Good day, and thank you for being here. Welcome to the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. I would like to hand over the call to Chris Reading, President and CEO. Please proceed, sir.

Thank you, sir. Good morning, and welcome, everyone, to U.S. Physical Therapy's Second Quarter 2023 Earnings Call. With me on the line are Carey Hendrickson, our Chief Financial Officer; Eric Williams and Graham Reeve, our Co-COO; Rick Binstein, our Executive Vice President and General Counsel; and Jake Martinez, our Senior Vice President of Finance and Accounting. Before I provide a little color on the quarter, we need to cover a brief disclosure statement. So Jake, if you could take that, please.

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. So this morning, I'm going to keep my commentary at a high level, and then we'll turn it over to Carey to go through the financials in more detail. I want to start by thanking our partners, our operations leadership team, sales and marketing directors, and our digital marketing support and development teams, all of whom are working hard every day to drive patients to our door. We can effect life-changing care, allowing them to quickly return to work and engage in activities that support families, as well as communities. This would not be possible if not for the care, connection, and dedication of our frontline caregivers. Many therapists across our more than 150 individual partnerships. In these first two quarters of 2023, as a result of the excellent care and outcomes you continue to provide our patients, demand has been greater than ever before in the history of our company. Quarter 1 delivered record visits per point for that, the highest ever for what is normally a seasonally slow quarter at 29.8. March gave us the best single month at that point at 30.7 visits per point per day. I'm pleased and proud to say that despite challenges in the labor market this past year, we were able to continue that quarter 1 momentum. In fact, we've turned it up even more in the second quarter with new record volumes in April and May at 30.9% for both months and overall Q2 volume at 30.4 visits per clinic per day on average. We produced some very good additions, both acquired and de novo, since quarter 2 a year ago. We've added 48 clinics in total this year: 22 de novo clinics through the end of July, which, as you know, earlier, mostly during our overall average until we get fully up to speed with staffing and overall community involvement. These new facilities, of course, become much more highly productive in the years to come, and they will continue to grow for many years serving patients and families. This quarter, our mature facility same-store volume grew 2.6% against a strong comparative quarter in 2022. Our same-store for the year is up 4.2% overall. Cost is not an issue for us. Also on the very positive side of the equation, general cost improvement, especially in light of the very significant labor scarcity and general inflation, has played out in every corner of our country these past four-plus months. In spite of that, we've seen salary and related costs per visit, as well as total costs per visit, decline for three quarters in a row, peaking in the third quarter of 2022 as inflation began to quickly accelerate last year. Our team is making real progress with very focused multifaceted efforts to address costs, streamline operations where possible, and innovate with new solutions, some of which are being rolled out across our main partnerships. We're not done yet, and we have more progress to make. In the area of commercial payer contracts, we continue to make progress with rate increases while absorbing the 2% Medicare rate reduction this year and the 1% sequester relief phase-out, which impacted us in this quarter. What we have seen over this past year was tighter than normal labor dynamics and extremely high volume demand. On a small percentage basis, the number of licensed PT assistants that we have hired to fill that strong demand has increased compared to where we've historically been. That, in combination with the high demand, has resulted in a greater percentage of Medicare visits being handled by a PT assistant, with a further 15% PTA reimbursement reduction creating