Good day, everyone and welcome to the U.S. Physical Therapy Fourth Quarter and Year End 2021 Conference Call. It is now my pleasure to turn today's program over to Chris Reading, CEO.

Thank you. Good morning and thanks, everyone, for joining us for U.S. Physical Therapy fourth quarter and year end 2021 earnings call. Several of our team are on the road this morning working on new opportunities including Eric Williams, our Chief Operating Officer for the Eastern half of the country; Rick Binstein, our Executive Vice President and General Counsel. On the line, we have Carey Hendrickson with me here in Houston, our Chief Financial Officer; Graham Reeve, our COO for the Western half of the company; along with Jon Bates, our Vice President and Controller. Before I provide some color on the year and the quarter, we need to cover a brief disclosure statement. 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. So I want to start this morning and cover some highlights on the year. For the year, our operating income increased $18.2 million or 34.8% compared with 2020. Reported revenue increased 17% to $495 million. PT net revenue increased 17.4%. As you're aware, in 2021, we were hit with reduced Medicare pricing, which in turn impacted our net rate, which dropped slightly from $105.66 in 2020 to $103.88 in 2021. Visits were very strong throughout most of the year, up 19.4% in spite of the fact that comparable numbers in the latter part of 2020 were also very strong. Volumes from most of the year, beginning March and continuing through year's end, were at record highs for us, exceeding 29 visits per clinic per day for those 10 straight months. Visits from Mature Clinics increased 17.8% for the year, management contract revenue was up 17.2% on the year, and our injury prevention services revenue increased 12% on the year and 38.5% in the fourth quarter. Our total operating costs were impacted in 2021 by inflation along with some labor escalation. In spite of that and in spite of the net rate impact from Medicare, we finished with total operating cost as a percent of revenue at 76.3% versus 76.7% in both 2020 and 2019. Further, our total operating cost per visit decreased slightly in comparison. In 2021, we finished the year at $79.70 per visit and in 2019, again pre-pandemically, we were at $81.38 per visit. The team has worked really hard all year to balance and control the cost equation along with the growth in visits per clinic per day. I think they've done an excellent job. Total salaries and related cost held up well for the majority of the year, although we did experience some slight upward migration in the latter part of the year. In spite of that, we finished 2021 with salary cost as a percent of revenue at 56.3% compared to our pre-pandemic level in 2019, 56.9%. Salary and related cost performed well this year ending at $57.20 on a per-visit basis for 2021 compared to $57.26 in 2020, and as you know, 2020 included a period of significantly reduced salaries early on in the pandemic and continuing actually through a good chunk of the year. We also compared very favorably to where we were in 2019 at $59.24 per visit. That's a 350 basis point improvement from that pre-pandemic year. Our gross profit was $117.2 million in 2021, an increase of 19.1%, and our gross margin ended up 40 basis points better on the year at 23.7%. PT margins were up 70 basis points to 23.8% while management contract margins were down slightly to just under 16%. Our injury prevention business, which has been impacted by remote workers as well as COVID, finished at 24.4%, down slightly from 25.7%, and what was a very tightly controlled expense year in 2020 with very little travel and no major conferences attended. Our performance included the addition of our newly acquired industrial injury prevention business late in the year. This business has a slightly lower margin profile compared with our legacy business and the combined margins will be reflective of that difference going forward. Operating income for 2021 increased $18.2 million or 34.8% from 2020. Operating income margin improved 190 basis points to 14.3% despite the many challenges we have faced throughout the past year including COVID, staffing, inflation, and all the rest. In 2021, our company deployed significant acquisition-related capital across several deals in the PT space and two in the injury prevention area including our largest to date, which we announced late in the fourth quarter of last year. Carey is going to review with you our total use of free cash flow and I think you'll find it pretty impressive on the year what we were able to get done, while still keeping our debt to EBITDA ratio in very good shape. Response to the company's strong performance in 2021 and our continued confidence in our ability to grow, our Board of Directors has voted to increase the first quarter dividend from $0.38 per share to $0.41 per share, which is an increase of approximately 8% from the last dividend, but an increase of approximately 12.3% when compared to our average dividend paid in 2020. You may recall that midway through 2021 for the third and fourth quarters we increased our dividend. As I stated in our press release, I'm immensely appreciative of the fine work and results produced by our partner-led teams all year. All of them, along with our home office support group in Houston have not only functioned well in these exceedingly difficult and rapidly changing times, we have worked effectively under difficult circumstances to produce a record earnings year for the company. Our services, which keep people on the job and healthy along with those who may have suffered a serious musculoskeletal injury, help make people's lives better, more enjoyable, more productive, and ultimately, with the documented improvement in our overall health and well-being. This allows people to stay in the workforce as well as to do productive and enjoyable things with and for their families at the time when our nation needs all of these things very much. Speaking of the labor market, I would like to address staffing for a minute. While I would characterize the current environment as challenging both for finding staff and for the increased time that it takes to do that right now, our turnover rate for licensed clinicians is actually down slightly as compared to where we ran on a pre-pandemic team. Let that kind of sit for a minute. So when you look at our turnover rate from our most important group, which is our clinical group, we're actually down as a percentage compared to where we were in 2019. We thought 2019 as being a very normal operating and hiring environment. Now, on our front desk and our unlicensed support staff, our turnover rate is definitely higher and we are working hard and making some continued adjustments to overcome that. But I will say that partners along with their revamped recruiting group have worked their tails off all year to stay on top of the strong candidates where we needed them as a result of some normal turnover, whereas the case has been too much of the year as a result of some very strong expansion and volume growth which require the need for additional clinicians. So while the environment is definitely challenging, in some cases, we are seeing an upward migration in terms of salaries. Overall, I think we've done a pretty good job in this area as evidenced by our strong result for the year both in terms of cost and also our earnings growth. So that concludes my prepared comments. Carey, if you would, please cover some of the additional aspects of our financial performance as well as our guidance before we open it up for questions.

