U S Physical Therapy Inc /Nv Q3 FY2023 Earnings Call

Good day. Welcome to the US Physical Therapy Third 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 like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thank you. Good morning, and welcome everyone to our US Physical Therapy third quarter 2023 earnings call. With me on the call this morning include Carey Hendrickson, our CFO; Eric Williams and Graham Reeve, our Chief Operating Officers; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President Accounting and Finance. Before we begin our discussion around our third quarter and year-to-date performance, we need to cover a brief disclosure. 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. So my commentary this morning is going to be at a high level, and following that, Carey will cover the majority of our very detailed release more completely. Let me start with where volume is. Overall, we've seen a number of really good things that our team of clinicians, partners, and support staff delivered this quarter. There are a few challenges that we're continuing to work on as well. First, and importantly, volumes have been very strong this year and remain so throughout the third quarter, including during our normally seasonally slower summer months. Visits per clinic per day came in at 29.7, which is an all-time high for us for any third quarter in our company's history. It serves as the best indication of both the overall demand for our services and the way we're viewed by patients and referral sources alike, in a market where there is an abundance of choice. Truly our partners and staff locally are providing care which is not just excellent but which our patients and referral sources around the country are seeking out. My sincere thanks to all of you who are listening. That care you provide is not only changing lives for the better, but it is being recognized for driving the highest level of volume ever delivered by us at this time of the year. For the quarter that throughput, coupled with the strong development work we've continued to produce, helped drive volumes year-over-year by 10.8%. Part of those volumes have come through de novo and tuck-in acquisitions with 31 additional clinics so far through October, which as you know, depresses our volume per clinic average some; it drags a little bit on results early on. We've added nine de novo clinics in the quarter, and five of those were added in September. Keeping that strong de novo growth in mind is a bit of a near-term drag through the nine months. Our operating income, in spite of these strong de novo openings, has grown 10.9% for the year. So looking back to the quarter, revenue grew 9%, which was impacted by the Medicare rate reductions we have absorbed this year, coupled with a slightly higher percentage of PTAs onboarded over the past 18 months or so, due to the nationally tight staffing market. So let me explain. If you call having PTAs touch a Medicare patient in the course of care results in a 15% reimbursement reduction. While we are focusing on that, particularly in Q3, rolled out some new retraining because we have a slightly higher proportionality of PTAs compared to where we've historically run, which has increased the Medicare rate reduction ever so slightly. Our challenge at present is to offset the hole in the bucket that Medicare has created with additional better-paying business at higher negotiated rates. We expect to see continued improvement as we work and achieve additional successes in our contract negotiations and in some longer-term initiatives around further diversifying away from Medicare. Additionally, we've added to our leadership on the revenue cycle area. We are optimistic we will identify some opportunities to further enhance our already strong collections effort to further bolster our net rate and time. We've renegotiated a very significant number of contracts in a very positive way. As we explained last night to a couple of different analysts who follow the company, from the time of negotiation until the time those contracts—the new rates are implemented, oftentimes, there's a several-month delay, but we are making progress, I think good progress. I'm happy with the percent rate increases; we just need to see them pick up and gain traction as they are implemented. On the injury prevention side of our service offering, we let the market know at the beginning of this year that we expected growth to be a little bit more muted, with pauses and some limited drops from a few of our customers who are expecting their business to be negatively impacted by the heavy inflationary environment coupled with the fear of a coming recession. The good news is that our geriatrics team has been able to replace their lost business with new business that will again provide us with growth when moving forward into 2024, while our progressive partnership has added a great deal of new business as well, despite suffering a loss of one plant in the auto industry, which has been hit particularly hard this year on a variety of fronts. From my perspective, the majority of accounts we've done exemplary work over the years, but maybe those who have paused or dropped some service component temporarily will come back once our economy is in a more stable growth mode. Furthermore, we recently added to our injury prevention core with a recently announced acquisition that includes both traditional injury prevention business as well as a new service offering delivered via a well-developed recently introduced software program in ergonomics, which fills the service gap that existed previously with our offering. We're excited about the team and we look forward to helping them meet the needs of this growing and important market. Finally, our injury prevention teams have done a very nice job overall adjusting and responding to the tighter than usual labor market, which has allowed our quarter-over-quarter margin percentage to improve 80 basis points, from 21.9% in Q3 last year to 22.7%, this most recent quarter. Last week, a few of our executive and development team members attended the annual private practice section meeting, which this year was held in Austin, Texas. This is for us the most important meeting every year. On the development side of things, these past 12 months have been a very active period for us. We've purchased an additional 54 clinics over that period. In the same period, we've currently opened 72 clinics, so a net addition of 58 clinics over the past year. We've seen many of our competitors hamstrung right now with extremely high debt levels, which can impact many factors, including their ability to sometimes even close on deals. We've got a clean balance sheet and we're working hard to put money we raised at the end of our quarter two secondary offering to work. This past week was the busiest we've ever been at the private practice conference. We scheduled double the number of individual meetings and held two large offsite gatherings, which we believe will continue to help us to drive and differentiate our partner-centric model, a model that distributes cash to these newly acquired partners throughout the entirety of the partnership without the undue debt burden from the acquisition itself. That and the back-end flexibility and guarantee regarding purchase methodology gives us another meaningful distinction with our competitors, which should further aid us as we work to significantly grow our partner-centric company. One final bit of commentary directed toward our analysts and our shareholders: we've been fielding a lot of questions related to the impact of Ozempic-like drugs on our physical therapy business. There have been a number of articles in notable publications regarding the massive, in some cases negative impact on multiple areas of the healthcare system through the expanded use of these drugs. Taking a step further, I truly believe physical therapy is going to continue to grow with or without these drugs. It is estimated that currently, only about 10% of people with musculoskeletal issues ultimately end up in a physical therapy office. That number is growing and changing. There are numerous studies that indicate that physical therapy done early for other more costly and invasive treatments, or worse, with only palliative narcotic-only pain treatment, not only saves the patient but also the payer system significant dollars, resulting in better overall health. Presumably, because they get moving again to regain their health related to activities they enjoy doing, work, or at home, with family, socially with friends, resulting in a healthier, happier person. That message will be aggressively marketed to groups like our Alliance for Physical Therapy Quality and Innovation, which we refer to as APTQI. We believe with grassroots marketing, we'll continue to expand the physical therapy-first initiatives that we have across our space. Secondly, and importantly, the vast majority of our business comes from injuries caused by activity, not simply because somebody is obese. Unfortunately, obesity can result in hip and knee arthritis over time, and some of these end up in joint replacements. However, the majority of joint replacements come from activity-related injuries, often caused by sports and daily activities. We don't see hip replacements very often in our clinics, and we’re really only talking about knee replacements as potential impact. I think the market is ignoring all the other possible activity-based injuries, while often not severe, they occur as a result of enjoying life in a physical way, such as hiking, gardening, and various types of sports. So many activities can be participated in and enjoyed if individuals are not obese. I believe that potential exists if these drugs are successful for patients long-term without creating unintended health issues. So I believe we will see more patients as a result, not less. So that concludes my prepared comments this morning. Carey, go ahead and walk us through the financials in greater detail, and then we'll open it up for questions.

