workers’ comp decreased as a percent of our total mix and Medicare, which is paid at a lesser rate than our overall average rate, increased as a percent of our total mix and that put downward pressure on our overall net rate. Our Physical Therapy revenues were $112.3 million in the third quarter of 2021, an increase of 16.5% from $96.4 million in the third quarter of 2020, and an increase of 7.6% from $104.4 million in the pre-pandemic third quarter of 2019. Revenues for the industrial injury prevention business were at an all-time high of $10.5 million in the third quarter of 2021, which was a 4.8% increase over the third quarter of 2020, and a 5.5% increase over the third quarter of 2019. Our team also continues to do a good job managing our costs and keeping our cost increases aligned with our growth in revenue. Our operating costs, less closure costs, were $96.1 million in the third quarter of 2021 or 76.3% of net revenues. This was 40 basis points better as a percentage of revenue than our 76.7% in the pre-pandemic third quarter of 2019. Our operating costs, less closure costs, as a percent of revenue were at a low point of 72.1% in the third quarter of 2020 as a result of the significant steps we took to reduce costs during the pandemic, including temporary salary reductions, furloughs and other similar measures. Our 76.3% in the third quarter of 2021 is consistent with the first quarter of 2021 when operating costs, less closure costs, were 76.9% of revenues and a bit higher than our 73.0% in the second quarter of 2021. Looking specifically at salaries and related costs, they were 56.0% of revenues in the third quarter of 2021 versus 52.8% for the third quarter of 2020, which was lower than normal due to temporary salary reductions and furloughs that were put in place as a result of COVID, as I mentioned a moment ago. Salaries and related costs in the third quarter of 2019 were 56.9%, so we were better in the third quarter of 2021 by 90 basis points as compared to the pre-pandemic third quarter of 2019. Similar to our total operating costs, our salaries as a percentage of revenue in the third quarter of 2021 at 56.0% was lower than the 56.8% for the first quarter of 2021 and a bit higher than our 54.3% in the second quarter of 2021. Our gross profit was $29.8 million in the third quarter of 2021, which compares to $30.4 million in the third quarter of 2020, which again benefited from those lower costs due to COVID. Our gross profit in the third quarter of 2021 was higher than the third quarter of 2019 by $2.4 million or 8.9%. Our gross profit margin in the third quarter of 2021 was 23.7%, and that compares to 23.3% in the third quarter of 2019. Our corporate office costs were $12.9 million in the third quarter of 2021 as compared to $10.4 million in the third quarter of 2020. Corporate office costs were $10.6 million in the third quarter of 2019. Our third quarter 2021 corporate office costs include $1.3 million in incremental equity compensation expense for the accelerated vesting of restricted stock previously granted to our Chief Operating Officer of the West region, who retired in July. Excluding that incremental equity compensation expense, our corporate costs were 9.2% of revenues in the third quarter of 2021, which compares to 9.6% in the third quarter of 2020 and 9.0% in the third quarter of 2019. Our other income includes $1.2 million for the positive resolution of a payer matter in the third quarter and our interest expense on our debt was $268,000 in the third quarter of 2021, which is down from $351,000 in the third quarter of 2020. Our weighted average interest rate in the third quarter of 2021 was 2.19%. Our net income attributable to non-controlling interest was $4.1 million in the third quarter of 2021. Our non-controlling interests were 13.3% of our profits, including the favorable resolution of the payer matter in the third quarter of 2021. This compares to 16.0% in the third quarter of 2020. The reduction in the non-controlling interest percentage is primarily due to the purchase of non-controlling interest from our existing partners. Through the first nine months of 2021, we’ve purchased $16.0 million of non-controlling interest from our existing partners. Our balance sheet remains in an excellent position and our cash generation remains very strong. We ended the third quarter with $33.0 million drawn on our $125.0 million revolving credit facility, which includes $3.3 million drawn on September 30 to fund the acquisition of an industrial injury prevention services business. The $33.0 million is $5.0 million less than we had in our revolving line of credit at June 30. We had cash of $19.2 million at September 30, 2021. Our net debt at September 30, 2021 was $24.4 million, which includes the $33.0 million on our line of credit, $8.3 million in payroll taxes deferred in 2020 under the CARES Act and $2.3 million in notes payable, net of our $19.2 million in cash. Our net debt position at December 31, 2020 was $11.0 million. So in the first nine months of this year, we have funded acquisitions totaling $22.6 million, invested $6.0 million in fixed assets, paid back $14.1 million in Medicare advance payments that we received last year, purchased non-controlling interest from our partners of $16.0 million, paid dividends of $13.9 million and paid off $4.7 million in notes payable, all of which totaled $77.3 million, but our net debt position has increased by only $13.3 million. Our leverage and our strong cash generation provides us with tremendous flexibility and sufficient capacity for the right growth opportunities as we identify them. With that, Chris, I’ll turn the call back to you for your remarks related to our operations and third quarter performance.

