Good day and thank you for joining us. Welcome to the U.S. Physical Therapy First Quarter 2022 Earnings Conference Call. I would now like to hand the call over to Chris Reading, President and CEO. Please proceed, sir.

Okay, thank you. Good morning and welcome everyone to our U.S. Physical Therapy first quarter 2022 Earnings Call. With me in the office and on the line include Carey Hendrickson, our Chief Financial Officer, Graham Reeve and Eric Williams, our Co-Chief Operating Officers; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President and Controller. Before we begin today with some prepared comments, we need to cover a brief disclosure statement. Jake, if you would please.

Thank you, Chris. This presentation contains forward-looking statements, which involves 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 I am going to start this morning with some highlights and color on the quarter as well as some commentary on the operating environment. While we wrapped up the quarter where we expected it to be, we did have a particularly slow start to the year, where January, particularly in February, meaningfully impacted as a result of the Omicron virus, which produced a pandemic high number of our team in quarantine. This was especially prevalent in January. Of course, we dealt with the usual challenges with impactful winter weather. Despite that, we rallied hard in March with very good visit and referral numbers and a rather dramatic drop in quarantines and exposures. Both of those good trends have continued through the present period. On the business front, we closed the quarter at 27.9 visits per clinic per day, which is up from the same period in 2021. Our team produced a really nice same-store visit growth number at 5.9%. I just want to call out to our partners, our sales staff, and our clinical staff, that’s as good a number as I can remember we have ever hit in a quarter. Considering all of our challenges, even to the start of this quarter, that’s just an exceptional number. That was offset slightly on the revenue side in part by Medicare pricing adjustments announced earlier in 2021, which became effective at the start of this year. In spite of that, our adjusted EBITDA grew 14.2% on overall volumes of 12.2%, which was over 1 million visits. I believe that that’s the most visits we have ever produced in the first quarter of our company. That drove Physical Therapy revenue up by 10.6%. Considering the challenging labor market, I feel like our team across all fronts did a spectacular job on staff engagement management, where total cost per visit was up less than one half of 1% year-over-year in our mature facilities, which I think is really amazing considering a broad environment right now. Another bright spot was in our injury prevention business, which we continue to invest in since our first acquisition beginning March of 2017. Our IP revenues for the first quarter increased 90% to $19.1 million. Of that increase, $6.8 million related to the acquisition we completed at the end of November of last year. Excluding that acquisition, our injury prevention revenues increased 22.4%, again, a very strong number there and a great team. Total company revenue grew by 17.2% for the quarter, despite as I mentioned earlier, a slow start to the year. Our operating costs were up as a percent of revenue in Q1 as expected, especially with the great impact. Our biggest controllable costs in salaries and related costs held up extremely well in our facilities, up just 40 basis points compared to 2021 Q1. In our non-mature acquired and new facilities, I just want to make sure everybody remembers, it was off. We had a great development year last year, so we had a lot of those. They often come in at a lower margin than our aggregate mature facility margins, and of course that was reflected in this recent quarter. The most recent injury prevention acquisition had a lower margin profile than that of our legacy business. The combination was expected to bring our aggregate margins in that segment down somewhat also. I think the team has proven that in spite of whatever comes—margin pressure, weather, pandemic—it certainly makes things more challenging, but we have been proven to be able to grow through these types of challenges as we continue to demonstrate the strengths of our model and execute on our opportunity at hand. These opportunities include development, which I will tell you is very strong right now; very busy, which includes the early announced deal with Chad Madden and Mike Gilbert in Pennsylvania, with a number of growth opportunities surrounding that partnership beginning to present themselves. Additionally, we have opened 12 de novo facilities so far this year and processed strongest PT partnerships. We are off to a good start there. We are very, very busy on the acquisition discussion side of our opportunity as well, maybe as busy as we have ever been. While the environment is challenging for all healthcare providers right now, it’s clear that over these past couple of years that we have the resources as well as the balance sheet flexibility to withstand these challenges and to grow through them. We continue to be a great home for like-minded partners to see opportunities to further expand that footprint. We believe in the future of our profession and the broad benefits that the entire system derives from our services. We can become a valued partner with those private practices and the partners to help them thrive at a time when others are struggling to forge ahead. Our team has proven we are well equipped to do so in the long run regardless of these product challenges. We have a lot of information to cover; Carey, if you would take the financials in a little bit more detail and then we will open it up for questions.