Great, thank you, Chris. And good morning, everyone. In the third quarter, we had continued strength in patient volumes, strong growth in revenue, growth in our physical therapy and total operating income, and year-over-year growth in both adjusted EBITDA and operating results per share. In addition, we added 19 clinics during the third quarter through acquisitions and de novos, with just three closures. We've now added 72 new clinics since the third quarter of last year, a net addition of 58 clinics over the past year. We reported adjusted EBITDA for the third quarter of $18.6 million, which was an increase of $1.6 million over $17 million reported in the third quarter of 2022. Our operating results were $0.62 per share in the third quarter of 2023, which was a $0.04 increase over the $0.58 we reported in the third quarter of last year. Our total company revenues increased 7.5% in the third quarter, growing from $139.6 million in the third quarter of '22 to $150 million in the third quarter of 2023. Our total company gross profit increased $1.1 million from $26.8 million in the third quarter '22 to $27.9 million in the third quarter of '23. As Chris noted in his remarks, our average visits per clinic per day in the third quarter were 29.7, which is the highest volume in the company's history for the third quarter and a 3.1% increase from our average visits per day of 28.8 in the third quarter of last year. July was at 29.9 visits per day, August was slightly lower than expected based on normal seasonality at 29.6. September came back up to 29.9. All three of those months were higher than in the same month of the previous year. Our net rate was $102.37 in the third quarter of '23, which was lower than last year's $104.01 per visit, but it was sequentially an increase over the second quarter of 2023, which had a net rate of $102.03. The decline in net rate compared to the prior year was due to the reductions in Medicare rates. As we've talked about in the last couple of earning calls, we've either renegotiated or terminated this subset of our Medicare Advantage contracts that reimburse us at a rate that's less than what it costs us to serve our patients. We are making adjustments to our net rates as well. Our physical therapy revenues were $128.1 million in the third quarter of '23, which was an increase of $10.7 million or 9.1% from the third quarter of 2022 due to the addition of 58 net new clinics since last year, and our record high third quarter average rate of visits per clinic per day, partially offset by the decrease in net rate. Our physical therapy operating costs were $105 million, which was an increase of 9.9% over last year due to the addition of 58 net new clinics since the third quarter of last year. On a per visit basis, our total operating costs were $84.49 in the third quarter, which is a decrease of just less than 1% compared to $85.14 per visit in the third quarter of the prior year. Our salaries and related cost provision also decreased about 1% in the third quarter of 2023 versus the prior year from $60.99 in the third quarter of '22, down to $60.35 in the third quarter of '23. This is the fourth quarter in a row that we've reported year-over-year decreases in both total physical therapy operating costs for visits and salaries related cost per visit. The increase in total operating costs on a per visit basis for the second quarter from $80.61 to $84.49 is a normal seasonal occurrence. The physical therapy margin was 18% in the third quarter of '23 as compared to 18.7% in the third quarter of 2022, with the change due to the decrease in our net rate versus the prior year. Even with the decline in our net rate, our PT gross profit increased 5.4% over the third quarter of the prior year and increased 10.9% over the first nine months of this year versus the prior year. Our income in the injury prevention segment was approximately $700,000 less than last year, resulting in $4.4 million of income in both years. Our injury prevention margin increased from 21.9% in the third quarter of last year to 22.7% in the third quarter of this year. Our balance sheet remains in an excellent position. We have $145 million of debt on our term loan with a five-year swap agreement in place, placing the rate on our debt at 4.65%, which we expect to remain at this rate going forward. In the third quarter of 2023 alone, the swap agreement saved us $100,000 in interest expense, with cumulative savings of $2.3 million over the first nine months of 2023. Our interest expense was $2.1 million in the third quarter of 2023. In addition to the term loan, we also have a $175 million revolving credit facility that has nothing drawn on it during the third quarter, and we have approximately $120 million of excess cash over and above what we need for working capital ready for deployment into growth initiatives. In the release, we noted that we expect our full year 2023 adjusted EBITDA to be within our originally stated guidance of $75 million to $80 million, most likely in the low to mid-area of that range. We expect to have continued strong volumes in the fourth quarter as we've had all year. Where we fall within the range will depend ultimately on the strength of our volumes in the fourth quarter and how much sequential growth rate we're able to achieve and our net rate from the third quarter to the fourth quarter. Our operations team has produced solid results in the first nine months of 2023, and we'll all work to continue to produce the best results possible for all of our stakeholders as we finish out this year. And with that, I'll turn the call back to Chris.

