U S Physical Therapy Inc /Nv Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thank you very much. Good morning, and welcome everyone to our U.S. Physical Therapy first quarter 2023 earnings call. Joining me on our call this morning from our executive team, I have Carey Hendrickson, our CFO; Rick Binstein, our Executive Vice President and General Counsel; Eric Williams and Graham Reeve, our COOs; Jake Martinez, Senior Vice President, Finance and Controller. Before I make some opening remarks, I'll ask Jake to cover a brief disclosure statement. Jake, if you would, please.

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, Jake. I will make some high-level comments this morning on various aspects of the business, and then I will turn it over to Carey to discuss the numbers. I wanted to start by thanking our team. Midway through last year, around late May into June, it felt like the world changed. After navigating the pandemic, we faced significant inflation that impacted everyone. Employee scarcity was a major challenge, making it a tough year. I want to express my gratitude to our team for staying focused, working through these challenges, and maintaining a positive attitude. Our partners, staff, leadership team, and marketing support group have all done an exceptional job, and it showed in this first quarter. Volume has been excellent and reached unprecedented highs. This first quarter marked our best-ever visits per clinic per day in the company’s history, surpassing last year's numbers. The care provided by our team and the support from our marketing group helped us achieve the strongest volume ever. We have made progress, though there is still work to do. We've seen improvements in salary and total cost per visit, and Carey will share more specific numbers and progress with you. These improvements are supported by volume even amidst inflation, and we are making strides in a couple of key areas that affect our costs. Our rate renegotiation process is ongoing, and our team is doing an effective job managing a large portfolio of contracts, achieving some nice increases. It's important to note that, despite some challenges with Medicare cuts this quarter, overall rates are up by 2%. We are making headway, but there's more to be done. We've previously seen mid-teen to upper-teen revenue growth, but under the current market conditions, nearly 16% revenue growth in physical therapy, along with double-digit improvements in operating income and the highest quarterly EBITDA ever, are impressive achievements. The effort put in has led us here, and there are still opportunities ahead. Some of this revenue growth has stemmed from our mature facilities, with same-store numbers reflecting a 6% increase, which is strong for us. Additionally, we've made excellent acquisitions with talented people, and I've been pleased with the progress seen from them. I mentioned in the previous call our decision to stop accepting low-margin and no-margin business, particularly concerning some Medicare Advantage contracts that are problematic in our industry. We are evaluating our contracts, as we provide vital services for our patients and deserve compensation that reflects the care we provide. Low rates persist only because they are accepted as the norm, and that mindset needs to change. Our volume has remained strong this quarter, and I hope we maintain that momentum. We have made strides in automating our front-desk operations, which should help with employee retention at that level. Turnover for licensed clinical physicians has decreased significantly, though front-desk turnover has not yet reached that level, it has improved markedly. Now, regarding our injury prevention business, it has remained robust and resilient. We have made nice acquisitions that have strengthened this area. While we expect some slowdown this year, particularly in the tech sector, where company leaders are cautious about the economy, the demand for new business should remain strong. We anticipate some ups and downs this year, which may level our performance compared to the past. As Carey will outline in the first quarter numbers, that is how I see this year shaping up. I believe we will meet our budget, but growth may slow without additional deals. I will now turn it over to Carey. This feels like a strong start to the year. I want to thank my team again. We have exciting initiatives in the works that we will share later this year. Carey, please go ahead and present the results in more detail.

