Good day, everyone, and welcome to the U.S. Physical Therapy Third Quarter 2022 Earnings Conference Call. I would now like to turn the call over to Chris Reading, President and CEO. Please proceed, sir.

Thanks, Ashley. Good morning, and welcome, everyone, to our third quarter 2022 U.S. Physical Therapy earnings call. Today I'm calling in from Denver, where we have the largest aggregation of private practices for the annual physical therapy private practice meeting. It's a great place for us to seek friends and colleagues and work on deal-related opportunities for the future. Additionally, this year in conjunction with this PPS meeting, we held our annual APTQI Board meeting, where we continue to work on behalf of our profession in areas such as fair reimbursement for the amazing life-altering results we produce for our patients. We continue to push for the reduction of administrative burden. We're working to ensure that we have an adequate supply of therapists to serve the growing needs of our aging population, replacing unnecessary and excessive pharmaceutical and other more expensive interventions with proven functionally restoring care. We focus on other legislative and long-term efforts. I'm proud of the work that we're doing within APTQI and our member company's ongoing support of those efforts, which to date have helped mitigate some of the significant harmful cuts proposed by CMS these past few years. Joining me on the call this morning include Carey Hendrickson, our CFO. I'm really happy Carey's part of our team. He arrived here 2 years ago as we worked our way through year 1 of the pandemic. He's doing a great job. Eric Williams, Graham Reeve, our co-COOs, are also here with me. They've been working extremely hard, along with our regional presidents in conjunction with our partners and our local staff who work every day to provide outstanding care, while we work to make ongoing adjustments during what has been a rather continuously evolving environment this year, to include a rather sharp and significant inflation across all cost areas, coupled with some employee scarcity, which I think we're beginning to deal with more effectively at this point. Finally, Rick Binstein, who, in addition to being our Executive Vice President and General Counsel, is my right arm in so many important areas and ways, including, especially in our acquisition-related work, where we've tried hard recently to make sure Rick stays as busy as possible. Rick is also unfortunately a Phillies fan, so that's the only real strike against him at this point. Before I continue further, I'll ask our Senior Vice President of Finance and Accounting, Jake Martinez, to please cover a brief disclosure. Jake, if you would.

Thank you, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information. Thanks.

Okay. Thanks, Jake. I'm going to start this morning with some color on highlights on our third quarter performance, and then Carey can fill in any gaps as he thoroughly reviews our financial results. This year, we have seen the resumption of our long-standing seasonal pattern, which was really absent in 2021. With the advent of summer and school letting out, we normally slow just a little bit and then later we pick up. And that return as per our normal seasonal pattern this year was evident. June and July with vacations and travel slowed modestly, with July coming in at 28.4% visits per clinic per day, and then we started to pick up with the kickoff of fall football and the start of school. Ultimately, we finished the quarter averaging 28.8% visits per clinic per day in spite of a very active de novo and development year, which can sometimes mute those volumes somewhat. And considering we were impacted by about 3,500 visits in the last week of September and into early October due to Hurricane Ian, which devastated parts of Florida and caused considerable damage across several Southern states along the Southeast Coast. Overall, patient visits increased 2.8% from the prior year quarter. One of the bright spots showing up this quarter from the very good work our payer contracting team has initiated around negotiating some of our payer contracts, which has been a stated focus of