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

Thank you. We'll take our first question from Joanna Gajuk with Bank of America.

Good morning. Thank you so much for taking the question. A couple of questions, I guess here. On the last comment from Carey around the outlook for this year that you slightly lowered it. Are we talking about being towards the middle or lower? And so you kind of took off the higher end from the table. So I guess what are the main drivers for this lowered guidance? It sounds like Q3 was roughly in line. So Q4 seems like there are some indicators that are pointing to a slower or lower number for Q4. Is that the way to think about this?

Yes, Joanna. I would say it's within the expectations we had, although it may be slightly lower than anticipated. We need a bit more net rate growth to reach the higher end of our range. If we achieve that growth, we will likely position ourselves closer to the middle of that range. You mentioned that the fourth quarter appears to be shaping up to be less than the third quarter based on the guidance we've given, and that's not an unusual trend. Looking back over the past few years, in 2019, we saw EBITDA drop from $17 million to about $15.6 million in the fourth quarter. Similarly, in the third quarter of 2021, we went from $19.9 million in the fourth quarter to around $17 million. Last year there was a slight increase, but that was due to some significant acquisitions we made, which slightly boosted our fourth quarter. It's a typical trend for us that is somewhat affected by the holiday season, which can lead to decreased volume, especially in late December. There is also some seasonal decline in our IIP business, because some of the big manufacturers, auto in particular, close down their plants in the last part of December for the holiday. So they shut down the plants, and when that happens, we don't have people on-site that can bill. Last year in our IIP business, our IIP income went down about $1 million from the third quarter to the fourth quarter. I don't expect it to go down that much this year, but it will likely come down some in the fourth quarter because of that phenomenon. Chris, anything you would add?