We will do. Thank you, Chris, and good morning everyone. As Chris noted, our momentum built through the first quarter once we moved past the effects of Omicron, which we felt primarily in January. As a result, we posted operating results that were higher than the first quarter of the prior year despite the Medicare rate reductions that were implemented on January 1. For the first quarter of 2022, we reported operating results per share of $0.65 as compared to $0.64 in the prior year’s first quarter. Our reported adjusted EBITDA was $17.9 million for the first quarter of ‘22, an all-time first quarter high for the company and a $2.3 million or 14.2% increase over the prior year, which was the previous first quarter high. Our Physical Therapy patient volumes per day per clinic were 27.9 in the first quarter, which is also a record high first quarter volume level for the company. That’s 3% higher than last year’s 27.1 average visits per clinic per day. By month, our average visits per clinic per day for all clinics were 25.9 in January, 28.1 in February, and then 29.5 in March. You recall that March of last year is when we reached that 29 level in volume for the first time in our history, and we continued at that level or greater for the rest of 2021. We are happy to see March of this year above 29 again, and April trended well also. Our net rate for our Physical Therapy operations was $103 in the first quarter of 2022, which compares to $104.72 that we reported in the first quarter of last year, which was our highest quarterly net rate in 2021. In the most recent fourth quarter of 2021, our net rate was $103.53. So, our first quarter net rate is down 0.5% on a sequential basis from the fourth quarter. Our first quarter ‘22 net rate reflects the 0.75% Medicare rate cut and a 15% decrease in rate for care provided to Medicare patients by Physical Therapy assistants, both of which went into effect on January of this year. As a reminder and as we have disclosed previously, the sequestration relief that we have had since the beginning of the pandemic will start to phase out in the second quarter when Medicare rates will decrease by 1% and then the remaining 1% of sequestration rate relief coming out in the third quarter. Our total visits increased by almost 116,000 in the first quarter to 1,063,519 visits, that’s an increase of 12.2% from the first quarter of 2021 to the first quarter of 2022. The increase is due to both organic same-store growth and from the addition of new clinics. As Chris noted, our same-store volumes increased 5.9% in the first quarter versus the prior year and we had 40 more clinics on average open in the first quarter of 2022 than in the first quarter of 2021. Our Physical Therapy revenues were $110.4 million in the first quarter of 2022, which was an increase of 10.6% compared to the prior year. Revenues for the Industrial Injury Prevention business were at an all-time high at $19.1 million in the first quarter of this year, which was a 90.5% increase over the first quarter of 2021. Excluding our IIP acquisition in November of 2021, IIP revenue still increased 22.4%. Our team also continues to do an excellent job managing our costs and keeping our cost increases aligned with growth in revenue and visits. Our operating costs were $105.1 million in the first quarter of 2022 or 79.8% of net revenues, which was up from $86.5 million in the first quarter of 2021. That was an $18.6 million increase in costs from the first quarter of the prior year, primarily due to the significant increase in visits that we had year-over-year. When you look at it on a same-store basis, our Physical Therapy operating costs per visit were $81.08 in the first quarter of 2022, up only 0.4% from the first quarter of 2021. Our total Physical Therapy operating costs were $83.09 in the first quarter of 2022, up only 2.4% from $81.18 per visit in the first quarter of 2021. Looking specifically at salaries and related costs, our salaries and related costs for all operations were 57.1% of revenues in the first quarter of 2022, only slightly higher than our 56.8% for the first quarter of 2021. That represents only a 0.5% increase year-over-year in salaries as a percent of revenue. For our Physical Therapy operations only, salaries and related costs were $58.74 per visit in the first quarter of 2022, up only 1.6% from $57.83 in the first quarter of 2021, and down from $59.20 in the fourth quarter of ‘21. Our gross profit was $26.6 million in the first quarter of 2022, which compares to $25.9 million last year. Our gross profit margin was 20.2% in the first quarter, compared to 23% in the prior year. Our margin was impacted by the Medicare rate reductions and the lower margin profile of the IIP business that we acquired in November of last year, which had a margin of 18.3% in the first quarter. Our corporate office costs were $11.6 million in the first quarter of this year compared to $10.9 million last year. As a percent of revenue, our corporate costs were 8.8% of revenues in the first quarter of 2022, which was down from 9.7% in the first quarter of last year. A new line on our income statement you’ll notice is our other income, which includes a gain of $603,000 related to the reevaluation of a put-right liability. As part of the November 2021 IIP acquisition, USPH and the founders of that acquired business agreed to the right for USPH to purchase the second phase of that business in 5 years. We have a liability on our books that represents the value of that put-right. The put-right must be revalued each quarter with any change in value recorded as a gain or loss or other income. The total liability was originally $3.5 million and it’s now at $2.9 million after recording this change in value in this first quarter. Because it’s not associated with our ongoing operations, we’ve adjusted this gain out of our operating results and will continue to do so going forward, whether it’s a gain or a loss in any given period. Our net income attributable to non-controlling interest was $3.2 million in the first quarter of this year, which is less than the $3.7 million in the first quarter of last year, even though our operating income from our PT and IIP businesses was higher in the first quarter of this year than last year. As a percent of such profits, our non-controlling interests were 12.0% in the first quarter of 2022, compared to 14.3% in the first quarter of 2021. The reduction in the non-controlling interest percentage is due to the purchase of non-controlling interest from existing partners. In '21, we purchased $30 million of non-controlling interest from those existing partners and another $2.3 million in the first quarter of this year. Finally, our balance sheet remains in an excellent position. Our cash generation remains strong. We ended the quarter with $118 million drawn on our $150 million revolving credit facility, which includes $11.2 million that was drawn on March 31 to fund the acquisition of the Madden & Gilbert Therapy Company. Our net debt at March 31 was $102 million, which includes the $180 million on our line of credit, $4.2 million in deferred payroll taxes under CARES, and $4.1 million in notes payable, net of our $24.2 million in cash. Our net debt position at December 31 was $94 million. In the first 3 months of 2022, we funded that $11.2 million acquisition, invested $2.5 million in fixed assets, and purchased non-controlling interest from our partners of $2.3 million. All of those things together totaled $16.1 million, but our net debt position increased only $8.1 million. As Chris noted in his comments, we expect to have another very productive year on the acquisition front. Our low leverage and strong cash generation provide us with tremendous flexibility and sufficient capacity for the right growth opportunities as we identify them. Now, Chris, I’ll turn the call back to you.

