Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2025 Full Year Earnings Conference Call. Please be advised that today's conference call is being recorded. I'd now like to turn the call over to Chris Reading, Chairman and CEO. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy Second Quarter 2025 Earnings Call. With me on the call include Carey Hendrickson, our Chief Financial Officer; Eric Williams, our President and Chief Operating Officer in the East; Graham Reeve, our Chief Operating Officer in the West; Rick Binstein, our Executive Vice President and General Counsel; Jason Curtis, our Senior Vice President, Accounting and Finance Area. Before we begin today's call, we need to cover a brief disclosure, which I'll ask Jason to go ahead and read.

Thank you, Chris. The presentation includes 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. This presentation also contains certain non-GAAP measures as defined in Regulation G, and the related reconciliations can be found in the company's earnings release and the company presentations on our website.

Thanks, Jason. I want to start by expressing my gratitude to our partners, staff, and home office support across the country for their outstanding work. I'm going to share some statistics regarding patient sentiment about our care that we haven't revealed before. Our clinical staff and partners are performing excellently, and we have maintained strong focus and execution in several areas this quarter. Our industrial injury prevention partnerships are thriving, and we've secured a number of large opportunities, with many yet to commence. We're very optimistic about this segment of our business, and the statistics will clarify why. For the second quarter, physical therapy volumes reached a record high for us, which is significant as the second quarter is typically our busiest one. Our visits per clinic per day rose to 32.7, a substantial increase from last year’s record of 30.6. I attribute this success to satisfied patients who refer us to their family and friends, and many return for care in the future. I want to share a stat we haven’t previously discussed: our Net Promoter Score is 93.5. To put this into perspective, I found that a Net Promoter Score above 30 is considered good and above 50 is excellent. We learned that 95% of our patients are active promoters of our business, while only 1% are detractors, which places us in an exceptional position. Our injury prevention efforts continue to perform well; revenues are up by 22.6%, and gross profit has increased by 25.8% compared to the same quarter last year. We're working on several significant contracts, including new ones in the auto industry. In physical therapy, revenues grew by 17.3%, and we added over 50 net clinics compared to last year. We've also surpassed 3 million visits year-to-date for the first time. Despite challenges with Medicare reductions impacting our profits by about $25 million due to consecutive cuts over several years, we've managed to post over 20% growth. Though salaries and related costs increased slightly on a per-visit basis, our overall cost per visit decreased slightly. Since March, we've been gaining traction on several initiatives aimed at cost management and volume growth, and we feel more optimistic than we have in a while. In physical therapy, our gross profit margin came in at 21.1% for the quarter, reflecting a slight adjustment related to an incentive payment. We've also expanded our home care business and physical therapy acquisitions, with more planned for the rest of the year. We are putting effort into our injury prevention business, which has shown organic growth, improved margins, and overall strong performance. Due to these positive developments, we've raised our guidance for adjusted EBITDA to between $93 million and $97 million. Before handing it over to Carey to delve into the numbers, I want to reiterate my appreciation for our teams. We strive every day to make a positive impact in our patients' lives and within the injury prevention space for workers at our nation's most prestigious companies. We're making a difference, and we feel proud about that. Carey, please continue.