No, I think you've covered it, Carey. Joanna, the business is solid. This kind of follows our normal seasonal pattern. We're just trying to be clear about where we think we're going to finish.

Right, no, makes sense. And I guess just to follow up on that comment around the net rate vote; it sounds like that's where maybe things are a little bit softer. So I guess the question is, because you have been talking about negotiating contracts with commercial and some of the MA contracts—improvements in our workers' comp come out. When will we see that the benefit from that net rate?

We have seen some benefits from recent changes. Our commercial rates and workers' compensation rates are both up about 1.5% year-to-date. While we would prefer a higher increase, some negotiations conducted throughout the year will take time to fully implement. We expect to see more improvements in the fourth quarter and certainly in 2024. The rate for personal injury and self-pay, which represents about 6% of our revenue, has increased by approximately 2.5% year-to-date. Medicaid is also up about 1% year-to-date. The only category where we have seen a decline is Medicare, attributed to the higher ratio of Physical Therapy Assistants to Physical Therapists, which has risen slightly over the past 18 months. We've had to do that in some cases because the market is tough from a hiring standpoint, but also, we've had such heavy volume that we've needed to hire, what we can hire to cover the volume. The heavy volumes have also caused a bit of a downtick in billed units for our Medicare. And then, Medicare Advantage, that's growing as a percent of our total Medicare visits. There is a big push for Medicare patients to move to Medicare Advantage, and that pays us less than traditional Medicare. So some of those things have impacted our Medicare rate this year. Like I said, everything else is up. Medicare has been down about 3.5% to 4%, year-to-date.

So I would say, Joanna, when you look at the contracts we've redone, a lot of them have been double-digit increases. Some of those are spread over two or three years. We're pleased with the percent change. We need to see that show up in the P&L. We're working to make that happen.

All right. And if I may, a last question on the Medicare rate. I guess we would get the final Physician Fee Schedule, the therapy rate there, down 2% or so. There's a potential work in progress on the relief for disposition fee schedule. Can you talk about what this reg means to you in terms of the net rate update? If there's no relief and if there is relief, what it will be? Any other impact for rehab therapy?

Carey, you want me to take that, or do you want to?

You go ahead, and I'll fill in.

That's fine. So right now, I hate to say it, but sometimes these tables that are published don't correspond with the actual realities for the companies. The expected reduction for us is about 3.5% all factors considered. There are other things that we're involved in, extending our ability to oversee physical therapy assistance in certain licensed facilities and do that remotely other than being physically present on-site. It's less beneficial. That's a continuation of something done during COVID. That’s beneficial. There have been some mildly positive things around remote therapeutic monitoring, which are net positive. They're not especially dollar-wise impactful, but they make more sense and will ease the capture of those charges. On average, think of this as somewhere between 3.4% and a 3.5% reduction. Now you asked what it would be if it gets mitigated? I don't know the answer to that. We've had success in getting it mitigated through Congress every year since that original 9% to 9.5% cut was proposed leading into COVID. I don't know what it will be if it gets adjusted. We'll have to see.

Just as a reminder, Joanna, that's one-third of our business, Medicare is, so that's on an overall rate that will have a lesser impact than 3.5% if it were to end up at that rate. I think we have momentum, as I've talked about in all of our other rate categories, going into '24.

Great. Thank you so much.

We'll take our next question from Brian Tanquilut with Jefferies.

Good morning, guys. Chris, maybe I'll follow up with one of your comments regarding remote. Obviously, an area or part of your business we haven't talked a lot about since COVID. So just curious how we should be thinking about your strategy on integrating remote into your workflow and the investments that you need to make to take advantage of that, especially as we consider this Medicare rate cut.