Carey, thank you. Operator, we will go ahead and open it up for questions.

Our first question will come from Larry Solow with CJS Securities.

Good morning, Larry.

Hey, good morning, guys. I guess, first question, Chris, Carey, very good volumes, good start to the year, a little bit of an easier comp. I feel like you kind of—things really normalized in March of last year, so I think as you head out now, it looks like Q2 and beyond, you were sort of back at pre-pandemic levels and growing. How do you feel just— I know you don’t give exact guidance on sort of volume growth, but do you think you can still maybe not get 6% volume growth from Q2 on, but do you feel like you could still see historical 2% to 3% volume growth as we look at this year and maybe even the next few years?

Larry, I think I’ll go on record as saying over a period of time I think we can continue to grow volumes. I’m going to try to avoid getting into a quarter to quarter speculation on what we’re going to do just yet. We’re going to try to avoid that. The volume that we’ve seen accelerate in the spring that’s continued, and so we’re happy about where we are right now.

Okay. Then just on pricing, I know we started to feel some of the Medicare hit this quarter. It’ll be a little bit more. I guess we will see a little—another step-down, I guess, right, Carey, in Q2.

That’s right.

Hopefully, things should be somewhat easier in Q3 right now, and we should be relatively stable for this year. How about on the private side? Are you working with private insurance to possibly secure better rates than those on the government side? It's clear that across industries, most rates and reimbursements are increasing. So, do some of your private insurance providers understand this and are they easier to negotiate with? I know nothing is ever simple, but I'm curious about this.