Thanks, Carey. Great job with that. I am going to make some candid comments and go off script a little bit. I think you guys deserve that. I hope some of our partners and our staff will listen to this call at some point. For those of you who have followed the company for a long time, you know that we follow historically at least a pretty distinct seasonal pattern. We have winter storms and so January with new deductibles we started out a little slow. Second quarter, really beginning in March and continuing through early to mid-June, which I understand spans both quarters, beginning in March we see a distinct pickup as spring comes and people get outside. That continues until about school is out and then things slow down a little bit in the summertime. People take vacations and doctors take vacations and school is out. For every year that I’ve been here, which is 18 years, we’ve slowed down in the summer. This year, that didn’t happen. In fact, we delivered, as Carey mentioned for the quarter, a record third quarter for us, even despite some of these markets in the summer, in fact, in some big markets like Nashville, where we had hospitals who had put off elective surgery again because of the COVID push. Despite that, we delivered 29.5 visits per clinic per day, which is just a fraction of a visit off our all-time record, which was Q2. And in spite of a few hurricanes that heavily affected us hitting Louisiana with our new acquisition partners there who are doing a great job, by the way, and all the way up the coast. So, in spite of that, the best third quarter in our company’s history. I just want to let our partners and our clinical staff know and they can hear me say it, but I want to say it on this call: they are doing a phenomenal job. They are taking great care of patients. They are doing it under still difficult circumstances, keeping people safe as they should, but it’s tough. It’s tough to get through a day with a mask and goggles in some cases. To do that now for the last one and a half years, going on two years, it’s pretty extraordinary. Again, I just want to thank them. They’re doing a terrific job. Our result this quarter is directly related to their variability and their delivery in terms of how they care for our patients because that’s the most important thing that we do. Everything comes from that: the continuity we have with referrals, the visits that we get, which are related to the care of our patients. If we were doing a bad job, we wouldn’t have that performance. So hats off to them for that. On the industrial side of the business, we’re still making our way through this transition toward, I hope, normal. It’s still a tough employment market, not just challenging for us which I’ll address in a minute, but also for the companies that we serve. But we delivered record revenue and record earnings performance this quarter. We’re beginning to see new business come in, and so I continue to have great confidence in the team. At the end of the quarter, the last day, as Carey mentioned, we added a nice tuck-in deal to that business, which should further strengthen and actually widen our service offerings. Finally, I want to make a couple of comments relative to the employment environment right now because I know there’s a lot of talk about that. It is, in our view, challenging. But I think there is some important color to provide. First of all, all year this year, really if you want to look at beginning, I guess, spring and forward, which is when the market really seemed to be more difficult, we’ve had more inflow than we’ve had outflow. I would say it again, we’ve had more inflow than we’ve had outflow. Right now, our licensed clinical turnover on a percentage basis is in line with our historical rates. When I say historical, I factor out the 2020 period because we furloughed and we did a lot of unusual things to get through that period. So it goes back to 2019. Our headcount is down from about 5,400 and change in 2019 to a little over 5,000 now in 2020. It is tough, particularly front desk and non-licensed positions, and licensed positions as well. But our team has done a great job. I had a conference call the other day with our recruiting department, we’ve added our VP of HR and recruiting in that entire area. He’s done a phenomenal job bringing in key people. The energy of that team is better than I’ve ever seen it. We’ve added some great people. They are doing a terrific job working with our partners, our partners working very hard to make sure that we have the right clinical staff. If we didn’t have the right clinical staff, we wouldn’t have delivered the visit volume that we delivered this quarter. One more stat and then I’ll be quiet here and we will open it up for questions. As a point of reference our salary and related cost per visit: if you go back to Q3 2019 our salary and related cost per visit was $58.30. Beginning this year, first quarter was $57.80, second quarter, again a record quarter for us in terms of volume and earnings, was $55.20 per visit. In Q3 2021 it was $56.60 per visit. So will the fact that the labor markets are tight show up in our financials at some point? Yes, I think it probably will. But we’ve held very steady through this period. That’s not a testament to me; that’s a testament to the team, to our partners, to the staff locally who care so much about what they do, and to our recruiter team and all of our various support functions and operations that help to make all this work. Again, I just want to say thank you to all those folks. So that concludes my prepared and not-somewhat prepared comments. With that, I’d like to open it up for questions.