Yeah, so remote therapeutic monitoring codes were introduced this year. We’ve rolled it out. It's been a little painful for many companies because the companies that have the infrastructure that we've all used, often are set aside in our Billing and EMR systems. This is something that has recently been addressed. I think, by the beginning of the year, we'll be positioned where all of our Medicare patients will be auto-enrolled on our Raintree system, which covers about 90% of our company. That integration is nearly complete. We believe that will be done and effectively out by the first of the year. So that we'll have a much greater percentage of our company that can efficiently address remote therapeutic issues. Beyond that, from a digital perspective, there have been many companies that have come out with some nice additions. We're not there yet on a fully digital basis but continue to evaluate that opportunity and make decisions. At some point, we expect to have a visual offering working on some of the high-priority things at the moment; that's certainly on our list.

Got it. And then Chris, maybe since we're talking about workflow, as I think about your IIP business, are you seeing anything changing in that world, as some virtual offerings emerge in the market?

On the prevention side, not so much. We see continued adoption among and across companies. Certain companies go through cycles. Uber is a great example; initially, we had a very large contractor rollout with them that got paused. Then over the next couple of years, it rolled out and became substantially larger than we originally envisioned. They have since paused again, not completely; we still do a lot of work there. They are one of our bigger customers, but their outlook has affected our expectations for the coming year. We're hopeful that we can continue to expand that relationship as conditions normalize. So I don't see technological disruptions on the prevention side, although we have added recently software deployment for ergonomics, which allows companies wanting to control and roll out their own ergonomics program to do so on a guided basis with our software. That's a new offering for us. This remains an embedded model where people need to be on-site, evaluating individuals. Certainly, we can use technology and video monitoring, and certain evaluative techniques can now utilize cell phones and other devices.

Got it, and then maybe Carey or Graham, as I think about just tying it back to the core business, how much productivity opportunity do you think there's left in terms of driving the visits per clinic rate or percentage per day?

Let me address part of that. Then I'll let Eric or Graham address the other part of what we think of as productivity. But on the visits per clinic per day, there aren't any real constraints we generally bump into. It's a factor of additional staffing; if we're currently staffed where we need to be. To grow, we have to hire some increment on a part-time basis for additional staff. Generally speaking, our facilities can handle it. It's grown this year about as we expected it to grow, all things considered. It's been pretty good. I guess you guys refer to that as productivity output. I think of productivity as the amount of people our clinicians can see. Eric, you might want to speak to that part.

Yeah, Chris, you summarized really well. Our turnover is at an all-time low; it hasn't been this low in years. Our partners have done a really good job hanging in with their staff. We've had incredible growth. When you look at the de novos that we opened last year and the 32 facilities we've added this year, de novos and tuck-ins, we've faced challenges filling those growth positions. To your point, there isn't a cap here. When we hit the 30 mark for a couple of quarters this year, we got a record first quarter, second quarter, and third quarter. We still continue to see growth opportunities in front of us. We've invested a lot of resources into recruiting, with eight recruiters working for us. We leverage social media as well as our relationships with various school programs. There are currently 210 accredited PT schools out there; we have clinical affiliation agreements with 155 of them. We're playing both the short game and the long game regarding staffing, ensuring relationships with those schools so that as students complete their clinical rotations, they are more likely to work for us.

Awesome, thank you, guys.

Thanks, Brian.

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

Good morning, Chris. Thank you for the insights. I have a few points to discuss. I understand that you're not yet ready to provide guidance for 2024. However, from a high-level perspective regarding the components, it seems that pricing will decrease this year, with a decline of about 1%, which is partly due to a Medicare cut. It appears that you have positive momentum on the commercial side, as you've noted that on average, you are achieving mid-single-digit annual increases in several negotiations, with some not yet reflected in your profits and losses. Therefore, there seems to be potential for more opportunities that could be realized. Overall, it’s reasonable to suggest that pricing could increase next year, even if Congress does not change the Medicare rate.

Maybe Carey, you want to address that one?

It's still early for us to provide any details regarding '24. We will be in a better position to discuss that during our next earnings call at the end of the year. Much will depend on the outcome for Medicare and what challenges we may face there. However, as Chris mentioned, we do have positive momentum in other payer categories. There are step increases in our contracts, and we might see a total increase of around 12% or 13%. We'll see continued momentum in both commercial and workers' comp. I think certainly, I feel good about our ability to offset the Medicare rate reduction going into 2024.