Thank you, Chris, and good morning, everyone. We're very pleased with the results our team achieved in 2021. We had significant growth in all of our team metrics, many of which Chris noted in his remarks. Our operating results excluding Relief Funds finished at $3.17 per share for the full year and at $0.72 per share for the fourth quarter, both of which were higher than the high end of our guidance that we provided and were higher than analysts' consensus estimates as well. Not included in these numbers is another $4.6 million in CARES Relief Funds that we received and recorded in the fourth quarter of 2021. Our $3.17 of operating results excluding Relief Funds are 32.6% higher than we reported on the same basis for 2020 and they're 12.4% higher than the $2.82 we reported for the pre-pandemic year of 2019. Our fourth quarter 2021 operating results excluding Relief Funds of $0.72 per share compares to $0.85 in the fourth quarter of 2020, which benefited from reduced expense levels due to the pandemic and a slight rate adjustment we had related to earlier 2020 periods, and it's 12.5% higher than the $0.64 we reported for the pre-pandemic fourth quarter of 2019. Our adjusted EBITDA, excluding Relief Funds, was $74.3 million for the full year of 2021, which was an increase of 31.5% from full year 2020 and an increase of 2.1% from pre-pandemic 2019. The same measurement was $17 million in the fourth quarter of 2021 compared to $18.3 million in the fourth quarter of 2020, and it was 10.9% higher than the $15.3 million of adjusted EBITDA that we reported for the fourth quarter of 2019. Our full year 2021 revenues increased to $495.0 million, a 17% increase over full year 2020 and our fourth quarter 2021 revenues increased to $129.8 million which was a 10.5% increase over the fourth quarter of 2020. Our physical therapy visits per clinic per day continued at a record pace in the fourth quarter finishing at 29.8 for the fourth quarter of 2021. The only quarter higher in our company's history was the second quarter of 2021 when our average visits per day were 30.0. And for the full year, our average visits per clinic per day finished at 29.1. Prior to March of 2021, we'd never had a single month at 29 average visits per clinic per day, and this year, we've finished for the full year above 29, a real testament to our operating team. Our net rate for our physical therapy operations was $103.88 for full year 2021 as compared to $105.66 for the full year of 2020 and our net rate was $103.53 in the fourth quarter of 2021 compared to $107.5 in the fourth quarter of 2020. Our 2021 full year and fourth quarter rates reflect the 3.5% Medicare rate cut that went into effect in January of 2021 as well as some shift in the mix of our business. Higher-rate workers' comp visits have not yet returned to pre-pandemic levels while Medicare visits, which are paid at a lesser rate than overall average rate, have increased above pre-pandemic levels, which put some downward pressure on our overall rate in 2021. Also, that net rate in the fourth quarter of 2020 was high; it included a slight adjustment related to earlier 2020 periods that I mentioned earlier. Our physical therapy revenues were $441.3 million for the full year of 2021, which was a 17.6% increase over 2020, and were $114.2 million for the fourth quarter of 2021, which was 8.6% higher than the fourth quarter of 2020. In the industrial injury prevention business, full year and fourth quarter 2021 revenues were all-time highs of $43.9 million and $13.4 million respectively. That was a 12% increase over 2020 and a 38.5% increase over the fourth quarter of 2020 as Chris noted in his remarks. The fourth quarter of 2021 included the one month of operations related to the November 30 acquisition that we made of an industrial injury prevention services business. Our operating costs were well contained in 2021 as Chris noted in his remarks and were well aligned with our growth in revenue. Our cost per visit did increase from the third quarter to the fourth quarter of 2021 with most of the increase in salaries as we continue to build our staff to the levels needed to support our record volumes. And also, we had some higher contract services costs in the fourth quarter due to having a higher number of employees out due to COVID. Our gross profit was $117.2 million for the full year of 2021 