a negative impact on our net rate. So we're in the middle of a large-scale push to elevate this issue across our platform to retrain any and all of our front desk staff to optimize scheduling to make sure that our clinical leadership is doing everything possible to ensure that we have optimal scheduling and clinically directed resources to not only provide exceptional patient care, but to ensure that we get fully paid for providing that care. We believe this heightened awareness, which may have been diluted a bit dealing with front office turnover in late 2022 and early 2023, coupled with the high demand for our services, has resulted in some addressable inefficiencies that flow through to a net rate. Given the already very low-cost nature of the incredible care that we provide, this becomes an all-hands-on-deck effort to ensure that we are compensated at a level that aligns with the results we are achieving. We're not there yet, but we are very focused on working hard to make the necessary adjustments. Other positives for the quarter: our company completed a secondary offering at the end of May, which has proven to be very successful, allowing us to pay off our highest interest rate debt, further invest the remaining significant proceeds directly to grow our partner-centric company. We are currently busy doing just that, and you will continue to see us add new partners and expand into new states, while we also explore offerings in other adjacent service areas we believe we can further strengthen our business in physical therapy as well as our injury prevention business services. On the injury prevention front, this year seems to be unfolding much as we expected. We have seen major increases in spending across some of our longest-tenured relationships, and as we discussed last quarter, some companies fearful of a pending recession have pulled back from prior levels of spending and engagement defensively. Counteracting that, our teams have done a great job replacing the vast majority of that pullback with exciting new business that I'm happy to report we're able to staff now with greater efficiency and much less time than where we were nine months ago. Both of our injury prevention partnerships are working hard together to cross-sell and expand programs, and we are looking for new opportunities. We continue to explore acquisition-based opportunities and expect that our reinvigorated balance sheet will provide us with the capacity and runway to do that over the coming quarters and years. Finally, I want to end my comments the way I started by thanking those colleagues and many dear friends who have been with me now as I close in on my 20th anniversary here with the company. It's been an amazing, fun, and exhilarating ride with more good things to come. I feel extremely fortunate to be working alongside so many talented and committed team members across our home office support group as well as our many partnerships around the country. We've made a huge difference in the lives of millions of patients, and I'm proud to say that my life and the lives of many of our partners and staff have been made better as a result of the work that we do. And we're not done. As you've heard, we always have challenges to tackle and things to address. That has been the way for the entirety of my career, including the early chapters of treating therapists and clinicians. We continue to have the energy and the drive to fight for better reimbursement for the life-improving work that we deliver so consistently every day, for rules and regulations that make sense and increase access to the very essential treatments we provide versus the much more costly and often riskier interventions that should not be positioned as first choice options. I believe physical therapy should be a primary care equivalent for the prevention and treatment of musculoskeletal health issues, and we will continue to fight for that rightful place in the healthcare continuum. And for those of you who are listening from other companies, please get dialed into the constant work we are doing within APTQI. We need you to fight alongside us as we work towards these important goals. That concludes my prepared comments. So Carey, if you would cover the financials in more detail.