Yeah, Larry, the short answer is, the final rule just came out last Thursday, late afternoon. We're still in the middle of our budgets and a lot of analysis. We're pushing very hard on these contracts, but we're not at a point where we can give you a clear conclusion yet, unfortunately for next year. Just too many moving parts.

That's fair. In terms of you mentioned a lot of good internal growth, especially last year, in this quarter on the de novo side of dimension, nine and five in September; de novos don’t cost a significant amount to get on their feet. Is there sort of some inefficiencies initially? And even with the acquired clinics, there is some dry powder to improve margins from those two points. Is that a fair statement?

Eric, do you want to take that?

Sorry about that, Chris. My phone cut out for a moment. Can you repeat that?

No, I got it; yeah. Larry, on the de novo side, while they don't cost a lot of money to get out of the ground, it's not really the issue. They do weigh on us a little bit, particularly in the first six months before they break even. Some break even much quicker than that. But early on, certainly those ones we opened in September are going to be a drain. Then, on the acquired clinics, yes, there is some upside that occurs, oftentimes a rate reset at the point where we do the deal, we credential that deal in 60 days before closing; then we get a pickup in rate—usually not across every contract but some contracts. Other things take a little bit longer, including program development and productivity changes over time; that all takes a little bit longer. I'm more patient with those because we want to ensure that the relationships are strong and stay strong, and we can achieve that. So there is upside in the acquired clinics. There is some short-term downside in the de novo clinics.

The one comment I'd add on the de novo clinics is none of them are flyers. They were built because there were established referral relationships in the community. The biggest challenge in a potential drag on those de novo clinics goes back to staffing. Typically, staff who might be relocating from an existing facility are not always able to move right away. We take advantage of openings when we have the support, but that can be difficult and is often the biggest hurdle in terms of how fast they ramp.

To follow up on staffing; obviously, it has been a tough stretch in staffing labor. Certainly, labor pricing is much higher today. But does it feel like you guys are having much more success in getting that? I don't know about quality, but hopefully quantity of labor.

Go ahead, Eric.

Yes, no question. I mean, I think the recruiters are doing a great job. As I said earlier, our retention is at an all-time low over the last five years. I think we do a better job filling positions than most other organizations. There is no question; it’s a challenge. As Chris referenced earlier in his opening comments regarding PTA usage; our facilities, our staff of licensed physical therapists and licensed physical therapist assistants. We've had to rely, especially with the growth spurt that we've had, on bringing PTAs on board to service the patient volume. Every time that PTA touches a patient, it has an impact. You saw the breakdown on our rate; every category has gone up from the net revenue per visit perspective, with the exception of that federally funded bucket that includes Medicare and Medicare Advantage. We've gotten very aggressive this year in turning Medicare Advantage programs that we felt did not pay us the appropriate amount of money below our actual cost of providing services to our patients. We've done a nice job there, and we're just going to continue to have to push in this category. To Chris's point regarding the de novos, the rolling out of additional programs takes time, particularly the workers' compensation initiative, which has been really successful this year; we've grown rates for three consecutive quarters, and our third quarter '23 was almost 4% higher than our third quarter '22 in terms of workers' compensation rates. These programs do have an impact, but take time to roll out in new de novo clinics and new acquired partners.

Okay, I appreciate that. If I can just sneak one more in just on acquisitions. It sounds like in the Q on the PT side, on the physical therapy side, it sounds like your queueing opportunities that remain strong, and you want to put your capital to work. Can you just comment on that ergonomic software and the IP acquisition you made, which is a little bit different than your de novo acquisition? Any color on that and how you plan to leverage that?

Thanks. Yeah, so these are some folks I've known for a number of years. They've been working on a software sales product, software service product for a number of years, and it's really, really strong. We're able to deploy this software not just to new customers but also to existing customers across our portfolio. We should be able, with many more salespeople than the niche folks have in their own company, to ramp that up. The other part of the offering was more in line with what we already do, which is just, you know, embedded people on the prevention side, but it fits nicely for us. It's a new offering. We expect to be able to sell it to our existing client base in many cases. This was a niche that our bariatric team recognized. This was a client profile that we weren't servicing today, who want to manage these types of projects on their own ergonomics projects but need to from a financial perspective. We see a cross-selling opportunity. The other company was looking to create their own software and investing the time and resources to chase this market segment. So that ERGO Plus represented an opportunity for us to speak first with software already developed.