Thank you, Chris, and good morning everyone. As Chris mentioned, we had an outstanding first quarter in nearly every area: we achieved record high volumes, experienced strong revenue growth, continued to lower our salaries and total operating costs per visit, and saw an increase in our physical therapy operating income and margin, along with year-over-year growth in our total adjusted EBITDA. This marks a very good start to the year. We reported adjusted EBITDA of $18.5 million for the first quarter, which is an increase of $1 million compared to the $17.5 million from the first quarter of '22. Including the impact of higher interest expenses, our operating results were $0.59 per share for the first quarter of '23. Our total revenues increased by 12.8%, rising from $131.7 million last year to $148.5 million this quarter. Our operating income for the total company grew by $2 million, from $15 million in the first quarter of '22 to $17 million this quarter. The average visits per clinic per day were 29.8, marking the highest first-quarter volume in the company's history and the second-highest volume overall, only surpassed by the second quarter of 2021. Each month of this quarter set a record high for that month, with average visits of 28.9 in January, 29.8 in February, and 30.7 in March, the highest monthly volume ever. Our net rate, which Chris referred to, was $113.12, an increase of $0.12 from the first quarter of last year, despite year-over-year changes in Medicare rates. We experienced a 2% reduction in Medicare rates at the start of this year, while last year we still had a 2% sequestration relief that phased out throughout the year. However, these differences in Medicare rates were more than compensated by a 3.2% increase in our commercial rates compared to the first quarter of last year. As Chris indicated, there is still a lot of work ahead, but we anticipate continued progress in increasing our commercial rates. We plan to renegotiate or terminate contracts that reimburse us below our service costs, particularly concerning some Medicare Advantage contracts. We expect to see the effects of this work become evident in the second half of '23. Our physical therapy revenues reached $127.4 million in the first quarter of '23, which represents an increase of $17 million, or 15.6%, compared to the first quarter of '22. Revenue growth at our same-store clinics was 5.8%, driven by an impressive 6% increase in visits compared to the previous year. Our physical therapy operating costs were $100.6 million, an increase of 13.9% compared to the first quarter of last year. We are pleased to report a decrease in our physical therapy operating cost per visit, dropping from $83.09 in the first quarter of '22 to $81.97 in the first quarter of '23. This cost per visit peaked in the third quarter of 2022 and has steadily declined since then. Our total operating costs were $85.14 in the third quarter of '22, decreased to $84.05 in the fourth quarter of '22, and fell further to $81.97 in the first quarter of this year. Our salaries and related costs per visit increased only 0.7% in the first quarter compared to last year and have continued to trend downward since the third quarter of 2022. They dropped from $60.99 in the third quarter to $60.04 in the fourth quarter, and further to $59.14 per visit in the first quarter of this year. The rise in physical therapy volumes and revenue, combined with stabilizing expenses, has also improved our physical therapy margins, which rose to 21.0% in the first quarter of '23 from 20.0% in the first quarter of '22. Chris highlighted our industrial injury prevention business. Revenues in that sector were $19.4 million in the first quarter, up $300,000 from the previous year. However, our expenses in that area were $15.6 million, an increase of $700,000, resulting in industrial injury operating income of $3.8 million, with a margin of 19.5% compared to 21.8% in the first quarter of '22. Our interest expenses were $2.6 million in the first quarter of '23, an increase of $2 million from last year. This rise in interest expense is attributed to increased debt-related acquisitions closed last year and rising interest rates. Our balance sheet remains strong, supported by a $150 million term loan with a five-year swap agreement that fixes the one-month term SOFR rate at 2.815%. Including the applicable margin, the effective rate for this debt was 4.915% in the first quarter, which is favorable compared to the current market. The swap agreement saved us $700,000 in interest in the first quarter, and as of March 31, it had a mark-to-market value of $3.6 million, indicating we expect to pay $3.6 million less in interest over the next four years compared to without the swap. In addition, we have a $175 million revolving credit facility, of which $38 million was drawn at March 31, with $32.6 million in cash on our balance sheet. The borrowings on the revolving line are at a variable rate, which averaged approximately 6.8% in the first quarter, leading to an overall effective interest rate of 5.5% when combined with the term loan. The strong results from the first quarter and ongoing strong volumes in April reinforce our confidence in the adjusted EBITDA guidance range of $75 million to $80 million provided earlier, excluding potential acquisitions for the remainder of the year. In conclusion, we had a solid start to 2023 and will continue striving to achieve the best possible results for our stakeholders. Chris, I will now hand it back to you.

I'm sorry, Carey. I was muted. Operator, go ahead and open the line for questions.

Certainly. We'll take our first question from Larry Solow with CJS. Please go ahead.

Good morning, Larry.

Good morning, everyone. I sometimes have trouble with the mute button as well. We've had a great start to the year, likely aided by mostly favorable weather across the country, despite some areas facing challenges. The 6% growth in same-store volume is impressive, especially given the strong comparison from last year. I know you don't provide quarterly guidance, but we are currently in a strong part of the year, averaging nearly 31 visits per day per clinic. Do you anticipate this trend continuing, assuming the weather remains beneficial?

Volume remains very strong. While I won't make any predictions, we shouldn't expect significant weather disruptions in the near future. I am optimistic that we can continue our growth trend as we have in most years since I joined, except for the second half of last year. We are certainly committed to achieving that, and we will see how things unfold, but we are pleased with our current position.

Do you think labor costs are still high, but your access and availability have improved? Did that assist you in serving more patients daily? Were there instances of lost revenue due to previous labor issues that have since improved? Is that part of the overall improvement you see year-over-year?

Yeah, sure, absolutely. Now, I will say this. First quarter of last year, we weren't feeling the labor issues that we began to experience late in the second quarter and certainly into the third and fourth quarters. So, I think the quarterly comparison, access to labor, was not as much of an issue a year ago. I will also say that right now, our time to fill open positions has decreased dramatically from where it was in the second half of last year. It's improved a lot. I think it will continue to improve, that's my sense, and that's both for clinical positions as well as front-desk positions. I have to believe that some of the 20,000 people who left the profession during the pandemic won’t all stay out forever. I think a lot of those folks will come back. And, yeah, certainly I think that will help us as the year progresses on a comparative basis.

Got it. Just last question, one follow-up. Just on the total clinic, it looks like, I think you grew seven sequentially. I think there's only one acquisition of the one larger clinic, right? So, it looks like six net new clinics, if I am not mistaken, so that's pretty good de novo activity at least to start the year, if my math is right?

Yes, we've had good de novo activity. We've got across a swathe of great partnerships. We've got more acquired activity which is coming and it should be another very good year, at least that's what we're working to produce, and expect that will happen by the time we lap this year. So, development right now we feel confident that we can deliver a good year, both de novo as well as acquired.

Excellent. Thanks, Chris. Appreciate all the color.

Thanks, Larry.

And we will take our next question from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Congratulations.

Good morning. Thank you.

Good morning.

I guess, Chris, I'll start with, obviously, strong quarter here. Larry said strong start of the year. It's really nice to see that. Do you think you're gaining market share? Or is the whole industry seeing kind of a recovery and an uptick in demand for physiotherapy services right now?

Yeah, I don't know yet, Brian. I mean, I think Select reports tonight after the market closes. I think ATI reports next week. We'll see how they do. I have a lot of friends who are CEOs of these other companies, but we tend not to put each other in a position where we're sharing details like that. Look, I think last year was a tough year, and last year was one of the first years we didn't grow our visits per clinic per day. It was a little bit more muted, more flat. I think with staffing improving, we're seeing some pickup. Whether we're moving that from competitors or not, I have to believe in some cases, we are. When we do acquisitions and bring on really good companies, one of the reasons that people come with us is because of the resources that we can provide. Some of those resources are enabling these companies to grow at a faster rate than they would have otherwise. I think that's coming from market share, but I don't have a precise way to measure it, so it's just my guess.

And then, Carey, as we think about rate, just curious, you talked in your prepared remarks about how you're going to walk away from some of these under-paying contracts. You've already been vocal and public about it since the last quarter or so. So, curios what those conversations are like or what the feedback reception has been from those payers as you're having those conversations?

Yeah, I'd say it's mixed. In some cases, they're willing to come back and renegotiate rates with us, and sometimes they're not, and that's fine with us. We're going to move forward. It's not good business for us, and as Chris noted, we're just not going to take that any longer. We feel good about it as they don't represent that much volume for us, and it's a volume we can easily replace, especially with the strong volumes we're having this year.

In the tight labor market, which is improving but still challenging, it’s essential to avoid hiring staff for business that doesn’t provide a good profit margin. When we discuss shifts in market share, we are willing to let our competitors take that share at a loss. We will focus on acquiring business that offers much better margins. Whether those clients return or not is acceptable to me at this time.

Yeah. No, actually, my last question, Chris, was related to that. I mean you called out in your prepared remarks that your turnover at the clinician level is the lowest. I'm curious, I know you're very in touch with a lot of folks in the industry, and we're hearing turnover rates that are higher, notably higher than yours from some of your competitors. I’m curious what are you hearing from your own clinicians as you do survey work that allows you to maintain this industry-low turnover rate for clinicians?

I can't say with absolute certainty, but I believe it relates to our partner model and the feedback they receive from leadership regarding our values and what matters to us. I think this connection resonates with people and encourages them to stay longer. We do face challenges, but we tackle those in a collaborative manner. It's not a harsh environment; rather, it's supportive. I think this overall attitude has an impact. From a leadership viewpoint, whether it’s our Regional Presidents, COOs, or myself to a lesser extent, our long-term industry experience plays a role. This isn't merely a business endeavor; we prioritize care above all else. I believe I have a strong team that effectively communicates and exemplifies these values, which makes a difference. I hope that’s a key factor.

Awesome. All right. Thanks, guys. Congrats again.

Thanks, Brian.

Thanks, Brian.

