Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy First Quarter 2024 Earnings Conference Call. 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.

Okay. Thanks, David. Good morning, and welcome, everyone, to our U.S. Physical Therapy First Quarter 2024 Earnings Call. With me on the line this morning include Carey Hendrickson, our CFO; Eric Williams, who is our COO East, and Eric will be assuming a larger role in our company as he takes over as President in just a few weeks after our Annual Meeting later this month. So we congratulate him on that. Graham Reeve, our COO West; and Jake Martinez, our Senior Vice President, Finance and Accounting. Before we begin our prepared remarks, I'll ask Jake to cover a brief disclosure statement.

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. Okay, I'm going to keep my remarks reasonably brief, but I do want to give you an overview of what I think are some important takeaways for the start of the year. So let me begin by saying that while these past few years have not been easy for anybody in our industry, I think our team has done some remarkable things in that period. We feel like we're off to a good start for this year as well. For some of you, I know that it may feel like this first quarter is a little bit of a disappointment, having enjoyed an all-time record Q1 in 2023. This quarter was actually ahead of where we expected to be, and that expectation was baked into our original guidance, which you will see we are updating today. While we experienced a tough start to the year, not based upon demand, which has been very strong, but a rough weather start for sure compared to last year. However, we bounced back very quickly and visits have again been at or above previous record levels for visits per clinic per day. Visits per clinic were all-time highs for both February and March of this year, and I'm happy to report that April is another all-time high for that month as we have built slowly but steadily in our volume progression so far this year. So what does that mean? Well, for one, it means that our facilities are being recognized and sought out for the great care we are providing to patients and their families and by the physicians who refer to us, and so demand has been very high. I will also tell you that staffing, while improved, is really still the gating factor to be able to capture even more volume. We're working hard on that. We have a new leader over that recruiting department. And I expect we will continue to make adjustments that will further assist us in meeting the demand that we're seeing for our services. Our partners are working with the ops team to network differently than maybe we have done in the past, to increase the number and the quality of seeds planted, so to speak, with respect to talented clinicians in their markets. It's an all hands-on deck exercise, but I'm buoyed by the fact that demand is really strong and that underpins all of this. Coupled with strong demand and record monthly volumes once we get outside of January is the progress the team has made with respect to net rate. In spite of the impact of a rather large, approximately 3.5% Medicare reduction to start the year, we were able to produce some uplift in our rate and some improvement in our work comp mix. It created some overall incremental improvement that we hope to build upon as the year progresses. For this first quarter, we saw non-Medicare rate improved another 2.8% overall from Q1 2023 and up 5% since the same quarter in 2022, and we're not done yet. We continue to work to lift reimbursement for the life-improving work that we are delivering across more than 5 million patients. While demand is also improving in our injury prevention business. First, you saw our recent acquisition announcement with respect to a really terrific company led by a fine team, who recently joined our Briotix partnership. That opportunity will help us further broaden our exposure to several additional verticals, essentially industry types where over time, we expect to gain additional sales traction as well as cross-selling opportunities, given that we have a much broader subset of services available now to sell. For the quarter, revenue grew 9.8%, which in turn produced a gross profit increase of over 15%. I'm very proud of our teams and our partnerships in this area. They continue to attract opportunities for further expansion, while they make a large difference for these companies in terms of the injuries they prevent and the costs that they save as a result of the fine work of our embedded clinical and technical resources. We have other highlights to cover. So let me turn the call over to Carey to discuss our results in more detail before we open things up for questions.