This was a terrific product. We think this is a great market opportunity for us, and we're really excited about this acquisition.

Right. Appreciate the enthusiasm. Thanks for all the color.

We'll go next to Calvin Sternick with JPMorgan.

Good morning. Thanks for squeezing in here. Just one quick one for me on IIP. Some of their customers have pulled back on spending just given some macro concerns. How are those conversations evolving? Are employers still hesitant? Are you seeing any signs of a shift in demand next year? I know you talked about expecting net growth for 2024. Is the expectation that growth rates improve every year but still below 20%? Just any color on what the IIP revenue growth rate looks like next year would be helpful.

Yeah, thanks. I guess on a macro basis, I would say yes, I expect the growth rate to pick up next year. I actually expect that '24 from a macroeconomic standpoint will not be great for the country. I think we still have some headwinds, but we're making good progress with sales that will carry us through next year, I think. In terms of the exact percentage of growth as Carey mentioned before, that was our budget we're still working through that. It would be premature for me to peg that number at this point in time. We haven't used that 20% number. That was the number that we had coming out of '21.

Great, and then maybe one more on workers' comp. I know you just had a couple of quarters where volumes have been increasing and payroll mix improving. Just wondering how you're thinking about that trend continuing into next year? Do you think the momentum in workers' comp is really an opportunity for acceleration, or are you thinking about it as steady progress year-over-year?

We are working on something; I can't really talk about right now. We're working hard. Let me just say we're focusing on the comp side to do something that would be a difference maker for us. We've got some more work to do. It's certainly a focus, and we have the resources and attention on it. I expect continued progress.

All right, great. Thanks.

We'll go next to Michael Petusky with Barrington Research.

Good morning. So Chris, on the meeting you all attended, private PT, we've sort of heard out there not in terms of PT specifically, but in terms of healthcare in general, a lot of the private owners have not gotten the memo that valuations have come down in transactions and that expectations are sort of out of whack with reality of interest rates, etc. I'm just curious; as Carey pointed out, you've got a lot of opportunities from a balance sheet perspective, the revolver to do something. What was the vibe at the private meeting? Do you think this will be a good year, or more active than the last 12 months?

Let me just say we have more strong discussions that are going on right now than we've ever had. There's a good mix, not just smaller practices but some larger practices as well. I expect it to be a good year, a very good year. We had one deal that we still expect to get on; that was bigger in size for us. That got hung up around a divorce proceeding that slowed everything down. This would have been a fantastic year if not for that. I expect next year to be even better based on the activity we have right now. In terms of valuations, look, it depends on many things. There are a lot fewer buyers in the market right now. Individual private equity companies are really at a limit, so it's a good time for us, and we expect to make hay while the sun shines, as they say.

And sort of pivoting, but staying on the idea of making hay. How far along would you estimate in terms of your efforts on getting better pricing in commercial and workers' comp? If this was a nine-inning baseball game, are we in the third inning, seventh inning, where would you sort of say in terms of your efforts to renegotiate rates with your various customers?

Carey?

Yeah, I think it’s hard to fit into that kind of measurement. But we see ourselves about fourth inning or so. We still have some work to do, but we've done a lot of good work; fourth and fifth inning, some where in that range. But we haven't necessarily seen all the impacts come into our net rate yet. But that's where we are from a negotiation standpoint. That makes sense.

I got an honor of the Texas Rangers that I’d throw the baseball analogy.

There you go.

I didn't catch if you mentioned the patient volumes for October. Can you provide any insights on that? I'm sorry if I missed it.

I don't think we mentioned that. Go ahead, Carey.

We didn't mention, but I’d say it came in strong. We don't have the final numbers yet, but based on weekly reports on progress through the month, it's coming in at our expectations and continuing to be strong, just like it has been all year long.

Very good. Thanks, guys. Appreciate it.

Thanks, Mike.

At this time, we have no additional questions standing by and would like to turn the conference back over to management for any additional or closing comments.

Thank you. Thanks, guys. I know this was a little bit longer call than normal. Carey and I are standing by and happy to take additional questions offline. Thank you for your time this morning, and hope you have a great rest of the week.

Thank you, everyone.

Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation.