Good day and thank you for standing by. Welcome to the U.S. Physical Therapy 4th Quarter 2023 and Full Year Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. In order to ask a question during the session, please press the star (*) key followed by the number one (1) on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star (*) then zero (0). I'd now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thanks, Shelby. Good morning and welcome everyone to U.S. Physical Therapy's earnings call this morning. With me on the call today include Carey Hendrickson, our CFO; Eric Williams, our Chief Operating Officer; Rick Binstein, our Senior Vice President, General Counsel; and Jake Martinez, our Senior Vice President of Finance and Accounting. Graham Reeve, happens to be on a plane this morning, and won't be joining us. Before we begin with some prepared remarks, I'll ask Jake to cover a brief disclosure statement. Jake, if you would, please.

Thank you, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.

Thanks, Jake. I'm going to go ahead and start this morning with particular thanks to our clinical teams, led by our capable partners around the country, for their efforts in delivering exceptional care, returning a record number of patients to the things that they enjoy the most and to our prevention partners, for weathering what we expected to be a more challenging year in ’23, with great continued success in keeping thousands of workers and companies that we serve healthy and injury-free. They finished the year in really strong fashion with 9.7% revenue growth in our final quarter, and a 330-basis point improvement in margin in what has been a seasonally slower quarter for this subset of our business, all of which sets the table for a good growth year ahead in 2024.

Great. Thank you, Chris, and good morning, everyone. Despite challenges as we entered 2023, including the 2% Medicare rate reduction that we've talked about in a tight labor environment, our team produced strong results in 2023.

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

At this time, if you would like to ask a question, please press the star (*) and one (1) on your touch tone phone. You may remove yourself from the queue at any time by pressing star (*) two (2). Once again, that is star (*) and one (1) to ask a question. We'll pause for a moment to allow questions to queue. And we'll take our first question from Brian Tanquilut with Jefferies. Your line is open.

Good morning, Brian.

Good morning. Congrats on the strong quarter. Maybe for both Chris and Carey, as I think about the fact that you included some M&A, expected M&A contributions in the guide, just curious in terms of your visibility into the timing of the deals that you embedded in the guide, and then maybe Chris, more broadly speaking, how are you thinking about the M&A landscape this year in terms of what you're seeing in the market in terms of competition for deals, and also like the deal flow that you're seeing within your own pipeline?

Yes. In terms of the timing, I think we've tried to speak to that. I mean, one of the reasons we added it into our guidance this year is just due to the relative proximity to when we were going to do this announcement, this release. So, you know, I would say between now and because these sometimes aren't certain, between now and July, you know? It’s kind of what we're looking at for the ones that are in queue right now.

That was awesome. And then maybe, Carey, as I think about the gross margin side, you highlighted your success there, and it obviously is very impressive. So, just curious in terms of what you see as the remaining opportunity either to hold the gross margin line steady as you grow volumes this year, or if there are remaining opportunities to drive some margin expansion.

Yes, I think it's going to depend on how much we can do on the rate side this year. We expect to do well there. I think we'll be able to at least maintain our margins where they have been, if not, grow them slightly in 2024. Yes. But it's really going to be a function of how much we can push on the net rate side. And then, to the extent we're able to keep our costs in line, either flat on a per-visit basis or slightly better than that. And if we do that, if we push both of those really well, I think we can see a little margin of improvement.

Maybe Carey or for Chris, actually, as I think about the last point that Carey made on the ability to drive rate growth from commercial payors, how are you thinking about that in terms of what the discussions are, and what inning are we in terms of trying to get more rate growth across the portfolio of contracts that you have in the different markets that you're in?

Go ahead.

Yes. So, we've had really good success in these discussions. I'd say they're based around outcomes and they're based around the value that physical therapy provides and the fact that it's a way to actually decrease costs of the overall patient's care. And we've been successful in those conversations. We have a team that is focused on this you know, we're working on our most - the ones that we concentrate on the most are the five largest carriers and at our top partnerships, and we're going to keep at that work during 2024.

So, what inning would you say?

Inning, I would say we're probably in maybe the fifth inning or so. We've made some good progress so far in the last 18 months, I'd say. But we still have some more we can do. We still have - we definitely have work we can do. The good thing is, Brian, we've built in step increases. As we've renegotiated these contracts, we've been trying to build in one, two - I mean, three-year step increases so that we're not having to revisit all these contracts each year because we have, as you know, 1,700-plus contracts that we're always having to come back to and renegotiate. So, the three-year step increases have really helped because we get that automatically as we, as the one year lapses. So, that's been good.