Thank you, Chris, and good morning, everyone. Our first quarter results, as Chris noted, were better than we anticipated coming into the quarter, driven by strong volumes in February and March and a growing net rate. As we noted in our release and also in our year-end earnings release, we had the significant adverse weather events in January of 2024 that Chris noted that we knew were going to make comparisons to the first quarter of 2023 challenging since there weren't any significant weather events in the first quarter of last year. Volumes in January of 2024 were light as expected, but volumes quickly picked up back up in March - February and March, and we experienced record volumes in each of those 2 months. Our hard work on rate negotiations and our focus on increasing workers' comp as a percentage of overall business continue to take root in the first quarter of 2024 and resulted in a net rate increasing year-over-year despite that Medicare rate reduction that was in effect for most of the first quarter that Chris noted. From an EBITDA standpoint, we reported adjusted EBITDA for the first quarter of 2024 of $16.7 million compared to $18.5 million in the prior year. We noted in our earnings release that the Medicare rate reduction brought our 1Q '24 EBITDA down by about $1.7 million and then the adverse weather in January was a negative impact of about $1.3 million. Our operating results were $7.7 million and built the first quarter of '24 and the first quarter of '23. On a share basis - on a per share basis, operating results were $0.51 in the first quarter of this year versus $0.59 in the first quarter of last year, and that's because of the decrease related to the increase in shares that we had associated with the secondary offering that we completed in May of '23. Our average visits per clinic per day in the first quarter was 29.5%, which is the second highest volume in the company's history for first quarter, second only to the $29.8 million that we had in the first quarter of 2023. January was at 27.4% and that compares to 28.9% in the previous year. So we're down from 28.9% to 27.4%, but then February was at 30.4%, and March was at 30.8%. And both of those months, as Chris noted, were higher than the same months in the previous year. Volumes continued strong in April with our average visits per day just north of 31, and that's a record high average visits per day number for the company ever, and the first time we've ever had average visits per day at or above 31 per month. Our net rate was $103.37 in the first quarter of '24, which was an increase of $0.25, again, despite that Medicare rate reduction that was in effect for most of the first quarter of 3.5%. The increase was largely related to our strategic priority of increasing reimbursement rates through contract negotiations with commercial and other payers and then our focus on growing our workers' comp business. Excluding Medicare, our net rate was up 2.8% versus the first quarter of last year with increases in each of the major categories other than Medicare. Workers' comp, which is one of our highest rate categories, increased from 9.3% of our revenue mix in the first quarter of '23 to 10% in the first quarter of '24. And both of those initiatives, increasing net rate through rate negotiations and growing the workers' comp business, will remain high priorities throughout the year. Our physical therapy revenues were $134.4 million in the first quarter of 2024, which was an increase of $5.3 million or 4.1% from last year despite the setbacks that we had from weather and the Medicare rate reduction. The increase was driven by having 28 more clinics on average in the first quarter of this year than we had in the first quarter of last year, coupled with the increase in our net rate. Our physical therapy operating costs were $110.4 million, which was an increase of 8.1% over the first quarter of the prior year, due in part to having 28 more clinics on average in the first quarter than in the first quarter of last year. On a per visit basis, our total operating costs were $85.50 in the first quarter, which was up from just under $82 in the first quarter of 2023. Our average cost per visit was high in January because we had less operating leverage due to the lower number of visits, and then it returned to more normal levels in February and March, which averaged $82.90 per visit. Our salaries and related costs were really the same story. They were $61.42 in the first quarter of 2024. That was up from $59.14 in the first quarter '23, but again, those salaries-related costs were high in January, but then they returned to more normal levels in February and March, which averaged $59.42 per visit, which is comparable to that $59.14 that we saw in the first quarter of '23. Our physical therapy margin was 17.9% in the first quarter of '24. That margin was also impacted by January due to having less operating leverage, but then it increased to 20.6% for February and March on a combined basis, which is back to very close to the first quarter margin of 2023, which was 21%. Chris talked about IIP and what a great job they did. In the first quarter, revenues were up almost 10%. IIP income was up 15.1% and that our margin increased from 19.5% in the first quarter of '23 to 20.4% in the first quarter of 2024. Our balance sheet continues to be in an excellent position. We had $143 million of debt on our term loan with a swap agreement in place, that places the rate on that debt at 4.7%, which, as you know, is a very favorable rate in today's market, and it's well below the current Fed funds rate. In the first quarter of 2024 alone, the swap agreement saved us $900,000 in interest expense with cumulative savings of $4.2 million since we put that in place in the third quarter of 2022. In addition to the term loan, we also have a $175 million revolving credit facility that had nothing drawn on it during the first quarter, and we have approximately $105 million of excess cash over and above what we need for working capital, ready for deployment into growth initiatives. Including the April 30 acquisitions that we announced last week, we've deployed just over $40 million of cash into acquisitions so far this year. As we noted in our release, we're raising our EBITDA guidance range for the full year of 2024 to $82.5 million to $87.5 million. That's an increase of $2.5 million on both ends of the range. Our guidance previously considered a 3.5% Medicare rate reduction versus last year's rates would be in place for all of 2024. However, as we noted in an 8-K that we put out in March, Congress addressed the Medicare reduction in the Consolidated Appropriations Act of 2024 and adjusted that reduction from 3.5% to 1.8% that's effective March 9 through the end of 2024. It was not retro to the beginning of the year, but it will be from that March 9 forward at a 1.8% reduction rather than 3.5%. The outperformance of our internal expectations in the first quarter of 2024 due to our strong volumes in February and March and our continued progress in that rate gives us confidence to raise the range by more than just the $2 million effect that's related to the Medicare rate change, even though it's early in the year. As a reminder, the expected EBITDA contribution from acquisitions we've closed so far this year and another one that we expect to close by the end of July are included in the guidance just as they were in our previous guidance. In closing, our first quarter was ahead of our internal expectations. February and March were strong months from a volume, revenue, EBITDA and margin perspective. Our net rate grew in the first quarter over the prior year, even with a 3.5% Medicare reduction in place for most of that first quarter, and we had very good momentum as we start the second quarter as evidenced by our average visits per day in April. And we increased our full year guidance by $2.5 million to reflect all of those things. So with that, Chris, I'll turn the call back to you.

Really appreciate it, Carey, great job. Thank you. So operator, let's go ahead and open up for questions or comments.

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

Eric, congratulations. Chris, for my first question, considering your remarks that Q1 was largely in line with internal expectations, we noticed that salary costs increased by 3.5% sequentially. I'm curious about what you're observing in this area and what needs to occur for this to potentially stabilize. Are these the levels we should expect going forward regarding salaries and related costs as a percentage of revenue?

Yes, I believe the impact on revenue and volume in January affected us on a percentage of revenue basis. However, when we consider the rest of the quarter, the February and March figures returned to a more typical level. I think that gives us a clearer picture of where we anticipate things will head in the future. Carey, would you like to go over those numbers again briefly?

Yes, salaries and related costs in February and March were $59.42 per visit, which is a slight increase from $59.14 in the first quarter of 2023. This is a more accurate comparison since the January weather conditions varied significantly between the two years. Last January had no weather issues, while this January was affected by a weather event and other factors. Looking ahead, I expect salary costs per visit to hover around $59.42. These costs may decrease slightly in the second quarter, as a portion of salary-related expenses is fixed, while others fluctuate with the number of visits. Typically, the second quarter is our highest volume period, so the variation may result in a lower figure compared to the first quarter. Overall, I believe we're in a good position regarding salaries and related costs, although January significantly influenced those numbers due to the lack of operating leverage seen in February and March.

Brian, is that...

Yes, that makes a lot of sense. I have a follow-up question, Carey. I appreciate your comment that Q1 was within your internal range and that you are raising guidance for the year. Can you share any insights to help us understand your internal expectations for Q2, especially considering the strong start you've had in April?

Yes, we don't usually provide quarterly guidance, but I can say that we expect it to be higher than last year's second quarter and certainly better than this year's first quarter. A lot will depend on the net rate and the strength of volumes in April, May, and June, but that's the expectation. We've made acquisitions since the second quarter of last year, and we've improved our net rate since then, so it should definitely be up.

Yes, Brian, I mean, we're not going to get to the point, and I know you're not asking us to do this where we're going to guide by quarter. ATI just did that. I don't think that's the right move for us. But we're comfortable in the guidance that we updated for the year. And you guys have the hard job of trying to parse that out between quarters.

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

So I guess if we look at the volumes, February and March were pretty strong months, and April seems to be performing well too. The question is, what is contributing to this increase in volume? Additionally, what are your expectations for the remainder of the year?

I've got to tip my hat to our clinicians and our partners, 95% of whom are clinicians. They're doing a great job with patients. We're doing, I think, a better-than-ever job in outreach, not just to the physician referral sources but to communities, social media, and other things, driving patients. Frankly, our demand is high enough that if we could just magically import staffing on an incremental basis, where and when we need it, we could drive volumes even higher. And so the gating factor for us right now is staffing; teams worked very hard. Turnover for this quarter is at the lowest level that I can remember since I've looked at turnover going back many, many years. So our partners who largely influence that are doing a very good job. We're continuing to work to try to get it down even further. But staffing is really the gating factor. Demand is high.

That's great to hear. So essentially, met demand there. So for the turnover, are you willing to share the actual percent of turnover you've seen among your clinicians?

It's nicely below 20%. I don't want to get into a pattern where we've got to put it out every single quarter because it's going to move around a little bit. But it's lower than it was last year, and it's well below 20% at this point.

That's great to hear. It's useful to have a sense of scale. I see that your other segment, the industrial injury prevention revenue, is showing a nice increase with a profit margin of 15%. I just want to confirm that this growth is entirely organic, as the deal you announced hasn't even closed in the quarter.

That's right.

What is driving that? Are you growing with your existing partners, or are you adding new clients? What is contributing to that 10% revenue growth, which is also translating nicely into profit, starting with the top line?

Yes, thank you. Eric, both you and Graham are doing an excellent job with these two partnerships. Our partnerships are performing very well, and Briotix has shown significant strength. Would you like to elaborate on that?

Yes. And actually, it's both of those. I mean, we are adding new clients. We're adding new verticals. We're heavy in distribution, retail heavy in automotive, adding additional manufacturing and distribution clients as well. And then we're expanding product lines within existing clients. So it's a combination of both the business development pipeline for both of our injury prevention businesses, progressive and Briotix, are very, very deep right now. So terrific same-store growth, a terrific new client growth. We're really bullish in terms of the direction we're headed and really excited about the acquisition that we just announced here on April 1. So it continues to go really, really well, and we expect good things out of our injury prevention business as we move forward through the year.

It seems that the business staffing may not be a significant obstacle. Would you say it is considerably better, or perhaps just somewhat better, but it appears to be an improvement?

It's different. When considering the main challenge we face in the physical therapy area, we have a significant shortage of physical therapists, which makes effective recruitment and retention crucial for our business. As Chris noted, we are seeing success in both recruitment and retention, achieving our best retention rates in a long time. On the injury prevention side, we have the advantage of approaching staffing differently, utilizing athletic trainers. This means the hiring requirements are not the same. The challenge in injury prevention is that not all positions are full-time; many of our clients may only require part-time hours, such as 6 or 8 hours a week. This makes it more difficult to bundle these roles, as it is generally easier to find full-time staff than part-time. Consequently, the clinical needs differ slightly, which somewhat eases the process for our injury prevention businesses compared to physical therapy.

I want to emphasize that our turnover rate in injury prevention is notably low, even lower than at our facilities. The team has been quite resourceful, and as a result, we consistently have more demand than we can staff for. Although there is a slight lag in meeting this demand, they are currently performing exceptionally well, and I take pride in their efforts.

Great. Could you clarify and confirm what's included in your guidance? There hasn’t been any change, correct? The $2 million corresponds to the Medicare rate, and there’s $0.5 million expected in Q1. I just want to ensure that there’s nothing changing with the deals, and that they are tracking according to your initial expectations in terms of their contribution to the guidance?

Yes, I can say that one of the deals we initially included in our guidance didn't materialize and isn't going to happen, but we have other activity that is reflected in our guidance for the rest of the year. Overall, we're comfortable with our position for the year at this point.

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

Question about the positive price momentum, particularly outside of Medicare. It appears that the core contract negotiations are progressing even better than anticipated. It's also encouraging to see some improvement in workers' comp, which has lagged since COVID. Could you provide more details on the workers' comp area and the overall status of your contract negotiations?

Eric, why don't you go ahead? And then Carey, if you have something to add, you can jump in.

Sure. On the work comp side, there's been a significant effort over the past year and a half to enhance both volume and rates, and this improvement is taking time to realize. We're beginning to see positive results from our efforts during this period. A key factor for us is that since the second quarter of last year, we've signed 10 new work comp payer contracts, with 4 of them becoming active in mid-Q1. We also have several additional contracts in progress, and Carey is working on renegotiating rates for different contracts. We're putting in considerable effort in this area, and we expect this growth trend to continue as the year progresses.

Yes. And Larry, I'd say this mix of growing from 9.3% to 10%, it's both. It's both volume and rate. So volume picked up, so it's the volume outpaced the growth of the other categories so that it would increase as a percent of the mix. And then also net rate increase as well. So good on both fronts and that resulted in that overall mix of revenue increasing.

Great. What is the outlook for Medicare? They've reduced their rates, providing some relief from the original cuts this year. I believe that the physician fee schedule and the necessary adjustments should be settled by next year. Is this also the consensus among industry partners, or what is the current perspective moving forward in this area?

If I were to speculate on the future of Medicare CMS, I would need a few more insights. I'm not entirely certain, but we anticipate exiting the current system completely by 2026. About three weeks ago, we had a meeting in Washington D.C. at the White House and HHS, where we met the head of AARP and some consumer groups. We're currently working on a bill related to fall prevention, which could provide us with additional volume. At the MedPAC meeting, we found an opportunity to educate them about their initial calculations regarding the physician fee schedule, which were based on a misunderstanding of our billing code set. They aimed to reduce reimbursement for what they perceived to be high-income physicians, including physiatrists and orthopedic surgeons. However, physical therapy represents 85% of that code set, and physical therapists typically earn between $70,000 and $90,000 per year, something they were unaware of. Their recommendation to CMS was to cut funding, mistakenly thinking they were targeting higher-paid physicians, and we suffered as collateral damage. This highlights that corrections in Washington take time, but we have established strong communication channels and gathered valuable data over the years regarding how much physical therapy saves the system when accessed as a first line of defense for musculoskeletal issues. Although this is a challenging battle, the facts and reasonableness are on our side, and we must continue to reinforce our message and enhance our efforts in Washington. While it's a bit frustrating, we are committed to leading the industry alongside APTQI and APTA to make progress.