ours all year, those efforts are beginning to bear fruit. Our net rate for physical therapy came in at just over $104, which was a $1.08 improvement from our Q3 2021 performance and $0.83 sequential improvement from Q2 this year. I will point out, we're still in very early innings here. We've got a lot more work to do and a lot of contracts to touch before it's over. So earlier this week, each month, we have for each of our industrial injury prevention partnerships, a partnership call, where we go over detailed performance and opportunity. I was on one of those calls earlier this week with our legacy IP injury prevention partnership. They are getting some nice wins with respect to contracted rate renegotiation. These legacy partners are doing a tremendous job in spite of the macro challenges affecting all of us. Injury prevention revenue was at an all-time high for this third quarter at just over $20 million, which was more than 92% improvement compared with our 2021 Q3, with a 27.1% same-store organic growth rate in that business. A gross profit percentage for our IIP services was approximately 22%. Overall, our gross profit for the entirety of our injury prevention business increased 64.6% year-over-year, an excellent continued trajectory for that segment of our business. So shifting gears a bit, our challenges at the moment center around making adjustments to deal with the current inflationary environment, including in our labor cost. While we are taking steps and making progress towards mitigating those challenges, we need more time to completely impact and invest in a number of key areas, including as we've discussed in our net rate. Total salaries and related costs were 58.6% of revenues versus 56% in the 2021 quarter. I will point out that for us, this includes the labor necessary to build and collect for the clinical work that we perform. Rent, supplies, and contract labor are also higher than historic levels. As a percent of revenue, that's about 200 basis points above where we were a year ago at this time. These changes have come fairly acutely this year, starting really to appear for us in mid-Q2, and we continue to work our way through a series of mitigation efforts, which will be ongoing and require additional time to more significantly address resulting cost and margin impacts felt today. I want to close my remarks by emphasizing two very bright spots for us. The first of those is our people, starting with our partners and our clinical teams. They've been through a tough few years starting in early 2020 with COVID, where together, we navigated that very early difficult time well. COVID continued through '20 into '21, which meant they were spending long days screening patients while masked up all day. The job is very physical, and the adjustments necessitated due to COVID made that work even harder. The reality is, even though you don't hear about it on the news anymore, COVID is still around, and we continue to make adjustments to keep our staff and patients safe. Throughout all this time, our teams across the country and across the company have done an exemplary job adjusting and working to do the utmost for our patients. I just want them to hear how much we all appreciate those efforts and want them to remember they are making a huge difference in the lives and in the function of our patients. The final bright spot I will highlight here has been our development in these past two years. We have onboarded some fantastic partners who brought us a lot of joint enthusiasm to continue this mission we're on. Speaking personally, it has helped to make this job one where we roll out of bed every day, excited and grateful in spite of any challenges that we may have, in large part due to the wonderful people that I get to work with every day. I'm supremely pleased with the deals we've announced this year, including the most recent one we announced earlier this week. The people and the talent are amazing, and I'm also excited about what we still have in the works to complete. So that concludes my color on the quarter. I'll ask Carey to provide a more detailed overview of the financials before we open things up for questions. Thank you. Carey?