Great. Thank you, Chris, and good morning, everyone. We had an excellent second quarter in many respects. We had all-time high patient volumes. We had strong growth in revenue, a continuing downward trend in our salaries and total operating costs on a per visit basis. We had growth in our physical therapy operating income and our physical therapy operating margin percentage, and year-over-year growth in our total company’s adjusted EBITDA. In addition, as Chris noted, we completed a successful equity offering that further strengthened our capital structure, providing significant capital for future growth initiatives. The equity offering provided us with approximately $164 million in net proceeds for the issuance of 1.9 million shares. We used $35 million of those proceeds to pay down the debt on our revolving credit facility, which at the time was at a variable rate of about 7.2%, leaving approximately $129 million. This also lowered our leverage ratio, resulting in a 25 basis point decrease in the rate on our outstanding $150 million term loan based on our leverage grid. We've invested that cash at this point in a high-yield savings account prior to deployment into acquisitions. The savings in interest expense and the interest income on the net proceeds makes the offering immediately accretive, even with the issuance of the 1.9 million shares. Of course, the return on those net proceeds will increase substantially when we deploy them into acquisitions. We reported adjusted EBITDA for the second quarter of $21.7 million, which was the second highest quarterly EBITDA amount in our history and an increase of $0.4 million over the $21.3 million we reported in the second quarter of 2022. Our operating results, which includes the impact of higher interest expense, was $0.76 per share in the second quarter of 2023. Our total company revenues increased 7.7% in the second quarter, growing from $140.7 million in the second quarter of last year to $151.5 million in the second quarter of '23. Our total company gross profit increased $1.4 million from $30.8 million in the second quarter of last year to $32.2 million in the second quarter of '23. As Chris noted in his remarks, our average visits per clinic per day in the second quarter were 30.4%, which is the highest volume for any quarter in the company's history. April and May were both at 30.9%, the highest volumes for any month in our history, and our average visits per clinic per day in June were 29.6%, which is a normal seasonal decline related to vacations taken in the summer months and higher than the 28.9% we had in June of last year. Our net rate was $102.03 in the second quarter of '23, which was a decrease of 1.1% compared to our net rate of $103.18 in the second quarter of last year. The net rate for our commercial and workers' compensation visits both increased approximately 1%, while the net rate associated with Medicare visits was down 3.5%. As we noted in the release and as Chris mentioned, the Medicare rate decrease was primarily due to the 2% rate reduction from CMS that was effective at the beginning of this year, coupled with the effect that the second quarter of last year included a 1% sequestration relief on Medicare rates. As we've talked about on our last couple of earnings calls, we've either renegotiated or terminated a subset of our Medicare Advantage contracts that reimburse at a rate that's less than what it costs us to serve our patients. The terminations were effective in June and July, and most of the associated renegotiated rates are also now in effect, so we expect the impact of this work to begin showing up in the second half of 2023. We also continue to focus on the renegotiations of commercial contracts, and as Chris noted, we're making other necessary adjustments to improve our net rates. Physical Therapy revenues were $130.1 million in the second quarter of 2023, which was an increase of $11 million or 9.2% compared to the second quarter of 2022. The revenue increase at our same-store clinics was 1.3%, and patient visits were up 2.6% versus the prior year. Our physical therapy operating costs were $102.1 million, an increase of 10% over the second quarter of the prior year. On a per visit basis, our total operating costs were $80.61 in the second quarter, which was a decrease of 0.6% compared to $81.09 per visit in the second quarter of the prior year. We were pleased to see our physical therapy operating cost per visit decrease for the third consecutive quarter after peaking in the third quarter of last year. Our total operating costs were $85.14 per visit in the third quarter of 2022, decreased to $84.5 in the fourth quarter, declined further to $81.97 in the first quarter of '23, and then declined again to $80.61 in the second quarter of 2023. Our salaries and related cost per visit decreased 1.2% in the second quarter of this year versus the prior year, and they've also declined for three consecutive quarters, from $60.99 in the third quarter of '22, down to $60.04 in the fourth quarter, down to $59.14 per visit in the first quarter, and then down to $57.59 per visit in the second quarter of 2023. Our Physical Therapy margin also improved for the third consecutive quarter, increasing from 18.7% in the third quarter of '22 to 20% in the fourth quarter, 21% in the first quarter of this year, and ending at 21.5% in the second quarter of 2023. We are really pleased with the progression that we've seen in all of those metrics. Our Injury Prevention revenues were $19.2 million in the second quarter, which is down slightly from the second quarter of '22, and our Injury Prevention expenses were even with the prior year at $15.3 million, resulting in Injury Prevention operating income of $4 million, and our margin in the Injury Prevention business was 20.7% in the second quarter of '23. Our interest expense was $2.6 million in the second quarter of this year, which was an increase of $1.6 million over the second quarter of the prior year. Of course, that higher interest expense is due to the increase in our debt-related acquisitions we closed during or since the second quarter of last year, and also a higher interest rate in the second quarter of this year compared to last 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 term SOFR rate on that $150 million at 2.8%. Including the applicable margin based on our leverage ratio, the all-in rate of our $150 million of debt was 4.9% in the second quarter, a very favorable rate in today's market, and it's below the current Fed funds rate. As I noted earlier, the net rate on that term loan moved down 25 basis points to 4.65% after the secondary offering. In the second quarter of 2023 alone, the swap agreement saved us $800,000 in interest expense, with cumulative savings to date related to the swap of $1.5 million over the first 12 months. In addition to the term loan, we also have a $175 million revolving credit facility that had approximately $35 million drawn on it prior to the completion of the equity offering, of course, we paid that down with some of the net proceeds. So there are no amounts currently drawn on the revolver. Borrowings from April 1 through May 30 were at a variable rate just north of 7%. In closing, we've had a very solid first half of the year, and we'll continue to work hard to produce the best results possible for all of our stakeholders this year. The strength of our results in the second quarter gives us continued confidence in the adjusted EBITDA guidance range we provided at the beginning of the year of $75 million to $80 million. And with that, I'll turn the call back to Chris.