Yes, I wouldn’t say it’s an easy negotiation. That’s for sure. But we are working hard on that. Larry, that’s something that I’ve actually taken on as a task with our contracting team. We are working very hard at that and staffing up to make sure that we have enough resources to really go at these rate negotiations. The large payers have a lot of leverage in these discussions. And so we’re working hard to provide some leverage on our side in those negotiations. But we’re hopeful for some increases. We have seen some this year, and we’re hopeful to get some more meaningful ones as we go through the year. It’s a long-term play.

Yes, absolutely. Regarding margins, while you have the microphone, salaries and related costs have only slightly increased year-over-year as a percentage of revenue. As for your overall gross margin, it was indeed affected negatively, which you mentioned was due to a lower mix in industrial services. Additionally, there is a loss of revenue from the Medicare side.

Right.

But why did we see the largest year-over-year impact as a percentage of revenue specifically related to rent and contract labor? Was that influenced more by the mix? Is it primarily driven by industrial services, or was it more related to temporary labor early in the COVID situation? Perhaps you could clarify that for us.

Yes. That was primarily what you said there at the end, the contract labor associated with what was happening at the first part of the year. That was a big reason for the increase. And we do have some expenses that are coming back gradually as we go along, travel, for instance. We still, in the first quarter of last year, were not traveling very much. So that has begun to increase this year as well. So that’s why that particular line, but the first quarter is always typically our lowest margin quarter anyway. We have the new IIP business as well, which is an 18.3% margin, which is lower than the overall average. But I expect that margin to increase as it has in previous years and the quarters ahead, probably more in the low to mid-20s for the rest of the year.

Okay, great. And then just last on the workforce industrial prevention business, obviously great reported growth and very impressed on the organic side. I don’t expect 20% growth to continue, but was there anything in this quarter? Was it just sort of some pent-up demand or you’re seeing things start to line up more for you? Any thoughts on that, Chris?

Yes. I think it’s going to get better as the world normalizes, and while there is still a virus out there, I think people are committed to getting their life back to normal. I think our teams worked really hard from lots of different angles on filling open positions on contracts that we had started but didn’t have staffing for. I think that’s helped us some too. That’s going to continue to be somewhat of a fight, but we’re seeing some progress in that area. I think the combination has been everybody has worked really hard, and we’ve gotten some positions filled, which have allowed us to generate some revenue as a result.

Got it. Great. I appreciate all the color. Thanks so much.

Thanks so much.

Thank you, Larry.

Thank you. Our next question will come from Steph Wissink with Jefferies.

Hi, Steph.

Hi, Steph.

Hi, good morning, everyone. I wanted to just go back a little bit to the volume lift that you saw in the quarter. It was quite impressive. Just seeing if you are doing anything different with respect to training around referrals or activating your local network, maybe putting some marketing back into the market, trying to understand a little bit about that as a success case study?

I’ve got Eric Williams and Graham Reeve on the phone. You guys want to speak to that?

Yes. So, this is Graham. We’ve got currently about 75 total sales reps out there in the market, and they are serving about 470 of our clinics. That number has increased just slightly, but we have a big focus on sales and also direct-to-consumer marketing that we’re working on distinctly to try and drive volume. We’re having some success there as well.

Yes…

That leads into my follow-up. Go ahead, I’m sorry.

Go ahead, Eric.

Just go ahead.

I was going to just make the comment and reiterate what Graham said. There is a focus here, certainly in terms of marketing and direct-to-consumer, which has been a major difference for us in a lot of markets.

Yes. We’ve heard of some of that. I wanted to double-click on that and just understand it’s not conventional necessarily to see a lot of direct-to-consumer. So maybe talk to us about what kinds of mediums you’re finding to be most successful. Are you trying new things? Do you have good kind of data representation where you can get validation? Just share with us a little bit about that mechanism direct-to-consumer versus maybe some of your past marketing approaches.

Yes. Go ahead.

Yes. I apologize. We’re all in different locations. I’m actually on the road this morning, so I apologize for the delay there. There is a lot of social media focus there as well and tapping into the local market here. So, traditionally, most of our physical therapy business has grown through referral relationships with physicians. We’ve contracted with some outside organizations that actually have terrific expertise in this area. The markets where we’ve really focused on this are the Detroit market and the Ohio market, which are kind of leading the rest of the group right now in terms of those direct-to-consumer marketing efforts.

Alright. Very helpful. Thank you.