Operator provided instructions on how to ask questions. And we will take our first question from Larry Solow from CJS Securities. Your line is open.

Good morning, guys. Thanks for taking the questions. Perhaps we will start with labor and headcount. Chris, you mentioned more inflow than outflow and, obviously, you had some big furloughs in 2020. It looks like you haven’t brought everybody back. Some of these margin gains or ability to sort of keep your margin in line where others are struggling — are you able to do more with less, just be more efficient? Because I imagine some of your salaries are higher. What do you attribute that to? You still seem to have revenue that hasn’t suffered at all with a little bit less headcount and your margins are obviously even higher. Just trying to get a little more color on that.

I think 2020 was a great learning experience for all of us. I think our partners, particularly, but really across the board, we’ve learned like any other semi-crisis that you go through: you learned to focus on what’s important and you get rid of the rest. When I say get rid of the rest, I’m not talking about people. People are always important, but you learn what you can live with and what you can’t live with. We’re still adjusting. We’re still in some of our corporate support departments and we’ve added staff in areas to support some of the programs and initiatives that we are investing in. There has been some of that for sure. I think there has been much tighter control locally in terms of managing not big FTE changes, but very small FTE changes that do add up over the course of 600-odd facilities. I think it’s that combination. Margins were a little tighter this quarter and our net rate was down ever so slightly from where it was previously. But the cost per visit, or salary-related cost per visit, has stayed pretty steady. It’s all those things working together in small increments that have added up to where we are right now. We’re still making some adjustments. This isn’t a do-one-thing-and-you’re-done process; we’re working our way through.

Great. And how about on the volume trends — really strong, even since you mentioned a little bit of seasonal slowness, 29.5 visits per day? I think that magic number 30 visits per day is what everybody strives for, but could this go above that or do therapists reach capacity constraints above a certain number?

Therapists do reach capacity constraints, but clinics generally have flexibility. That number is a clinic number, not a therapist number. Clinics can go above 30 visits on average. There are some clinics in the mix that are capped out relatively, and we go through in any given year a number of expansions and relocations we do to grow those facilities because our biggest facilities get to a point where it gets a little high and you need more footprint. I don’t think 30 is the be-all and end-all. It’s a good number and it’s the highest number we’ve ever delivered, and I’m not suggesting that becomes an easy number to get to or to sustain. But as Carey mentioned, we’ve stayed above 29 visits per day every month this year, and I’m hoping that’s the new watermark. I don’t think 30 is a ceiling and I think we can, over time, slowly grow through that.