Thanks, Carey. I appreciate that. Operator, let's go ahead and line up for questions.

And we'll go first to Brian Tanquilut with Jefferies.

I guess, I'll ask the question. It sounds like based on the metrics that Carey shared with us this morning, whether it's productivity of the clinic, cost per visit, and all these KPIs, it looks like you're executing very well. But as I think about some of those key points, right? I mean, the productivity of the clinic and the cost to deliver care—how much runway do you think there is left to drive some of those metrics?

Yes, it's a good question. So, I mean, individual clinician productivity, there's not a lot of elasticity there. Individual clinic throughput—I wouldn't call it out productivity, but just being the number of patients that we can get through an individual clinic—we've got as much room as we had probably four, five, six years ago. I mean, we constantly adjust our hours. We can expand our hours—most of our clinics are not open on Saturdays. A lot of our clinics, I think to say this, that a lot of our clinics in certain markets close early on Fridays. We have capacity on a per clinic basis to continue to have that number increase. So that's not going to be a limiting factor. And we certainly have room to move this metric in that rate. This quarter has been a little bit of a disappointment as we've really gotten extremely granular with where that issue is. I think the fact that we had the turnover that we had and the scarcity we faced in '22, particularly at the front desk, has caused us not to be as effective in scheduling as we need to be. I'm actually encouraged by the fact that it's addressable; our clinical services team in conjunction with our operations group is on top of that, and they were holding out some very, very detailed training—not just on that but in a couple of other areas that I think will help us as we go forward. So, on one hand, for the quarter, a little better, but we have made progress, as you pointed out, in all of the areas that we've been focused on. I think we'll continue to make progress there. We know what to do.

Got it. And then maybe since you mentioned rates, obviously, 1% net rate growth on the commercial side being offset by some of the Medicare stuff. But as we think about maybe the number of contracts that you have, without going to percentages, right? I mean, how much opportunity is left to, number one, drive a positive rate trend within the portfolio of contracts? And maybe the second would be to push our rate increase above, say, a 1% number?

We have many contracts to negotiate any time—we have a lot of contract negotiation left in us. Carey, I don't know if you want to comment further.

No, I agree. We have lots of contracts. It's a constant focus for us, Brian. We're up—we're having good success. I mean, we're having success in these rate negotiations. I'd say the big payers are the ones that just take longer to make progress with them. And so we're continuing to work at it every day.

Brian, some of these contracts are getting increases now, but we have been sequentially getting the annual increases that are yet to come even on the ones we've completed already.

Yes. We're working to build in three-year step increases for the most part, so we'll have less to touch each year. We know we're going to be getting those contractual rate increases as the year goes along.

Last question for me, Chris. I mean, obviously, you guys did the raise, you're sitting on a bunch of capital right now, a lot of balance sheet flexibility. I mean, what does the market look like? I know your space is dominated by a bunch of PE-backed players. I know your appetite has been more on the smaller side rather than the big platforms. But what does the market today look like in terms of either competition for deals or opportunities popping up that probably are more scaled, given your capital availability?

Yes. I think the opportunity is still strong. I think what we're seeing right now is a lot of the PE-backed companies have been decidedly more flat this year, particularly because a number have either done significant deals themselves or have gotten to the point where the interest rate increases have made leverage high, and I think, to a certain extent, the reality is that many of these individual operators have kind of missed the peak this year. I mean, we're not in 2019 anymore or even early '21 when things are still really, really hot, and I think there's a little bit of timing remarks in the market. Having said that, we're busy. Sometimes, we're ready to go, and then the partner has something that pushes a little, and that's happened on a couple of occasions this year. We'll still get those things done. It's just taking a little bit longer. But we're looking at bigger deals too and opportunities not just in PT, but in injury prevention. So, it's going to be lumpy; it's always been lumpy, but we're going to get good things done.

We'll take our next question from Joanna Gajuk with Bank of America.

So in terms of these commercial rate increases, if I can just follow up there. So the 1% I guess experiencing right now. Are you kind of suggesting that as you negotiate incremental additional contracts that rate increase could actually accelerate into next year?

Joanna, it's just going to depend on the timing of it, kind of like M&A; it's lumpy, it's which ones you get and the timing of those. I certainly expect those commercial rates to continue to increase over time. We're working hard at that as far as the rate of increase—it's hard to say.

These contracts last and they go on for years, and every additional one builds on what we've done previously.

Yes. There are step increases built in for the ones that we renegotiated. So those should continue to help us as we go forward. I think—there's always a lot of work to be done at commercial rates because there are so many contracts. We still have a bit of work to do, but we've made good progress and I think we're going to continue to make progress.

And Carey, when you say the increases that we're seeing, the not 1% increase there—are in some cases, double-digit price increases or 3% to 5% or 6% increases. We're just not touching the whole portfolio.

That's right. We're getting 3% to 5%, 6% increases in year one. And over a three-year period, a lot of times, it's like 10% to 12% increase over that three-year period that we've built in. And I would also say we're making progress on some of the other Medicare Advantage contracts because those are a focus for us as well. And those we can impact and we've terminated a number of those contracts I mentioned in my remarks, but there are other ones that we can still renegotiate, and we're working on those as well because Medicare Advantage is becoming a bigger portion of our Medicare visits overall. We've done good work as it relates to identifying some of these contracts that just aren’t suitable. So we've terminated those. We've identified the primary ones that are in that situation. We've still got others to address. We've made progress on those as well, and those are the same kinds of increases we're seeing. A lot of times, those have double-digit increases right off the bat because we're going from— it could be where they paid 80% to 85% of Medicare and bumping them up to 100% or it may be from 80% to 90%, but those are really nice sizable increases on some of those contracts we're making.

That's good to hear. And the last piece, I guess, on the pricing workers' comp. So what do you spend now in terms of your mix? And I guess because that's the highest rates of all the different payers, right? So what's the mix there? And kind of—I know you kind of—the bucket, so to speak, the clients in the pandemic, and I guess was there some work being done to kind of bring back maybe to the 14% pre-COVID? Any update on that front?

Yes. So for our mix—go ahead. I'm sorry—Eric, are you going to say something?

Yes. I was going to weigh in—this is Eric Williams—in terms of where we're headed on the workers' comp side. So yes, we started putting in a lot of efforts in the second quarter of last year to rebuild some of the relationships with the networks. We brought back in the individual who actually built the workers' comp program for us years ago. In the second quarter of this year, this is the third straight quarter where we saw an uptick in volume, still a lot of opportunity. The volume we actually saw in Q2 was the highest volume we've seen over the course of the last six quarters. So we signed some new network agreements starting at the beginning of the year. We have a number of additional contracts in play right now, and we feel optimistic in terms of our ability to continue to drive this as a higher percentage of our mix. It was just under 10% here in Q2 of this year.

And I would just say for workers' comp increase as a percent of the mix is really notable because, as you know, our volume has been increasing pretty significantly. So they're increasing at a pace that is greater than our overall increase. That's good. They were closer to 9% in the first quarter as part of the mix, and workers' comp is about 10% in the second quarter. To address just kind of the mix overall: Joanna, commercial is about 47% in the second quarter, Medicare is 34%, workers' comp is 10%, Medicaid was about 3.5%, and then there's everything else, which is maybe 6% or so.

Great. And so helpful, if I may, just squeeze last one on pricing and I guess the outlook into next year. So the America proposal calls for, call it all in, 3.25%, which if finalized, would be worse than the 2023 rate cut. So what's your take on that proposal? And how much work, I guess, is being there? And what's your visibility to Congress, stepping in again and trying to lessen that cut here?

Obviously, this proposed rule came out in the middle to the end of July as it does every year, so we're early in that process. Again, I mentioned APTQI in my prepared comments; our delivery partner, lobby group leadership in APTQI, along with all of our individual member companies who are very active in Washington, are all putting a full court press. Unfortunately, it's difficult when we get finalized in December on a short runway for changes necessary to immediately come out of the gate and over companies, and this has been the case for a few years overall. We think it's very misplaced these reductions; they're targeting probably the greatest value in healthcare for returning people to function from significant injuries and surgeries, which could sell work without physical therapy. But it's early summer, and so we have not as we had in the past, a lot more work to do. I'm hopeful we'll make progress. I'm not going to give you much more than that on a crystal ball because I don't know yet. But the effort is massive directionally in that regard.