which was a 24.1% increase over full year 2020. Our gross profit for the fourth quarter of 2021 was $27.2 million compared to $29.1 million in the fourth quarter of 2020 and $27 million in the fourth quarter of 2019. Our gross profit margin was 23.7% for the full year of '21, it was 22.3% in full year '20, and 23.3% in full year 2019, so it was higher than both of those full year margins. Our corporate office costs were $46.5 million for the full year and $10.7 million for the fourth quarter. If you exclude the incremental equity compensation expense that we had in 2021 related to retirement of our COO to the west division, our corporate office costs were 9.1% of revenues for the full year of 2021, which is lower than the 9.6% of revenues for the full year 2020 on the same basis, and 9.3% of revenues for pre-pandemic 2019. Our net income that was attributable to our non-controlling interest was $17.1 million for the full year of 2021, which was 13.9% of our profits. This compares to 16% for the full year of 2020. The reduction in our non-controlling interest percentage is primarily due to our purchase of non-controlling interest for existing partners in 2021. In 2021, we purchased $31.1 million of non-controlling interest from our existing partners representing EBITDA of approximately $4.1 million with $14 million of those purchases occurring in the fourth quarter of 2021. In the fourth quarter of 2021, non-controlling interest as a percent of our profits was 13.3%, which compares to 16.3% in the fourth quarter of 2020. Our balance sheet remains in an excellent position and our cash generation remains strong. We ended the year with $114 million in revolving credit facility, including approximately $62 million added to the line on November 30 for the acquisition of the industrial injury prevention services business and about $3.5 million for the acquisition of three clinics on December 31. Our net debt at December 31, 2021, was $94 million, which includes the $114 million on our credit facility, $4.3 million in deferred payroll taxes under CARES, and $4.4 million in notes payable, net of our $28.6 million in cash. So that's net debt, December 31, 2021, it was $94 million. Our net debt at December 31, 2020, was $11 million. So in 2021, we funded acquisitions totaling approximately $87 million, we invested $8.2 million in fixed assets, we paid back $14.1 million in MAAPP funds, we paid back $4.1 million in deferred payroll taxes under CARES, we purchased non-controlling interest from our partners of $31 million, paid dividends of $18.8 million, and paid off $4.9 million in notes payable, all of which totaled $168.1 million but our net debt position increased by only $83 million. Our low leverage and our strong cash generation provide us with tremendous flexibility and sufficient capacity for the right growth opportunities as we identify them. As we look to 2022, we're optimistic about our prospects for the year and our team's operating ability to successfully manage through the Medicare rate reductions for 2022. We managed very successfully through the 2021 rate reduction and we're confident we'll do so again. In our release, we provided a range of $3.25 to $3.35 in operating results per share for 2022. The range considers the following, all of which we had previously announced: a Medicare reduction for the full year of 2022 of approximately 0.75%, the phase-out of sequestration relief which results in a 1% reduction in the rate applied to all Medicare payments for the second quarter of 2022, and a 2% reduction in the rate applied to our Medicare payments in the third and fourth quarters of 2022, and it also includes a 15% decrease in rate for care provided to Medicare patients by a physical therapy assistant effective January 1, 2022. Altogether, these Medicare rate reductions are expected to reduce our 2022 revenue by approximately $4.2 million, which amounts to $0.21 per share. As a point of information, Medicare visits represent approximately one-third of our total patient visits. As usual, the range does not include any potential acquisitions we may make in 2022. The guidance range implies a 10% to 13% increase in our operating results per share before the Medicare rate reductions, and a 2.5% to 5.5% increase in our operating results, including the Medicare rate reductions. With that, I'll turn it back to Chris.