I appreciate the information. That's all good. I have one last question. I noticed that you had six closures of facilities. Did you accelerate the closures of some underperforming facilities? What is the outlook for net openings in 2024?

Yes. I think you'll see us with strong openings similar to what we've done in the last couple of years. We're having a good organic de novo opening schedule for the remaining part of the year. We're in good shape through the end of April. And then we're finding tuck-ins at very, very reasonable prices where we can fold those into strong existing partnerships. So we expect that to go well. The closures really are a result of just what we believe is a healthy pairing of facilities that have been around some of those for multiple decades. And at the end - at the end of their useful life and the leases just happen to be up. And so they don't carry with them a lot of closure costs. It allows us to focus efforts on where we can get the greatest return. It's kind of like trimming a fruit tree; you got to prune some branches to have more fruit at the end of the day. So that's what we do. Timing is kind of no message there.

We'll take our next question from Mike Petusky with Barrington Research.

So on injury prevention, Chris, I think maybe 1.5 years, 2 years ago or so, you sort of expressed some caution, hey, some companies are pulling back on these types of services, concerned about recession and all the rest. I mean, do you feel like in light of the comment you made about demand improving. I mean, do you feel like most of these executives have sort of somehow made peace with the economic backdrop? Or can you just speak to your sense of that?

Sure. Sure. Thanks, Mike. Mike, you know us, you've known us for the entirety of the time, I've been here 21 years now, and we tell everybody what we think and what we're seeing and feeling and hearing. And going into last year, we felt like we were seeing from the CEOs and CFOs who make these decisions in some sectors that they were anxious and they were pulling back, not just with us, but with a lot of vendors in a lot of areas. We're not feeling that right now. And while there may be individual sectors or companies that are still a little tepid relative to the interest rate environment, look, I think consumer demand continues to be high. What's in part driving some of the inflation that we're seeing. Employment is still pretty good. And I think there's a sense that the Fed isn't going to run to the rescue anytime soon, and this is going to be the state of the state for a while. And we're just feeling really good about what we're onboarding. We're seeing good opportunities. We're winning some good fights. And I think you're hearing what we think the year is going to look like, just like you heard last year that we thought things were going to be a little slower. So that's just kind of where we are.

In terms of your progress with the multiyear effort to secure better reimbursement from commercial payers, how much work remains? I understand this is an ongoing process, but regarding the significant milestones you aim to achieve, how far along do you believe you are at this stage?

Yes. I would say we’ve completed about two-thirds of the initial heavy work. However, as you pointed out, this is an ongoing effort. Once we finish this phase, we will immediately begin the next round. Opportunities are always present, making it a continuous process. Overall, I believe we are approximately two-thirds of the way through the initial phase.

And then just, I guess, last question on just M&A. And Chris, I heard you say, hey, we're seeing some really reasonable prices for some tuck-ins. And I'm just curious, in terms of the conversations you're having, are there bigger sort of needle-moving deals out there where you would say, 'Hey, there's active discussions.' The timing, however, it could come in 6 months, it could come in 2 years. But are there larger deals out there or larger partnerships out there that are looking for exit strategies and where you guys could be a reasonable option?

Yes, it's an interesting time right now. Over the years, we've faced some criticism for maintaining a conservative balance sheet, which distinguishes us from many of our competitors who feel constrained. This allows us to continue growing and engaging in meaningful discussions, creating significant differentiation not only culturally but also in terms of stability, thanks to our solid capital position. You will see us grow as we are in talks with some large companies. While I won't specify the timing, it's important to note that we are not hesitant to grow; we just want to do it in the right way. Additionally, we need to align with people's individual timing and circumstances. We are optimistic about the deals we've recently won, which we didn't secure as the highest bidders. However, it's evident that people recognize our capability to effectively implement our long-term strategy, especially as others begin to feel the pressures of the current capital market conditions.

And there are no further questions on the line at this time. I'll turn the program back to our speakers for any closing comments.

Sure. All right, David. Thank you. Thanks, everybody. We appreciate your time today. Carey and I are available later again, as always, when you have questions, things you want to bounce around, we're happy to speak to those. Thank you for your time today, and have a great rest of your week. Bye now.

This does conclude today's program. Thank you for your participation, and you may now disconnect.