Thank you, Chris, and good morning, everyone. As you saw in the release, we reported adjusted EBITDA for the third quarter of $17 million and operating results per share of $0.58. Like all companies, we're dealing with inflationary cost pressures and labor pressures. We expect those factors to continue to impact us in the near term. However, our volumes remain strong by historic standards, and our team is focused, as always, on finding ways to become even more efficient so we can produce the best possible results for all of our stakeholders. Looking at our volumes, our physical therapy patient volumes per day per clinic, as Chris noted, were 28.8% in the third quarter. That's the second-highest per day volumes in the third quarter in the company's history. By month, our average visits per clinic per day for all clinics were 28.4 in July, 29.0 in August, and 28.9 in September. Chris noted we had some impact from Hurricane Ian. We lost about 3,500 visits at the end of September due to that. We would have been at about 29.0 in September as well were it not for those lost visits. We expect October volumes to be similar to August and September, which is a good place to be given the lingering impact of Hurricane Ian in Florida, Georgia, and South Carolina in the first couple of weeks of October. Our net rate for our physical therapy operations was $104.1 for the third quarter of 2022. That compares to $102.93 that we reported for the third quarter of '21. Our rate has increased each quarter this year, moving from $103 in the first quarter to $103.18 in the second quarter and then to $104.01 in the third quarter. This is despite the pressures on Medicare rates, some reductions that were put in place at the beginning of the year and the phase-out of sequestration relief, which is now complete. As we noted, we've seen nice commercial rate increases this year. It is the hard work of our contracting team that has resulted in our average commercial rates increasing each quarter in 2022. We still have a lot of work to do on this front, but it's good to see some progress here. Our workers' comp average rate is up 2.5% in the first nine months of 2022 compared to 2021. Our Medicare rates dipped in the first and second quarters of the year, but then increased in the third quarter due to the adoption of remote therapeutic monitoring, which is new in 2022 and due to other hard work on the ops team side. Our physical therapy revenues were $117.5 million in the third quarter of 2022, an increase of $4.4 million or 3.9% from the third quarter of 2021. Our physical therapy operating costs were $95.5 million as compared to $86.2 million in the prior year, and our margin in physical therapy was 18.7%. Looking at the revenue from our Mature Clinics, they were flat year-over-year with a 1.5% decrease in visits offset by a 1.4% increase in rate. Our physical therapy salaries and related costs for our Mature Clinics increased 5% in the third quarter of 2022 compared to last year. Contract services and rents were also higher at our Mature Clinics. Revenues for our industrial injury prevention business were an all-time high of $20.2 million in the third quarter of 2022. That was a $9.7 million increase over the third quarter of 2021, which represents a 92.1% increase. Our industrial injury expenses increased $7.9 million to $15.8 million in the third quarter. That gave us a margin of $4.4 million, which was an increase of $1.7 million or 64.6% over the prior year. Our same-store IIP revenue increased 27.1% in the third quarter of last year versus the same quarter last year. Our gross profit was $26.8 million in the third quarter of 2022, compared to $29.8 million in the third quarter of last year, and our gross profit margin was 19.2%. Our corporate office costs remained steady at $11.9 million in the third quarter of 2022. That's actually $1 million lower than they were in the third quarter of '21, with the decrease primarily due to lower estimated bonus expense this year. As a percent of revenue, corporate costs were 8.5% of revenues in the third quarter of 2022, down from 10.2% of revenue in the third quarter of '21. A couple of unusual things: our other income line includes a $2 million gain from the elimination of a liability for a potential contingency payment related to a prior acquisition. It also includes a gain of about $785,000 related to the revaluation of our put right liability associated with the potential second phase purchase of the IIP business that we acquired in November of 2021. Both of those items, though, were excluded from our adjusted EBITDA and operating results. Our interest expense increased from $268,000 in the third quarter of 2021 to $2 million in the third quarter of 2022 due to an increase in our debt, primarily related to acquisitions closed since the third quarter of last year and also due to higher interest rates in the third quarter of this year compared to last year. Our net income attributable to non-controlling interest was $3.3 million in the third quarter of '22, which is less than the $4.1 million we had in the third quarter of last year. As a percent of profits, our non-controlling interest was 12.1% in the third quarter of '22 compared to 13.8% in the third quarter of '21. That reduction in non-controlling interest percentage is due to our proactive purchases of non-controlling interest from existing partners, resulting in a greater percentage of profits being retained by USPH. In 2021, we purchased $30 million of non-controlling interest from our existing partners, and we purchased another $14.1 million in the first nine months of this year. Our balance sheet remains in an excellent position. We have a $150 million term loan with a 5-year swap agreement in place that fixes the 1-month SOFR rate on that $150 million at 2.815%. Including the applicable margin based on our leverage ratio, the all-in rate on that $150 million of debt is currently 4.665%. In our statement of comprehensive income in our financial statements, you can see that our swap agreement currently has a mark-to-market value of almost $6 million, meaning that the current expectation is we will pay $6 million less in interest expense over the remaining term of our 5-year swap agreement than we would have paid without the swap at a variable interest rate. In addition to the term loan, we have a $175 million revolving credit facility that had nothing drawn on it at September 30, and we had cash on our balance sheet of $37.9 million at September 30. We do now have $5 million on our revolving credit facility after closing on the fourteen-clinic acquisition that we announced earlier this week. The acquisition was primarily funded with our excess cash, but we used the revolver to fund the remaining $5 million. Borrowings on the revolver are at a variable rate, which for November will be right around 5%. Our low leverage, coupled with very sufficient capacity remaining on our credit facility provides us tremendous flexibility for the right growth opportunities as we identify them at the right price. As we look forward, our cost mitigation efforts put in place early in the third quarter are ongoing, but we expect our costs to remain elevated due to the significant inflationary economic environment. With solid volumes and rates, we expect our full-year results to be within our previous guidance ranges for operating results, which were $2.65 to $2.75 per share, and EBITDA, which was in a range of $73.5 million to $75.4 million, but most likely on the low end of those ranges. In closing, I'll say, we are all working very hard as a team to produce the best possible results for all of our stakeholders, as I noted in my opening comments. And with that, Chris, I'll turn the call back to you.