Yes. Good job, Carey. Thank you. Okay, operator, let's go ahead. I'm sure we have questions. So let's go ahead and open up for questions.

And we'll take our first question from Larry Solow with CJS Securities.

Just quickly on the guidance. I guess, two questions on the guidance. Maybe just some high level. Can you just give us a high-level sort of what are you thinking about same-store sales volumes? And then in terms of margin just directionally, if you can give us any thoughts on that? And then, part B of that question is sort of, I know you don't guide quarterly, but how should we think about cadence? I missed the first couple of minutes of the call but Q1, obviously there's especially early in the quarter, a big flurry of COVID and we all know if somebody, if not ourselves, who with our brother had it or our wife had it or we had it, so trying to figure out how that maybe employees' situation in the first quarter might be worse than the rest of the year, so just any thoughts on the cadence would be great there.

Let me talk cadence and I'll kick it over to Carey on the other. For the cadence, I think you're exactly right. For the first quarter, between Omicron, COVID, and the weather, which we always have in the first quarter, yes, first quarter's going to be the lighter quarter for the whole year, no doubt. I will tell you on a positive note, while we were heavily impacted in January with COVID and shorter quarantines due to updated CDC guidance, a lot of folks were out combined with weather. But the COVID situation has begun to dramatically improve over the last couple of weeks. So we've seen a big drop-off there—drop-off being an improvement—and now we just have to get through the rest of it. We're getting some weather again this week but we'll get through it.

And, Larry, as far as the Mature Clinics and the growth expected in 2022, within the guidance is built in about a 2% to 3% increase in volume for Mature Clinics, and then the net rate, with all things considered, is going to be down about 1% or a little bit north of 1%. So that's the pieces of that from Mature Clinics. And then from a margin standpoint, I think you should probably expect something like what we had in the fourth quarter going forward in 2022.

Okay. And in terms of price, obviously, we know the government pricing. So it sounds like Medicare, you're assuming private pay and commercial pay is about flat, it seems like, right?

Yes. We've assumed that in the budget. We've placed an enormous focus around contracting this year and aside from just straight contracting with commercial payers, it's something that I can't go into great detail on yet but we're about to kick off a program that we think will help to fill in some of the dirt that we're losing as a result of the Medicare cut. We're on the cusp of that and it will be a focus all year for sure.

And I would think, maybe not in the immediate term, but over the mid-term, with inflation, your cost of care is going up — you got some leverage. I'm sure the payers are going to always push back but I would think you have some leverage there against them on that, right?

I don't know if it's leverage, but it certainly seems rational that payers are going to have to understand that everybody's cost is going up and if rates don't go up, that's a problem.

Right. And then just last question on the turnover. So it sounds like it's not really a clinician issue for you guys. It's more back-office admin staff and stuff like that, right?

Yes, and I will say even with that, and Carey can maybe speak to it, our revenue cycle group has done a great job for the year, just hats off to them, and they have in some cases struggled to replace people quickly. But even with that, our people really stepped up this year and not just this year but the last couple of years in so many ways. Carey, do you have anything to add?

Despite the number of employees we had throughout the year, the team just worked incredibly hard to keep our billing and our collections well in line with where they've been in previous years, certainly in comparison with pre-pandemic 2019. We were able to close a few of our central billing offices and move them into more profitable ones and things like that. We made some headway this year.

Yes. We did a great job.

Our next question comes from Steph Wissink with Jefferies.

Thank you for all of the information, everybody. I do have a follow-up question just on the cadence. I just want to make sure we're hearing you correctly in terms of how you expect sequentially the business to kind of build back. And as you think about the acquisitions that you completed last year, plugging those into the productivity wheel, how should we be thinking about the organic nature of the contribution of growth from those kind of late-stage acquisitions in '21?

Well, the ones we did late in the year will certainly have the benefit through the entirety of this year. So the cadence: we had one in March, one in June, a small injury prevention deal in September, then a big injury prevention acquisition at the end of November, and then a small PT deal right at the end of the year. So all those will layer in accordingly for the first quarter. My earlier mention on cadence had more to do with the environment coming out of the gate in January between weather and COVID. I think we'll see some forward weighting and not equal weighting through the quarters, which is really our typical cadence, more than anything, but you will see that again this year.

Q1 is always lower for us as we get started out of the gates, because of weather and the other issues we're facing this year. The second quarter, typically in March or April, is when volumes really begin to pick up and that was the case last year and it continued from that point for the rest of the year. The second and fourth quarters typically are higher quarters, and the third quarter has a little bit of a lull because of summer and people being off. I think that pattern will hold in 2022 as well. As for the acquisitions, the largest one occurred in November and I would expect that to perhaps start off a little bit slower in the first part of the year and grow as the year goes along.

And then just my follow-up is on the waves of COVID that we've seen. I'm hoping you can compare and contrast Delta versus Omicron. It sounds a bit like your Omicron impact was more intense but over a shorter period of time. Is that a fair assessment or how would you help us think through what you're observing in your business in terms of recovery post-wave?

Yes. Definitely a fair assessment. Omicron was—we actually had more people out with Omicron than we did even with Delta, but the out-time was shorter and the drop-off has been pretty precipitous since things have settled down. Fingers crossed we don't face another similar wave, but right now we're doing better.

Last one for us is on ability to recruit and retain—any changes in the labor environment that you'd want to flag for us or considerations as you're thinking about your underlying de novo growth and then staffing up into some of the acquisitions that you've completed?

Let me kick that over to my COOs, Eric and Graham. They're front lining, so I'll let them comment.

From a recruiting perspective, we're down about three percentage points from our turnover rates pre-pandemic in 2019. The additional investments that we made in the recruiting department, adding additional staff, made a huge difference in our ability to backfill open positions. The biggest challenge for us, again not clinically, is that turnover is very competitive out there for front office and admin staff, but we're having success there as well. Turnover rates still continue to be high.

Graham, if you could speak to how that impacts de novo and what the de novo pipeline looks like for both East and West for this year since we just finished the Board meeting. Graham, you there? Eric, do you want to speak to de novo and staffing and overall pipeline?

Yes. So the de novo pipeline is really, really strong but we did see a delay. We actually expected to open more facilities in 2021, but as a result of a competitive environment for staffing it slowed us down. The bigger piece on the de novo front was related to the ability to get contractors and permits on a timely basis. That was actually an even bigger impact than staffing. But the de novo pipeline is very, very strong for 2022 as well.

Does that answer? Okay.

It does.

Our next question comes from Matt Larew with William Blair.

Hi. This is Madeline Mollman, on for Matt Larew. I just want to touch on the Industrial Injury Prevention segment. We are just wondering when do you expect trade shows for that segment to restart? And now that Omicron is kind of declining, have you started to have conversations around acquiring new clients for that segment? And then as a follow-up, do you think that the current labor environment and the current employee pressures will lead to greater interest in industrial injury prevention services? Do you think that's going to be a catalyst for growth there?

Let me unpack that. First, trade shows: while I haven't yet attended many trade shows, I am hopeful and think the team is hopeful that those will come back sometime this year, sooner rather than later. I think most everybody is anxious to get back to something closer to normal. Our ability to get face-to-face will help accelerate new opportunities. We're talking to new opportunities all the time and signing new opportunities as we go. As for the labor environment, it does impact our ability to staff for new opportunities. We might sign a new opportunity but then we have to find staff to service it. Different than the clinics where we may take one or two people from an existing staff to seed satellite opportunities, we don't always have that geographic flexibility. So we have to recruit and onboard people, which is taking a bit longer than normal. That's been some of our impact, but we have been able to attract good clinicians and I expect that to improve as the year unfolds.

And then just one quick question on M&A. Given some of the unfavorable reimbursement moves this last year, do you think that's been pressuring non-providers? Have you seen an uptick in inbound related to M&A?

We're busy right now. We have more scheduled calls than we've had in some time. Inbound calls don't always immediately translate to closed deals, but activity is high. The partners we attract are generally not afraid; many see opportunities to do tuck-ins and expand market share but may need capital or infrastructure resources, or they may want to take some chips off the table and benefit from additional resources. I think periods of prolonged uncertainty cause some to look for a bigger platform, so I think the environment will be helpful.

And our next question comes from Mitra Ramgopal with Sidoti.

Tell you what, Mitra is always good about asking questions. Why don't you go to the next person and maybe we can come back to him in a minute? Mitra, give us a call. Sorry for the technical difficulty. Carey and I are available immediately following this call through the rest of the day. We appreciate your interest and your time, everyone. We thank you for the time this morning. I thank my team for all the work that they've done as well, and have a great day. Thank you, all.

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