Right. Okay. And just last question, if I may, on the industrial injury prevention business. You mentioned a pretty good quarter this quarter. I don’t expect to get back to the rapid growth we saw in 2018 and 2019; I know some of that was inorganic. In order to drive considerable growth, my understanding is a lot of these new contracts are garnered at trade shows and whatnot. Is that sort of the hindering factor? Once trade shows start getting going again, can you start picking up some growth?

The sales team — Bob Patterson and the rest of the sales team — have done a great job in otherwise very challenging circumstances without many trade shows in the last one and a half years. I do think trade shows would be a tailwind that we haven’t experienced yet, but it’s not like they are not working to create opportunities otherwise; they are. We’re seeing that happen. It’s a little harder because it’s harder to get face-to-face and some companies are still working remotely. In 2019 we did the BTE deal and that brought on what we thought would be a strong post-offer testing program — that business is very strong right now, and that’s helped stabilize the rest of the business where some of the ergonomics testing business, which is heavily done on-site, is down at the moment. I expect it will come back as things normalize. As we mentioned, we did a small deal at the end of the quarter. We continue to look for opportunities in that space and expect to get more done over the coming year as well.

Got it. Great. I appreciate the color, guys. Thanks so much.

Thank you.

Operator provided instructions on how to ask questions. And we will go next to Stephanie Wissink from Jefferies. Your line is open.

Hi. Thanks, guys. Technical difficulty; I’m on for Steph. I appreciate all the incremental clarity. It’s definitely helpful and congrats on the strong quarter. I wanted to touch on the strong volumes. Are you gaining those volumes from a greater pool of referral sources? So are you seeing that contribute to these elevated levels? Maybe just talk about what you’re hearing from referral sources and anything incremental from sales reps that suggests new referral sources are more heavily contributing to this mix, or is it really just a greater number of referrals from existing sources?

That’s a great question. It’s a little hard for me to answer because of how we aggregate this information and I don’t have complete transparency around that detail to give an absolute final answer. But we’re always working on new referral sources and our sales team does a great job at that. I would tell you it’s a broadening of referral sources. It’s a broadening of our ability to go direct to consumer and not have to rely exclusively on referral sources. Thirdly, it’s probably moving some market share from less focused, less capable providers — whether that’s small local providers or hospitals that are focused on other things right now or don’t have the resources devoted to this. So it’s a smattering of things. I don’t think it’s that suddenly our finite group of referral sources who have always been with us are busier than they have ever been. I think it’s a broadening, some direct consumer activity, and some market share moving across a growing referral base.

That’s great color. I have to ask one final one on Medicare and recognizing there is still potential for things to change, how do you think about Medicare rates versus pricing in your commercial book moving forward? As you look through those contracts, what’s the anticipation for commercial rates to be more indexed toward Medicare? Are there other contract elements like inflation adjustments or annual escalators that could move price one way or another?

I was disappointed, but not surprised, when Medicare came out with their final rule update on Tuesday. I think with CMS it’s kind of the path of least resistance. We got a massive outpouring of support from the communities we serve and from therapists across the country. We lead a group called the Alliance for Physical Therapy Quality and Innovation and we’ve been very active in messaging and directing communication to CMS and with our congressional constituents. We represent a large number of facilities across the country and we’ve been on a number of these calls with Congress. I still think there is opportunity, as we did last year, to get some congressional relief. I think it’s shortsighted to deliver a cut like this to a subset of the physician fee schedule and physical therapy, because independent studies indicate that early physical therapy reduces downstream health care spend. When somebody comes to physical therapy early, their downstream costs for health care — not just for that issue but overall — are less. The reason is physical therapy gets people moving, and when you move you can exercise and be active, which benefits diabetes, obesity and even mental health. I think it’s wrongheaded and our congressional contacts understand that. We’re not done fighting and we have resources. We’re going to continue to work at that. It does create a challenge for us. We were fully productive at this point with our labor force, but it was a challenge for us earlier this year when we had a 3.5% change in January. We have been able to overcome that and we will have to grow through this if this is where we end up. I am not sure this is where we will end up, but if it is, we will have to grow through it. I think this team has been there before and we will find the way. On the commercial side, we have some wins that will kick in for the New Year and there may be some follow along on the PT assistant differential payment rate; that’s to be determined. Eric, Graham and our HR department have done a lot of work modeling that for the New Year. It’s a bit early to tell whether we will get follow along from commercial payers on Medicare reductions, but I have confidence our team can create some offsets and we are working on articulating our value proposition to payers. Commercial payers still pay hospitals disproportionately high rates compared to outpatient providers. We are often a better entry point to deliver care for patients, and we’re working to make that case.