Yes. Thanks, Carey. Great job. Operator, let's go ahead and open it up for questions.

And we'll take our first question from Brian Tanquilut with Jefferies.

I guess my first question, good rate growth performance this quarter. Chris, is this early signs of progress in terms of trying to negotiate better rates with payers? And how should we be thinking about the remaining opportunity to drive rate growth going forward?

Yes, it's a good question. Yes, I do think it's early progress. The team's worked really hard. Our injury prevention team is having success there, too, although that doesn't show up in our net rate that you just referenced. We've got a lot more work to do, though. We have some contracts that just kicked in in October that aren't in those numbers. But I would encourage you guys not to get too far ahead of this. This is not going to be a linear process that's easy to predict quarter-to-quarter. So hang with us. We're continuing to work on it. And as I said, we're in early innings on this. So more to do, more to come.

I appreciate it. Chris, there was a recent announcement about a solid acquisition that seems to be a promising business. Considering the current deal environment and the slowdown in private equity due to the prevailing rates, what are your discussions like now with the targets? I know you've built many of these relationships over the years, so I'm interested in how those conversations are unfolding today. Additionally, how should we approach your potential opportunities moving forward?

Yes, our discussions haven't changed significantly. We are currently at the annual private practice meeting. The environment has certainly shifted, and I believe the multiples will need to change, and they likely will. We will see how this affects things in the long run. These are ongoing discussions where we reassess the situation. People are aware that the market is evolving. There are deals that have reached the closing stage, not ours, but others that have paused or been withdrawn, likely due to leverage or banking issues and other factors. This will start to impact the process. Whether this results in slower deal flow or adjustments in expectations remains to be seen. We remain active and confident in our ability to complete transactions, and we anticipate making some necessary adjustments.

And then, Chris, last question for me. As I think about the broader health care space, there's a lot of discussion about tightness in clinician labor. But I know you guys have done better in that front. But obviously, the center of your business is still the therapist in the centers and the PTAs. How are you thinking about turnover? And what are you seeing in terms of your ability to recruit clinicians in this supposedly tight labor market?

Yes. It seems to me that we've made some adjustments on the recruiting side. We've invested in new tools and managed to hire several key people over the summer from the graduating classes, including some from competitors. It's challenging, but the situation feels improved compared to five or six months ago. We're also seeing some positive changes in injury prevention, though I wouldn't call it normal. At our APTQI meeting yesterday, a member shared an analysis, which I can check on my phone. It noted that 22,000 physical therapists left the workforce in 2021, along with 300,000 total healthcare providers. For context, the average graduating class across all PT clinics in the country produces about 11,000 new graduates annually, which means last year's workforce loss equated to about two years' worth of new hires. As you recall, last year was a challenging one for us, but we achieved record earnings and volumes. We're making adjustments, which take time, but things are starting to feel a bit better. It's crucial that our clinicians and partners recognize the significance of their work and the impact they have. We're dedicated to providing the necessary support, and we will navigate through these challenges together.

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

This is actually Madeline Mollman on for Matt Larew. I know you mentioned last quarter that you were engaging in some cost control efforts, including switching suppliers. I was wondering if you could sort of quantify the impact that you've seen from that this quarter and what you see going forward into 2023? And then, also I know that contract labor was a big headwind last quarter, and it was an impact on the take down of your guidance. I was wondering if you could talk about whether you think the contract labor costs are going to be more transitory or if you see those continuing into 2023?

Well, we definitely see contract labor continuing. We're never without contract labor. I think this environment would be crazy to think that we're going to be without it. I would tell you that the guidance change was not particularly impacted by the amount of contract labor, certainly slightly, but that was a minor part of our guidance adjustment. Much more significant was on the cost of capital side and on the general inflationary side. So we continue to work. Look, we're working our way through this. We're rolling out, as you mentioned, some vendor changes through a GPO rollout that's in its early stages. We continue to make careful adjustments with respect to our staffing. We're rolling out some improvements in our onboarding for our patients at our front desk areas that, hopefully, as we get further into 2023, will allow us to make further adjustments in our front office staff. But this is going to be kind of a slow study process. This isn't a one-and-done kind of opportunity. It's going to take us a little bit more time.

And then just as you think about acquisitions, I know you mentioned that you drew down on your debt to fund the most recent acquisition this week. Is there a leverage ratio that you want to stay below? Are you focusing more on acquisitions you can pay for in cash in order to not draw down on the debt? Just wondering how you're thinking about that.

Yes, well, certainly, we have covenants and an understanding with our bank. Those ratios right now, we get credit from prospective EBITDA that gets annualized in these deals. But our leverage ratio, including that prospective credit, would be at 3x, and we'll stay under that.

Just to be clear, that's the covenant. Just making sure that's clear. We're currently at about 6x or around that. So go ahead, I'm sorry, Chris, go ahead.

Yes. No, that's fine. I mean the point is we're well within those ranges that keep us comfortable. Will we use cash? Look, we always have cash available, $20 million and $25 million to fund ongoing needs of our business. We'll actually pay down that credit facility, that $5 million that we borrowed as we're able and then re-borrow as we need to. That will be a rather fluid process that occurs each and every week, in fact, depending upon cash availability and outflow.

Then we'll move on to Mike Petusky with Barrington Research.

So I guess I wanted to ask just on the GPO rollout, I mean, what kind of buy-in or pushback are you getting from your therapist partners? I mean, are they sort of getting onboard? Or was this somewhere in between?

Yes, this is Graham. So far, it's been well received. I mean we're working through partner by partner. But so far, we've had a good adoption on it, and we're working to move it out for more people.