Thank you. Our next question will come from Mike Petusky with Barrington Research.

Hi, Mike.

Hi, Mike.

Hi, good morning, guys. So I just want to clarify because I want to make sure I understand. In the rent clinic in other line, that’s where you guys include all your PRN therapy hours or costs. Is that right?

Not PRN. That would be, I think, Carey, just contract.

Just contract labor.

PRN would still be in the salaries and wages. Anything that’s recurring would be in that salaries and wages line, and anything that’s abject temporary would be outside of that.

That’s right.

Okay. So you guys did a really good job on the salaries and unrelated then. That’s terrific. Alright.

Well, our partners or staff, our operations team together, our recruiters doing, you know—Look, it’s hard right now, but I do think they did a really good job, and I appreciate the comment.

Given the quarantine, given labor wages, it seems like an outstanding job. Alright. So, going back, Chris, to your comment on M&A, and I think you said may be as busy as ever in terms of the discussions, which I assume revolves around the number of discussions you are having. And I am just curious, are you noticing just in terms of all that’s sort of going on in the space with labor challenges and reimbursement challenges, etcetera, are you seeing larger deals out there, a lot of smaller deals, any change in just the types of assets of businesses you are seeing that are open to having a discussion?

It’s honestly more of both. Larger and there are always plenty of small ones. But I would characterize our discussions as being more with people that we have been in touch with over a long period of time, and now they continue to see maybe for reasons that you pointed out in their markets— not for them so much— but opportunities that are driven by smaller practitioners who may be wanting to join up a bigger team. I know that’s been the case with the Madden and Gilbert acquisition that we did earlier this year. They have gotten a lot of calls and said, “Hey, you are a great provider and you know the market and what’s going on; let’s talk.” Most of our discussions are with people that still see a lot of opportunity in the market, but want some resources to help them realize it without meaningfully changing their cultural bend to do it. We are just very unique compared to the other acquirers in the market right now with respect to those attributes. I think it’s going to pay dividends for us over time.

And just last quick one. The revenue associated with the injury prevention asset that you guys acquired was a little bit above what I had anticipated. Is that business trending above what you guys had internally expected, or is it about in line?

It’s actually a little below.

Really?

I mean it’s doing well and we feel like over a period of time it’s going to do terrific. But a lot of their business has been heavily concentrated in the auto industry, which has been heavily affected by the chip shortage and by the shutdown and lockdown in China and other places. They are fighting their way through and they are doing a great job. In aggregate, the combined business of all of it is doing well and we expect it to continue forward.

Yes. And their momentum grew as the quarter went along as well. January and February were slow for them, then March was much closer to our expectations.

Given all the headwinds, I actually expected to be a rougher quarter for that business. But anyway, thanks guys. Well done. Thanks.

Thanks Mike.

Thank you. Our next question will come from Matt Larew with William Blair.

Good morning.

Yes. Good morning everyone. Chris, if I think about productivity sort of visits per day per clinic, I dial back a decade ago, you were around 22 and kind of emerging from COVID, you have now hit sort of record levels of productivity around 29 to 30. If I think about the physical footprint of one of your locations and the number of typical staff clinicians that you employ, what’s sort of the long-term growth opportunity is there? At what point do you hit a sort of a physical space limitation or a clinical staff limitation?

Yes. Well, the clinical staff limitation happens in every size clinic, just because you got to be able to find more staff if you are growing. We deal with that, regardless. The physical limitation on the facilities, it’s really not an issue. We expand or relocate somewhere between 12 to 16 facilities a year. A lot of times those are adjacent expansions; sometimes they are not, and sometimes they are a separate part of town. We need a bigger footprint. But it's a significantly small number compared to the majority of our facilities. We can stretch hours; we can open early or we can close later. I would venture to say most of our facilities don’t probably have the hour spread that even right now I would like them to have. So, there is certainly room there. There is room almost everywhere, on Saturdays before you really pump into a physical limitation perspective. So, that’s not the governing factor for us.

Okay. And speaking of governance factors, that last quarter, you talked about de novo being somewhat limited by staffing and as well as the ability to get contracted permits. You mentioned today that 12 opened here to-date. It sounds like maybe that’s gone away. But just in terms of the de novo pipeline for the balance of the year, do you feel like you have both the staffing and whatever logistics necessary to keep the pace up?