Great. Thank you, Chris, and good morning, everyone. As Chris mentioned, we're very pleased with our second quarter results and a few performance metrics that stood out to me. We achieved a new record of 32.7 average visits per clinic per day, the highest in our history. Our salaries and related costs increased slightly by 0.7% compared to the prior year, which is the smallest increase since the fourth quarter of 2023. Our total operating cost per visit actually decreased year-over-year. Our PT margin improved to 21.1%, up from 20.1% in the second quarter of last year. Our IIP revenue, excluding acquisitions, grew 18.4% on an organic basis, and our IIP gross profit also increased 21.8% on an organic basis. Our adjusted EBITDA rose to $26.9 million in the second quarter of 2025, up $4.7 million from the second quarter of last year. Additionally, our adjusted EBITDA margin expanded to 17.5%, compared to 16.4% in the same quarter last year. I was really pleased with all of these metrics. Looking at patient visit volumes, our average visits per day were 33.0 in April, 32.9 in May, and 32.3 in June. This slight decrease in June aligns with our historical summer patterns, where volumes typically dip before rebounding in mid-August. We recorded 1,530,263 clinic visits in the second quarter and had 28,493 home care visits, which we are reporting separately from our in-clinic visits for the first time. These visits are from the home care business we acquired through the Metro PT transaction in New York last year, and we will continue to report them separately going forward. For reference, we had 22,943 in-home visits in the first quarter of this year. Our net rate per patient visit was $105.33, slightly ahead of the $105.05 we achieved in the second quarter of last year, but lower than the $105.66 we had in the first quarter. As a reminder, we absorbed a 2.9% Medicare rate reduction that took effect at the beginning of the year, and our largest payer in Michigan implemented a policy change on April 1 that negatively impacted our net rate in that state. Despite these challenges, our net rate held up reasonably well in the second quarter, and we expect it to improve moving forward. We are focused on increasing reimbursement rates through targeted contract negotiations and growing our higher net rate workers' comp business, which accounted for 10.4% of our net patient revenues in the second quarter, with visits increasing 8.4% year-over-year. We remain fully committed to all of our rate-enhancing initiatives. Physical therapy revenues were $168.3 million in the second quarter of 2025, representing a $24.8 million or 17.3% increase compared to the same period last year, largely driven by acquisitions, particularly the Metro acquisition last November, which contributed $19.6 million of that growth. Physical therapy operating costs reached $133.1 million, an increase of $18.4 million or 16% from the same quarter last year. Importantly, we managed costs effectively, with salaries and related costs rising just 0.7% to $6.08, and our total operating costs showing a year-over-year decrease. Our physical therapy profit margin of 21.1% is the highest quarterly margin since the second quarter of 2023, reflecting solid revenue growth and cost management. Our IIP team also delivered strong results in the second quarter. Our IIP net revenues grew by $5.3 million or 22.6% compared to the second quarter of 2024, with income rising by $1.3 million or 25.8% over the prior year quarter. The IIP margin for the second quarter was 22%, up from 21.4% in the same quarter last year, reflecting strong top-line growth and continued operational focus. Our corporate costs remained in line with expectations at 8.7% of net revenue in the second quarter, compared to 8.5% in the same quarter last year. We are in the early stages of implementing a new enterprise-wide financial and human resources system, with implementation costs expected to continue through 2026. To maintain consistency, we'll add these costs back to our adjusted EBITDA calculation. Year-to-date, we have incurred $221,000 in implementation costs related to the selection phase, with full implementation set to begin in the third quarter. These costs will be detailed on our non-GAAP reconciliation page. Our operating results were $12.4 million, up from $11 million in the second quarter last year, translating to $0.81 per share, compared to $0.73 in the prior year quarter. Our balance sheet remains strong, with $135 million on our term loan, which has a fixed interest rate of 4.7% through mid-2027. Additionally, we have a $175 million revolving credit facility, with $24.5 million drawn as of June 30, 2025, and ended the quarter with $34.1 million in cash. As disclosed in our earnings release, our Board of Directors authorized a share repurchase program this week, allowing us to buy back up to $25 million of our shares through December 31, 2026, if market conditions are favorable. We see this as a prudent option, although acquisitions will remain our primary capital allocation priority in line with our strategic growth strategy. Our performance in the first half of the year has been strong, surpassing our initial expectations, and we believe we are well-positioned for a solid second half as well. Consequently, we've raised our full-year 2025 adjusted EBITDA guidance from the previous range of $88 million to $93 million to a new range of $93 million to $97 million, meaning the high end of our prior range becomes the low end of our new range, with a $4 million increase at the top. With that, I'll turn the call back over to Chris.

Thanks, Carey. Appreciate it. I want to mention one more thing. We're happy with where we are this quarter and the progress. We still have plenty of things to work on, right, which to me is also encouraging because we're not there yet. We have room for improvement. One of those things I want to point out as a matter of perspective relates to our same-store growth in mature facilities, which this quarter was a little bit lighter than maybe everybody expected. It was over 1%, but not in what I would call our normal range. We still have a few markets where staffing is a little tight, and with cost control, that probably put a little bit of a damper on us. I want to point out one thing. Back in the spring, we initiated a staged rollout of cash-based programs. We haven't spent a lot of time talking about it. As with anything, it takes a little time to get traction, getting real traction with that now. And so in our other income line, this doesn't show up as additional visits, although some of our patients are coming in for these cash-based services. We have generated about $900,000 worth of additional revenue, a lot of that coming from our cash-based services, which are continuing to ramp up as we go forward. And so that's an added benefit that we really haven't had before. We're seeing some of our partnerships do extraordinarily well with that. So with that, that concludes our prepared and candid comments, and we'd like to go ahead and open it up for questions.

Our first question will come from Brian Tanquilut with Jefferies.

Congrats on a solid quarter. Chris, maybe I'll start with a follow-up or a question around your last comment. So as I think about your same-store outlook, how would you characterize demand for your services or just broadly in the market versus like you were saying, kind of like pulling back and managing the cost because of the clinician labor situation? And then maybe how do I think about your capacity versus thinking about maybe de novo builds in the future as you start bumping up against capacity constraints potentially?

Demand is quite strong across the board. However, there is a balance we need to strike when controlling costs, as we want to avoid overstaffing while still meeting demand. It's not an ideal situation; in some markets, we have a tight labor situation and need to hire more staff to keep up with strong demand, while in others, we've reached the right level. We're making progress on this. Our cash-based programs are helping us generate additional revenue, which is a new positive for us. I'm trying to recall the second part of your question.

Good. Yes. Just as you think about capital deployment into maybe de novos as you start bumping up against capacity constraints. Yes.

On the de novo side, we've faced some market challenges, but this is likely to be our strongest year for de novos since I joined the company. The de novos are performing well this year and are on a solid trajectory. We have made and will continue to make adjustments in our recruiting efforts. In terms of residency, we are enrolling more students in our programs, which we believe will allow us to meet the growing demand. We need to stay focused on this, but I don't expect it to affect our de novo openings. In markets like New York, where our net rates are significantly higher than many of our smaller competitors, we can pursue smaller de novos without publicizing them. These projects are yielding very attractive returns and providing us with additional resources to support their growth and scaling. This trend is expected to remain strong as well.

Chris, to follow up on that. I mean, as we think about capital deployment, obviously, the announcement of the dividend is positive. So just curious how you and the Board thought about that decision to introduce a dividend just when it sounds like this is going to be one of your best de novo years. Maybe just thinking about the balance sheet, the cash generation, and then just the decision to do the buyback.

Yes. So you mentioned dividend. The dividend is ongoing, and so we've been paying the dividend for a long time. The buyback is new. Look, we feel like the stock has been undervalued for some time. We understand health care services having a little bit of a tough year, and we've had some Medicare headwinds and yet we're making progress and continuing to grow the company. So we wanted to be in a position to have flexibility at a certain level where we could go in and demonstrate our belief that we're going to continue to grow this company and do well over time. So it gives us flexibility. As Carey mentioned, it's not our first preference for capital deployment. I would say our first preference right now, frankly, is directed toward injury prevention where the embedded organic elements of that business are really, really strong. And the next would be PT, and then on from there. We'll be disciplined about any share buyback, and it's going to be dependent upon other capital demands and really where the stock is at any given time.

Got it. Chris, if I may throw one more question. As I think about just the efficiency of your physical therapists, we hear about AI tools in the market aimed at physical therapists. I mean is that something that you're throwing in the mix that's helping you out? And then maybe kind of related tangentially, you talked about your home PT business. Just if anything is out there that you can share with us in terms of the dynamics there because obviously, it's new to us investors on what that business looks like.

Yes. There are some cool AI tools right now. We're deploying AI-backed technologies for clinical documentation, which is helping people get through their least favorite thing of the day if you're a clinician, which is to document all the cool stuff that you did with somebody. And in physical therapy, you have to document a lot of things, sets and reps, weights, and motions and joint-related movements. And so it's tedious. It takes time. And so this ambient listening AI-driven assist is helping our clinicians get through that much quicker, much more efficiently. We're just on the front end of rolling that out, but that's been well received. And we're rolling out what I would call broadly a semi-virtualization of the front desk, which enables us not to go completely virtual because I don't think we're ready for that yet, nor do I think patients are ready, but an augmented situation where we're able to focus efforts from across multiple clinics through one individual that may be on-site or remote somewhere and be much, much more efficient and save the number of front desk FTEs, which continue to be a labor challenge for us just in terms of longevity, unlike our PT group, which, frankly, right now, we're having the best least amount of turnover that we've seen in maybe my recollection. We're really good right now. And so these tools are helping us get some margin and efficiencies in areas where we just haven't been able to do that in the past. And we're early, but it's directionally encouraging.

Our next question will come from Joanna Gajuk with Bank of America.

So maybe first on the metric that really stood out besides the visit per clinic, but the cost per visit decline. So maybe in that context, can you walk us through or give us some update on your labor management strategies, the wage, maybe talk about turnover and other, I guess, metrics you can share because it sounds like you're doing a pretty good job there.

Yes. Eric, do you want to go ahead and take that, talk about turnover and some of the things we're working on and what we're seeing.

Yes, we made significant investments in systems and resources in 2024 that are now yielding benefits in 2025, particularly in recruiting and retention. We’ve observed a 25% increase in student clinical rotations through our partnerships this year, partly due to our involvement in a student rotation matching program that utilizes widely used software across all PT schools. This has resulted in nearly 200 additional students this year. We also implemented a new applicant tracking system in 2024, enhancing our visibility across partnerships for all job applicants. This system allows us to effectively follow up with candidates and maintain contact even with those who don’t accept positions, as we are creating a substantial database for future job openings. These systems and additional resources have significantly improved our recruiting efforts. Furthermore, we have focused heavily on mentorship, engaging with younger therapists to lower turnover rates. As Chris noted, we are experiencing the lowest turnover rates in the first half of this year that we've seen in seven years. We’re excited about developing a software platform to enhance our mentorship programs, enabling connections among 2,600 clinicians throughout the company, allowing them to share expertise across specialties. This approach is expected to bolster our staff retention. Regarding AI, we are beginning to implement voice recognition technology, which is currently being utilized by about 200 to 250 PTs, and the feedback has been overwhelmingly positive. This technology should also aid in retention by reducing the cumbersome documentation tasks that clinicians dislike. We believe we are ahead of many large platforms working with this technology, and it positions us well to attract and retain staff in the future.

Are you willing to share the turnover numbers that you track?

We will report that publicly at the end of the year, and you'll find that in our ESG.

Yes, Joanna, I don't want to be in a position quarter-to-quarter to add to our already exhaustive list of metrics, but we're in a good spot right now. We're in a really good spot.

Yes, it sounds like it. And if I may, another topic. Medicare rates, right, have been a headwind for a couple of years now, but it sounds like '26 is going to be a better rate update. So the overall physician fee schedule is going up like 3.5% or more, 3.6%, 3.8%. So we had estimated like a 2.5% or so physical therapy codes. But can you talk about your estimate for your company in terms of how the rate increase would translate for your portfolio into next year?

Yes. I'll provide a brief comment, then pass it to Carey for the specifics. This year has been one of the most complex I've experienced in my career due to proposed rule changes. There have been numerous adjustments made to RVUs, work values, and geographic index factors, resulting in significant fluctuations particularly in geographic areas. Both we and the APTA questioned the accuracy of some of the tables. Overall, Carey will elaborate, but the key takeaway is positive. We've moved beyond a headwind, and while we haven't experienced a tailwind in some time, we are optimistic about progress, though we recognize there is still work to be done with CMS. Carey, please provide the details.

Thank you, Joanna. We have examined the various regions and the changes that occurred there. As Chris pointed out, this varies significantly based on the locations and the rate increases. We anticipate an increase in the range of 1% to 1.75%. This is a positive outcome for us, as we are glad to report an increase rather than facing negative numbers next year. If the increase falls within that range, it would translate to an additional $2 million to $3 million in revenue for us next year. From an EBITDA perspective, that would mean an increase of about $1.5 million to $2.5 million. This is our current outlook, although it is still preliminary. We expect to receive final confirmation in December, and we will see if there are any changes, but this is where we stand today.

All right. This is very helpful. And I guess, so you made it sound like there's going to be pushback on that level. So is it your expectation maybe the final is a little bit better than proposal or I guess too early to say?

Yes. We certainly hope that it will be. The irony is, unfortunately, if you get under the hood and see how the sausage is made is that the specialties that have the most extraordinary increases in the cost of equipment, so very expensive equipment and have the most highly litigated areas where there's exposure to litigation and other things, which you just heard the number of patients that love us on a percentage basis. So physical therapy in general doesn't have that problem. And so we're making a decided push where we know that we save the system a lot of money. In fact, in the state of Maryland, where physical therapy on a pilot program with CMS is in the position as kind of a primary care for musculoskeletal, they determine the physical therapists do what happens in the case. There's a massive aggregate savings. And we're hoping to use those results with CMS to extend that pilot beyond the state of Maryland, which could be a big pay for a reasonable, rational annual cost of living increase for the fee schedule, and we think we should be front and center in that. So yes, we're pushing. We hope it gets better. We think there's some flaws in the existing methodology, and we're going to be working on that between now and year-end.

Our next question will come from Benjamin Rossi with JPMorgan.

So turning to the IIP segment performance. You mentioned adding some services here over the course of the year, certainly seems to be off to a strong start in the first half with margins expanding year-over-year. Is it fair to say that that segment is coming in ahead of your initial expectations of a $3 million absolute increase in gross profit, particularly as we head into the seasonally stronger 3Q?

I don't have the exact budget details in front of me, but we are definitely ahead of our budget for the year. The second half has a slightly different seasonal pattern in injury prevention. We tend to perform well throughout the year, though we see a dip in January and December. In December, many of the large auto manufacturers and some of the biggest manufacturers in the country take early holidays, which slightly impacts our earnings. However, looking back not just at this first half or quarter but on a year-over-year basis, injury prevention has performed very well for us, showing strong organic growth. We remain optimistic and are dedicating more resources to development in that area while identifying promising companies. Naturally, we still have to execute our plans, but we anticipate continuing to invest strategically there.

Got it. And I guess just as a follow-up to your comments on Medicare PFS rates. Obviously, it seems like the change for 2026 is kind of amounting to more like a one-time fix and it doesn't necessarily address anything in 2027 and doesn't obviously take you out of that $25 million hole you described after decreases in recent years. Can you just walk us through where your conversations stand with your counterparts at the federal level and maybe how they are framing the decision to include that one-time fix for 2026 in the OBBBA?

Yes, it varies depending on who you ask, but there is general dissatisfaction in Congress with the fact that this issue arises annually. Unfortunately, this isn't the only recurring problem the government is facing right now. It appears that funding the government each year relies on this crisis management approach, which often results in a lot of back-and-forth without a definitive solution. This method is not ideal and it's particularly unfair to providers who essentially have only a month to prepare after being notified in December about the final decision. A multiyear plan should be established and secured, which is the consensus among lawmakers. However, achieving a long-term fix for the physician fee schedule, estimated to cost about $100 billion, requires identifying savings. We believe a significant area for potential savings lies in physical therapy, as highlighted by the ECLIPSE study results in Maryland, which we aim to extrapolate nationally. This could lead to substantial savings for the healthcare system, positioning physical therapists as primary care providers for musculoskeletal issues. This proposal has garnered favorable attention from lawmakers on both sides. The situation with CMS is quite complex due to its fragmented nature, making it challenging to get a comprehensive understanding. However, we believe that if we can demonstrate savings to mitigate deficit spending and consider other revenue sources, there's potential for a longer-term solution. Both the AMA and the Hospital Association share the sentiment that a year-to-year fix is not viable and is unsustainable.

Our next question will come from Larry Solow with CJS Securities.

Most of my questions have already been addressed, but I have a couple remaining. I'm curious about the nearly 7% year-over-year increase in visits per day per clinic, alongside the modest growth in labor and decreased overall operating expenses per visit. How much of this relates to the acceleration in clinic closures last year? I know you closed around 30 clinics by the end of Q3. It seems like a lot of these gains are due to increased efficiencies. Would that be accurate? Additionally, I'm interested in how your cost-cutting initiatives discussed last year, which you mentioned could lead to significant savings over time, have contributed to the strong performance this quarter.

Yes, it's like baking a cake. There's a lot of ingredients that go together. And at the end of the day, you hope it tastes good. I don't have in front of me the relative pieces of every one of those ingredients. And in fact, some blend together. It's a little bit hard to measure cost efficiencies on one hand, create some both challenges and opportunities sometimes in terms of volume-related aspects. And so we're trying to do the best we can to balance technology, efficiency, appropriate levels of labor, which minute-to-minute are never perfect, perceived demand expansion. It's pretty complicated. It's running a business, and there are a lot of moving parts. So all those things are coming together. What you're hearing is we're feeling more confident that the things that we've done, which, again, as you point out, are multifaceted, are coming together in the right way. But as I pointed out earlier, it's not perfect. We still have plenty to work on. There's still plenty of opportunity. Team is focused on it. But where we are feels a little better than where we've been for maybe a while now.

Factor in the visits per day growth is the addition of Metro in November. And so it's been higher since that point in time. We were probably running at about 31 before, and then that's kicked up a little bit because they averaged about 45 visits per clinic per day there at Metro. So that does look a little bit, but there's still really good growth in that overall visits per clinic per day.

That's a good point, Carey, regarding Metro, which I believe is your largest acquisition to date. It seems to be progressing very well. When you acquired it, you mentioned many opportunities, and it appears that new openings are taking place at Metro. I assume the favorable rates in New York are benefiting your operations significantly as well.

Yes. We have a strong team there. Michael and his team are strong. They're very strong. Clinically they're strong, operators are strong in development. And so yes, we've got plenty of opportunities to chew on and work our way through for what should be a long period of time. De novos being just one of those. So they're doing well.

The net rate increase at Metro since our acquisition has been very promising. One of our strategies with acquisitions is to enhance their contracts as we integrate them. In the first month post-acquisition, the net rate for Metro was approximately $101, which rose to an average of $104.50 in the first quarter and $107.50 in the second quarter. We've observed significant rate improvements. While this doesn't appear in the mature clinics segment, it is reflected in the clinic additions segment. I wanted to highlight that we are experiencing commendable net rate increases at Metro, which is beneficial for us.

Can you walk us through the pricing breakdown for the quarter? Did you discuss that? Typically, you provide details on the commercial pricing for the quarter. I heard you talk about the workers' comp aspect. Did you offer any additional information regarding the commercial side?

Sure. I'm sure, happy to look at that. So it was $105.33 overall. Commercial rates were about around $105.50. So that was a nice increase in commercial rates. Medicare is a little north of $92. Workers' comp was still a little bit north of $150 per visit, which is really good. So those are the three primary categories. The others were relatively stable as well, Medicaid, personal injuries, self-pay.

Our next question will come from Jared Haase with William Blair.

Chris, maybe for you, I wanted to ask another one on the IIP segment and nice to see the continued momentum there. I think you mentioned a number of larger opportunities that haven't started yet. So I'm wondering if there's any way that you can contextualize, I guess, what that backlog looks like or any way to frame up what the incremental revenue opportunity is and how that might compare to prior years?

Yes, I don't have that information readily available. My preference is to avoid recognizing revenue before it has actually been generated, whether through development or other means. We are certainly making progress and having a strong year. However, I can't provide specifics at this time. The main reason is related to staffing. The team has done an excellent job, particularly with a major contract in the auto industry that required us to hire 50 full-time employees. If we had only hired 20 or 30, the revenue generation would have differed significantly. Therefore, I prefer not to take any risks in this area, and we won't be doing that. Once things begin to materialize and we see results, I would be glad to discuss it further.

That's a valid point. It completely makes sense. I would like to ask a follow-up. You've previously made some comments regarding the virtual physical therapy applications available. Recently, one of the larger companies announced they're establishing a network of in-person providers to complement their digital services. I’m curious if you have any additional insights on that. Would you consider joining a network like that with a virtual partner? How are you viewing the potential opportunity in terms of patient acquisition and opening new referral channels?

Yes, I don’t want to speculate too much on hypothetical situations. We have had discussions with certain providers about the possibility of offering a brick-and-mortar option in addition to a virtual service. It remains to be determined if this is something the industry will accept. Many virtual providers have offered physical therapy services at very low prices, which are quite generic and not provided by licensed therapists. Instead, these services are typically delivered through an app or supported by call center agents, most of whom are not licensed clinicians but follow a script. They claim to cater to all types of patients and complex conditions, such as post-operative reconstructions and rotator cuff repairs. In my opinion, this cannot be done efficiently or effectively. Therefore, they face a challenging situation in deciding whether to implement a bricks-and-mortar solution. Conversely, we are leveraging technology through partnerships with companies like Limber, which provides an augmented solution that helps us monitor our patients while they complete their home programs. This allows us to gather objective measurements of motion and activity, enabling us to guide their care more effectively. There will eventually be a time when we concentrate more on a broader digital solution that will enhance our patient services and may make us less dependent on geographical location. However, we plan to approach this differently than those who have gone before us. Others have attempted to take on too much and are realizing that it is not feasible to deliver those services in that manner.