Yes, Mike, I think like anything else, will it be 100% uniform? And will the sensitivities around it be 100% one way or the other? No. But I think our partners understand where they are and where we are and where the world is right now. Buying the same stuff and paying more for it just doesn't make a lot of sense. We have a new opportunity, and it will be changed, but we're working our way through it.

And Chris, I guess, given that you're in a meeting, I'm extra curious what the current view is in the industry, yourself as far as reimbursement sort of a more rational reimbursement approach, including specifically for 2023, any thoughts?

Yes. So we had our APTQI meeting. Again, that's the vehicle that we use to do our lobbying and congressional work, all of the important work that we're doing to elevate physical therapy. There are a few good studies out right now that indicate that not only has physical therapy been downward and light in their healthcare spend. So the congressional champions that we're speaking to understand that. Many of them have had physical therapy themselves. We're now collectively of the age where people have things that are beginning to happen. All of us do; our kids do, our parents certainly, and they recognize it. So CMS is not the rational arbiter now at this point of where rates should be. We hope and expect that we'll get some relief here at the end of the year with group and with some congressional action that isn't certain at this point. It won't be certain until it happens, but we're making progress, and we expect to be there. Longer term, look, I think we're going to begin to see a shift in commercial payers. This is just my view; this is not based on anything else. But I think payers are beginning to see that they can't eliminate physical therapy, and they can't cut their way to improving the total cost dynamic. If people don't have access to PT, which is what's going to happen. We are in the process right now, quite honestly, looking at contracts that no longer make sense for us to take at a certain reimbursement rate. We've actually begun to drop some of those contracts. So with anything, I think as there's consolidation in our PT world, we'll have larger companies with more resources and better ability to negotiate. Some of this low-hanging fruit for these payers are making immense profits on Medicare Advantage and booking record earnings. It's going to have to flow to providers, and we're certainly going to fight for our fair share. I'm tired of taking low rates, frankly.

This one is more of a housekeeping, but does anybody there have the payer mix for the quarter?

Sure. Yes, I got it. So for commercial insurance, it was 45.7%. Medicare was 34.4%. Medicaid was 4.1%. Workers' comp was 9.5%, and then everything else together was 6.3%.

Okay. And just a quick follow-up related to that. Honestly, over time, Medicare, Medicaid has sort of moved up a bit as a percentage, while workers' comp looks like it's moved down over time. I mean, is there any way for you guys to sort of intentionally take steps that can sort of shift towards the $130, $140 reimbursement versus whatever it is, $95 or whatever that might be that government is paying?

Right. Yes. A few months ago, I think effective beginning July, we brought back the key executive who had actually been the driving force and the author behind a lot of our comp-based activities a number of years ago, which helped us meaningfully grow our comp rate. Obviously, at the beginning of the pandemic, our comp, and from my perspective, a lot of our competitors' comp businesses fell. We've yet to get that back, as you pointed out. But we've added resources in this area, rolling out new programs. We've updated our training. We've updated our web presence and our marketing and our sales efforts. We've yet to see meaningful change, but we're beginning to feel like we're moving back in the right direction. We hope to make some progress there. We're obviously early, but we're focused on it.

Okay. Can I sneak one more quick one? Just on the recent acquisition, the one from earlier this week. The press release was sort of vague. It seemed to say that the 14 facilities maybe were in a single state, but maybe that could get bigger. Can you just talk about what's the possibility, either geographically if you're willing to talk about that, or from a facility standpoint, how much that particular practice could grow?

Yes. That practice is primarily in one state, although it does technically cover two states. Let me tell you, Mike, these guys are as capable as any group that we've ever worked with. They opened new clinics, which get the profitability in what I think is a record time. We have a number of new clinics slated to open with them. We have some activities that are beyond the 2 states that they're in currently, again, primarily one state, technically two, that would take them in some other areas. They have relationships that go beyond those two states. I think this is a group that can grow very, very significantly over the next few years and then beyond that. So I'm very excited about it. Happy to have them part of the team and the family and looking forward to helping them recognize their vision.

Are you willing to share the geography or no?

Not right now, and it sounds fun. But the reason is we have so much in development with them. They want to jump on the market before the word gets out so that people don't shore up their defenses. It sounds crazy, but we're going to keep that quiet as long as we can. It's a good market, though.

And there appears to be no further questions at this time. I'll turn the call back over to the speakers for any closing remarks.

Okay. Ashley, thank you. Thanks, everyone. We appreciate your time this morning. I'm going to be tied up a little bit this afternoon with activities that are slated at this private practice conference. I think Carey is expected to be available. And certainly, I'll be available once I get back. So thank you for your time, and have a great day.

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