We'll take the next question from Larry Solow with CJS Securities.

My question has already been answered, but I’ll focus on the pricing. It seems like you have a bit of a favorable situation, especially in the second half, due to resolving scheduling issues and moving away from some Medicare agreements you mentioned. I'm not asking you to provide guidance on second-half pricing, but could this represent a low point for the year, with potential for gradual improvement in the latter half? Would that be a fair assessment?

We do believe there's potential to move that rate up, yes, based on the things that we've talked about today—things we think are addressable, and related to the work we've already done.

And obviously, like you said, much better position at the beginning of this back half compared to last year in terms of your staffing. Okay. Just last question, Carey, while you're here. Just you mentioned you've done a really good job and costs on a per visit basis are down overall. Costs really hung in that overall margin in the last few years have actually been pretty steady despite rapid inflation and price pressure, which we really commendable to you guys. Can you just explain to me how come on a—if I just look on a year-over-year basis, your margins, salary as a percentage of revenue and it's still up. Is that just more of a function of the acquired clinics pricing? Or what's kind of driving that?

Yes. It's a combination because when you're looking at those percentages, you're looking at—there's a double impact, right? There's the impact of volume and there's the impact of rate. I think that the rate and how that influences revenue when you're looking at those costs as a percent of revenue really impacts that.

Yes, I still agree with you. It's driven off. It's a driver. It's reflective of the pressure that I think we've done it pretty well with the pressure on that rate.

Yes, and that's why the best metric we believe to look at for those costs is looking at them on a per visit basis.

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

It's Madeline Mollman for Matt. Just one on the segment. I know it was down slightly this quarter, and you mentioned that some contracts—you talked to some customers about delaying contracts or pushing them back or putting a pause on them. With the macro environment starting to improve—have you seen these customers reengaging, wanting to restart contracts, beginning discussions for that at all?

No. I'm going to tell you, and I don't know that today, close to knowing if we have certain contracts where people were concerned and now that they're not. I honestly—I think things are not coming back with those few customers, not a lot, and it's heavily weighted on the tech side of the business. What their business is heavily tech-influenced. I still think they're kind of maintaining the same outlook as they were before. Having said that, we've added a lot of good customers this year across both partnerships; we've further diversified our client base. But to my knowledge, and Eric, you might speak to it, I don't know if we've seen any big reversals that are meaningful yet.

No, I would agree with that. I think you summed that up perfectly, Chris. I mean, the injury prevention businesses have done a nice job of trying to diversify their portfolios. But the tech sector and the automotive sector got hurt really hard, and that was a business that we saw fall away at the tail end of last year. We've seen other customers on the retail side and distribution side actually increase. So, on a macro basis, I think things have stabilized, and I think there's opportunity for growth here going forward, but not near as robust as it was in 2022.

Look, we haven't had injury prevention all that long, and the growth has been extraordinary. So for me, right now, it has many moving parts as we're in between politics and the economy, interest rate environment, the Fed, and the many things that influence CEOs and CFOs to make decisions. They aren't uniform across the country because different sectors, as Eric mentioned, recover at different rates or get hot or cold at different times. So expect us to be ahead of our PT growth and to be very positive as we go forward. All other macro factors being relatively stable and equal. We've demonstrated that we can grow this business through acquisition. Our clients, generally speaking, are very sticky; they stick with us, and most clients expand, particularly those clients that have numerous operations positioned around the country. But I'm not going to be able to take a growth rate at this point because I just don't have topics that are clear enough to do that.

At this time, we have no further questions in queue. I will turn the call back to Chris Reading for any additional or closing remarks.

Yes. Thanks, everyone. We know we covered a lot. We appreciate your time and attention this morning, and Carey and I are available today and the rest of the week. We have board meetings coming up for next week. But after that, we will come back up for air. If you have any questions or any follow-up necessary, please give us a call. Have a great day.

Thank you all. This concludes the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.