Our next question will come from Jiten Sanghai with Corre Partners.

Congrats on a great quarter and I appreciate the questions and answers here. Maybe two for me. One is, is there like a theoretical capacity we should think about? Because clearly, the volume growth, the record Q2 is great. But like is the system operating at 90% or some x percent? Clearly, I ask the question because incremental visits are very, very accretive to margins. And then a related point, as you think about the de novos, what is the staffing environment like? How will you attract the number of FTEs? I think, Chris, you mentioned maybe a record year for opening de novos. So I think they both relate to what's available in the system, but then how will you recruit x number? I don't know if it's 50, 100 of FTEs. And finding them is hard, but the question isn't just finding them, it's what you pay them and how the economics work. So I think there's two parts to this. If you could address both, that would be super helpful.

Yes. So on the capacity side, think of it this way. Our capacity really isn't limited, generally speaking, by physical footprint. So a typical clinic may be open from 7 to 6, but we have the ability in that same physical footprint, which has more peak times, and also has slower times. We have the ability to fill in certainly some of the slower times. And then we have the ability to extend hours and do other things. And so our visit per clinic per day number can continue to grow. It's not constrained by our physical footprint. It may be limited or it correlates without staffing. And so we have to have the staff available, as you mentioned, to be able to see the next 5 or 10 visits per day. And there really is the possibility ultimately of getting that number up much higher than it is right now. It won't happen overnight, but a little bit over time as we've shown over the last couple of decades. We've increased that number really ex-COVID every single year. So that part, I think, will continue to move forward as long as we can continue, as you mentioned, to find staff. And I would point you back to Eric's comments around the investments that we've made in recruiting, retention and school affiliations, residency programs, mentorship, and other things to try to have a stable bench from which to draw from to backfill our more senior therapists. Those are the ones that go and open the next adjacent clinic, not the new grad, but the more senior person. That more senior person then gets backed up maybe by somebody more junior in a clinic with a lot of people with tenure, so they can grow and learn, and it's easier to absorb that way. So again, it's not perfect. The market is competitive and in some cases, it's tight, but we're finding people and we're growing, and we expect to continue to be able to do that, particularly with the investments that we've made over the last 6 to 9 months.

And Chris, that's super helpful because what it sounds like is there's no theoretical capacity. So is the way we're thinking about it as equity holders the right lens, which is incremental visits are extremely margin accretive. So whatever your margin guide suggests for this year using your updated EBITDA range, as we think about next year or the year beyond, there should be some flow-through or increase in EBITDA. So your sort of margin should expand over time as you have incremental volumes. Is that the right general lens? I don't know if you can quantify that? Or if that's just a good soundbite to sort of end on from my perspective?

No, I think it's a reasonable soundbite. There are certainly points of inflection where when you have to go up, you may go back a little bit before you can go forward again. But generally, you're right. The last few patients of the day are incrementally more profitable. Your fixed costs are covered. I think that's one of the reasons why you see our total cost per visit come down a bit this quarter is because of the jump in visits per clinic per day. So hopefully, with particularly continued commercial rate wins, continued wins like we're seeing with Metro with $5, $6, $7 a visit in rate growth with a combination of continued efforts around work comp and other more preferable payers, that combination gives us more than enough to offset what might be a little bit of wage pressure year-to-year. That wage pressure for us, I mean, we're well below right now the average increase that people got at the end of the year. We're getting that with some efficiencies. And again, I'd point to some of the initiatives around AI and virtualization at the front desk, which are really just now getting started, but should give us some additional lift as we go forward. So you have to deliver it, you have to make it happen, but I'm hopeful at this point that we can continue to execute on that.

Our next question will come from Michael Petusky with Barrington Research.

Carey, you provided the hard numbers on the rate per visit. However, I'm curious about the commercial pricing. I'm assuming it increased slightly during the quarter. Do you have a percentage for how much it was up compared to the same period last year?