Yes. Definitely agree. Really solid color. Congrats again.

Operator provided instructions on how to ask questions. We will go next to Mike Petusky with Barrington Research. Your line is open.

Good morning.

Hi Mike.

Hi Chris. Just to clarify on the final reimbursement: I know there was some initial confusion around whether it was 2% or 3.5%. What do you and the industry judge the final rule impact to be in 2022 at this point?

We are still working through some modeling around code combination and selection, but we think at this point it’s around a 3.75% reduction.

Carey, I may have missed this earlier or in the press release, but have you commented on the EPS guidance from Q2? Have you affirmed that or talked about that?

No, we did not mention it here. We have kept the guidance where it was at the end of the second quarter.

I’m really happy with how the teams performed all year long and volume has continued to be strong through October. It has been a tough year to predict exactly how we are going to go. We typically don’t update guidance unless we feel like we will be meaningfully outside the range. Given some of the uncertainties, we think it’s best to stay where we are with the current range and we’ll see how we do.

On the inflow versus outflow on clinicians, which was terrific, are you seeing any difference in terms of full-time versus PRN in recruiting? I would suspect PRN is tougher, but can you speak to that?

I don’t know if PRN is tougher; I know full time is tougher. A few specifics: we are seeing fewer involuntary terminations than in 2019, which means we might hang on to some people a little longer because the labor market is more balanced. In some cases we’ll fill a position and keep the hiring slot open because we’re growing and hope to get the right people. Our recruiting department is doing a fantastic job. We have new people in recruiting and HR who are doing a great job. They are busy and it is a tough market, but the team has adjusted well and I think it shows up in our numbers.

On the vaccine front, the administration put something out today asking large companies and healthcare workers to be vaccinated. Do you feel you would fall under that? Do you feel like you have many therapists and clinicians who aren’t vaccinated?

Yes, I do feel like we will fall under that. My personal belief is we should all be vaccinated and it’s smart to do so. That said, a percentage of people don’t want to be vaccinated for various reasons and many will claim religious exemptions. In those cases, we have to document and go through the exemption process and there is usually a testing element where they have to be tested on a certain frequency. I didn’t see the exact details this morning, but I think that is likely everyone’s reality going forward: a mix of vaccination tracking, exemptions and regular testing for those who claim exemptions. Regarding what percentage are not vaccinated, we don’t have a perfectly accurate figure. We have a learning management tool where many have uploaded vaccination records. We think the reported vaccination rate is lower than actual vaccination, but I would estimate that roughly 20% to 30% of our workforce is still not vaccinated. The unvaccinated rate for non-licensed people is higher than clinicians. Clinicians with a science background are more inclined to be vaccinated. In aggregate, it’s probably around the 30% range still not vaccinated.

Thanks guys. Great progress. Thanks.

Thank you.

Okay. Well, listen, thanks, everybody. Again, we appreciate your time. Carey and I are available if you have follow-up questions. I know with some of you, we have already got that scheduled. Thank you for your time and attention today. We hope you have a great day. Stay safe and thanks for your support. Bye now.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.