And it does appear that we have a question from Mike Petusky with Barrington Research. Please go ahead.

Hey, Mike.

Good morning, Mike.

Good morning. And I had pressed star one three times, so, and was about to hang up. Anyway, I got it, okay. Now that I've learned to operate a phone, let me ask a couple of questions.

Yes, me and you both. So, we both learned...

That's right, I am in very good company. All right. So, on rate renegotiations, Chris, you know I am a baseball fan. In terms of just the nine-inning baseball game, how far along are you guys in terms of what you're trying to accomplish there?

We're early in the second inning, I think.

Yeah, that's what I think, yeah.

We're a little farther along than we were nine months ago, but I think we've got a lot of baseball left to go.

Yeah, I mean, considering you sort of called out a 3% up comparison in your commercial rates, that's great, but is there still much left to get after?

Well, we have a lot of contracts. We have a lot of partnerships with individuals across the 40-state network, so it's a lot to get through and we are still early. That's the reality. But it just means that we're going to be at this for a longer period of time and it should have an effect.

I wanted to ask about the revenue you might be willing to walk away from regarding certain MA contracts and possibly others as well. Carey, you hinted that this will start impacting the second half. Can you provide any insight on the magnitude? Are we talking about a few million dollars or more? From a modeling perspective, I want to factor this in. Is there anything you can share to clarify?

I mean, they're not big dollars, but I would say several million, something like that in revenue. But on every one of those dollars, the margin is zero to slightly negative, right? I'm absolutely willing to walk away from that. As Chris has noted, we'll be able to replace that volume with better-paying volumes, and that will make a difference. All of that is baked into our guidance and kind of our expectations for the year. It takes a while for the termination notice; once you provide the termination notice, it usually takes about 90 days to take effect. That's why I said we'll probably see more impact from that in the second half of the year, because we've done that in the first quarter. It will mostly be in effect by June or July, where we're no longer taking that business.

I understand why you might hesitate to make optimistic predictions for the near future, but regarding what you mentioned about April, could you share whether the daily average of patient visits was above or around 30, if you have that information?

Yes, we've been tracking weekly visit reports, and I would say it's been pretty consistent with what we observed in March.

Above 30.

Okay. Fantastic. Outstanding. And then I guess in terms of your commentary around the injury prevention business, I mean, does the state of things make it less likely that you guys might engage in any kind of M&A in that area or does it make it more likely maybe there are some opportunities that open up? Can you just speak to that?

Yeah, I don't know if I can handle that. Certainly, it doesn't make us less likely. We love this business. We love the teams, we love what it does. Understand that over the last six years since we've had it, we've added programs and products and services in a considerable way, and some of those are cyclical while others are countercyclical. So right now, our testing business has been very strong, and some expansion among existing clients has also been robust. But there are parts that have been affected that we've got to make some adjustments for. One of those is office ergonomics. It’s lost on nobody that their offices right now are not full anymore, at least not on a five-day-a-week basis. We’re making adjustments to do more things remotely and in people’s homes while adjusting that business a bit. Nobody can control the actions of the Fed, nor can we predict whether we end up with a hard or soft landing. CEOs and CFOs are waiting to see before making big investments, particularly with newer customers. Existing customers’ business has been pretty strong, however. We continue to look for opportunities in this space and have discussions. We like it just as much as we ever have. We’re just trying to guide you toward expectations for this short-term period, which we believe will be a little more tepid than it has been. This year will slow a little bit, which is not a bad business, and we expect to get it to pick back up again.

Can I just ask real quick? On the agreements that you have in place in that business, are they annual renewals or how does that work?

Yes, they're mostly annual renewals. However, we can't control whether a company, with which we've had a good relationship, presses pause. Great example: We were to roll out a big contract with a major client, and we all know that industry kind of disappeared at the start of the pandemic. So, we made a pause. We had a contract, but it doesn’t make sense to force the customer into something if they don’t want it. There’s a balance to be struck. These are longer-term contracts, but when there are major points of inflection, we defer to the customer and make necessary adjustments, which allows the business to thrive over the long term.

That story is a perfect example of why you guys have been as successful as you have in the last 20 years. Great job. Thank you.

Thanks, Mike.

Thanks, Mike.

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

Thank you very much. Thanks everybody for your time today. Appreciate all the questions. Sorry for my early fumble on the phone. We look forward to talking with you. I know we have some post-call follow-up with some of you. If you have any questions, just give Carey and me a shout, and we'll be happy to tackle those offline. Thanks, and have a great day.

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