Sure. I can calculate that real quick. It was up about 1% to 1.5% compared to last year's second quarter, which was actually the strongest quarter for commercial rates last year. It’s up about 2.2% from the first quarter, so we saw a nice increase in the second quarter compared to the first quarter regarding that commercial rate.

Okay. And the issue in Michigan with the large payer, how much impact did that have on the commercial pricing overall? I mean, did that take it down 20 basis points more than that?

It probably had about a $0.30 per visit impact or so. We would have been right at the first quarter number had it not been for that Michigan rule change.

Okay. So is there anything to suggest that what's going on in terms of that payer in Michigan could be an issue with other payers elsewhere? Or do you really feel like this is sort of an isolated situation?

Mike, each year I wish things were more uniform, though maybe I shouldn't. We have 48 or 49 states where this isn't an issue, so I don't see it spreading. Michigan has experienced some fluctuations with this payer in various aspects, including utilization caps and other challenges that have even led to litigation. It's been somewhat inconsistent. We will always encounter such variations as people try different approaches over time, and this is no exception. However, we did highlight this issue this year as a bit of a headwind.

Yes. And Mike, as Chris said, there's always puts and takes on the net rate, and you'll have things like that, but then we've got other things that are overcoming it in other areas. But I don't see it, as Chris said, as a contagion kind of thing at all.

Okay. Great. That's what I was trying to get at. So Chris, earlier, you said that IIP you felt like was a top priority in terms of capital allocation. When you were talking about that, were you sort of talking about it in terms of internal investment, hiring trainers and such? Or are we talking about more in terms of external assets that you may try to sort of build on the current base of business or both?

Yes, it's always an internal focus. However, that's not an issue, and I don't think too much about it, perhaps I should. When I discuss capital allocation, it's just a routine matter. I'm referring to investing in additional companies to enhance our service offerings, which will create more opportunities for cross-selling and allow us to continue our growth as we have over the past few years.

Yes, do you feel like there are assets out there that you're engaged with in terms of like active discussions? Or is this more like a couple of year, 2-year, 3-year type target?

It will be ongoing, but we're actively involved, and we've spent more time this year, I think, probably than ever before, attending conferences and getting face-to-face meetings and being active in the space. People now kind of know who we are. And while it's a much smaller space in aggregate than the PT world, we're making some progress. And so don't be surprised if we're active and continue to be in that area. So it's important. It works. Team has done and is doing a really good job, and we like the embedded growth elements in this business, particularly, I think, not to make any kind of a political statement, but if manufacturing is going to increase in this country. And I think just with the announcement yesterday on Apple and others, there's going to be a push to onshore manufacturing. And we're positioned pretty well to benefit from that. We continue to execute on what we've been doing. So I think we will.

Absolutely. Let me just sneak one last one in, and then I'll let the next person ask questions. Chris, you mentioned on the last conference call that you guys had been involved in sort of a deep operational dive with your top 40 partnerships. I'm just wondering, anything interesting, surprising? Has anything come out of that, that you sort of would be willing to share that might matter?

Yes. I can share a couple of things. Those calls have been important, and we are making progress. One thing our partners have appreciated, which I suspected, is that if you look back to the period after COVID, we were both lean and busy, providing a useful benchmark. I liken it to how our weight can fluctuate; using your college days as a reference point can be misleading. Year-to-year, there may not be much visible change, but over time, it's easy to lose track of where you are, and soon your clothes may not fit the way they used to. This is a simple way to illustrate how we're tracking progress. We are measuring various aspects of our business, and several influences have shaped the current situation. Having a clear, tangible tool that our partners receive every month, which allows them to compare their current performance to their most efficient point, has been beneficial. It serves as a useful benchmark to identify areas needing attention. We have been utilizing this tool, and I'm happy to report that we are making progress. Our partners have been understanding and appreciative, and we are witnessing positive changes as a result.

It appears we have no further questions at this time. I'll now turn the program back over to management for any additional or closing remarks.

Look, it's been a good call. Thank you all for your questions. A lot of really good questions. Carey and I are available for the rest of the day. And whenever you meet us, we appreciate your time and attention and particularly your support. We hope you have a great day. Thanks.

Great. Thank you.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.