Yes. We are going to have a big de novo. Part of our margins during the first quarter was we had a lot of facilities opening in January with the slow start. When you look at the contribution in income versus revenue, it was upside down, which happens with de novo facilities. They will pick up steam, and we are into a good part of our year right now, but we should have a good de novo year this year, Matt.

Okay. And the last one would just be, you again mentioned last quarter sort of a big opportunity for IIP this year was the tradeshows. They are reopening. I know I have been to a few conferences in the last couple of months. I imagine your folks have as well. I guess what did the tradeshow schedule look like? Any findings that’s kind of helping with traction as you are out there?

Yes. I am going to kick this over to Eric. Eric, you are a little bit closer to at least one of our IIP teams that does a lot with tradeshows. I don’t know if you know what that looks like right now, I am not sure.

Yes. We started going to those in the fourth quarter of last year when they started being in person again, and had a presence at a couple of shows, and they have a full slate of trade shows they will be attending throughout ‘22.

Yes. Thank you.

Alright. Thanks guys.

Thanks Matt.

Thank you.

Thank you. Our next question will come from Mitra Ramgopal with Sidoti.

Hi Mitra.

Yes. Hi. Good morning everyone. Thanks. First, Chris, I was just wondering if you could give us a sense of the competitive environment as we emerge from the pandemic if you are seeing maybe some incremental volume as a result of some of your competitors not doing so well?

Yes. So Mitra, it’s hard for me to measure that. Volume has been good, really good as to whether it has improved as you have heard. Where exactly that comes from and who we are moving share from, it’s really tough for me to say. I think throughout the pandemic, we probably moved share from hospitals and small practices. I think it’s probably continuing. We have a great team. We didn’t—I was going to say we didn’t really pull back. We pulled back in forming a bit on our sales and marketing team, just with furloughs very early on. But we got those folks back pretty quickly and as offices open up. That’s been back for a long time now. I just think we have a great team. They are really committed to what they do. Our partners who are embedded in these partnerships forever are very connected to these marketplaces. They do a great job as well. Compared to just what I would have called air quotes around “staff,” new grads that other groups are throwing into facilities because they are trying to get 100 de novos open in a year or something like that, and that’s tough to do. I mean that’s really hard to do, because the relationships aren’t there. It’s just a whole different dynamic. Our folks are embedded; they are there for the long run, and I think that makes a difference.

No, that’s great. Thanks for the color there. And on the IIP side, obviously, you did a really nice size deal a few months back, and just curious in terms of a couple of things. The valuations you are seeing in that front and any concern that a lot of service operators are having difficulty staffing, etcetera, if that might provide somewhat of a slowdown, or maybe make you a little more cautious as you look to expand in this space.

It doesn’t make me more cautious. I think long-term, we really like the business. It does what it’s supposed to do. It keeps people working in a really healthy way. It assists big self-insured companies. Sticking this to that business is very good overall. So, we like it. We are not looking at the environmental issues as a long-term inflection point for us in terms of changing our focus. That said, there are tens of thousands of physical therapy clinics across the country and not as many targets on the IIP side. We are having good conversations and will continue, as we have in the past, both in PT and injury prevention. We are still active. We will continue to look at what we think are the best long-term opportunities for the company. In terms of pricing, it’s tough to say. Our blended pricing for injury prevention has been less. The last year we did was higher, and what we have done in the past, but I don’t know that we have a trend that clearly demonstrates where that is. Pricing on the PT side is as high as it’s been in my career. It’s competitive, and it’s not cheap, but we are getting good things done. It’s a good time for a PT company, and you are seeing it’s a good time to give us a call. So, yes, it’s a healthy market.

Okay. No, that’s great. Thanks for taking the question and congrats on a nice quarter.

Yes. Thank you, Mitra.

Appreciate it.

We currently have no questions in the queue at this time.

Okay. Well, listen, thank you, everybody. Great questions. I appreciate your participation this morning. We have got a lot of work to do and we appreciate your support. Thank you, and have a great day.

Thank you, ladies and gentlemen. This concludes today’s teleconference, and we appreciate your participation. You may disconnect at any time.