And I would say that when we get to the ninth inning, we're not done, we're going to just play a new game.

That’s right.

So, we're going to start over. So, this is going to be a perpetual thing, and I think over time, how we get paid maybe it changes, and maybe we have a little bit more latitude to focus on results and not count minutes like we do right now. It's just a crazy way to do it. But I think we've got continued opportunity.

That's awesome. All right, congrats again. Thanks, guys.

Thank you.

Bye.

We’ll take our next question from Larry Solow with CJS Securities. Your line is open.

Good morning, Larry.

Hey, guys. Thanks. Guys, good morning, good morning as well to you. Continuing on that line of question, just on the commercial side, you mentioned a nice 2% increase this quarter, or a 2% [Unintelligble] at the CMS impact. Do you have what it was for the full year, and do you expect this to more sort of improvement or maybe a little bit better in ‘24? I think using that baseball analogy, we’re on top of the 5th and you get stuff from the bottom of the fourth that wasn’t necessarily in ’23, and maybe it was [Crosstalk]

Yes, for sure.

Yes, right. So, for 2023 on that, if you take all the categories except for Medicare and combine them on the combine basis, they were up about 1.5% in 2023. So, that actually accelerated in the fourth quarter being at 2.1%.

Right.

So, it’s been accelerating as the years gone long. I think - I’m sorry. Go ahead, Larry.

No, no. Go ahead. Yes, go ahead

I think as we look at ‘24, you asked about that. What we will do from a Medicare perspective, right? If Medicare - we’re just going to be down 3.5%, if we do 1.5% to 2% of an increase in these other categories combined, that would make our rate next year flat, and I think we can do that or maybe even a little bit better.

Got it. Okay. I’m with the CMS rate cut. I guess 3.5% sounds like that there’ll be no relief on that coming. That’s probably not going to get together in the public that’s the only thing there, but Chris, can you just remind us? I know these cuts, they’re sort of in [Unintelligible] because these guys were on shifts sort of more on the general practitioner while maintaining sort of budget neutrality, but what’s the outlook going forward? Are we pretty much at the end of that? Do you expect more cuts potentially in ‘25 or how do you guys do that?

Yes. I don’t know, Larry. I mean, trying to predict what the CMS does or the Federal Government does, a little bit of a hard job, but I think towards the end, I think we’ll get back into a more normal pattern as we go forward with small increases every year. I think people understand that they’re picking on the wrong guys and this isn’t sustainable to have three-sequential years of cuts, and that’s what I believe. So, we’ll see what happens.

Got it, okay. Great. I appreciate the thought. Thanks.

Thank you.

Thanks, Larry.

We’ll take our next question from Joanna Gajuk with Bank of America. Your line is open.

Hi, good morning. Thank you so much for taking the questions here.

Morning.

Hey. So, I guess, a couple of things, when it comes to these assets that you’ve outlined, your list of the contributions from acquisitions that you expect to close, later this year or this year to the first half of July. I’ve listed it as one of the items, but it was one of the last items on that list. So, she released these as implied assets she’s talking about here versus the 5.2 million. I could tell when you have to overcome year over year that there will be a contribution from [Unintelligible]. It’s kind of a smaller items. So, are you willing to quantify that or quantify some of these other things you’ve listed there as assets?

Joanna, you know, you could appreciate there’s a lot of flips and takes. We didn’t provide specifics about any of the items and their dollar amounts and impact just to know that there are things - and some will get more on than we would anticipate and on the others it may not be quite as much. So, we didn’t want to specifically talk about dollars related to each one of those items. On the acquisitions, I talked a little bit about that in here just a bit - these are ones that are kind of are normal course, if you will, between $1 and $3 million EBITDA for a total enterprise basis, and then we are going to have our ownership percentage of those, which typically is somewhere around 60, 70, 80%, and so, I think you can get some feel for what the amounts are, they are related to that, but we believe we’ll have some beyond what we have put in the guidance beyond the first half of the year that will close later in the year, and those can have impact.

All right, that’s helpful. I guess, on the guidance [Unintelligible] what do you [Unintelligible] for volume? So I’m, for sure, you highlighted that Q1 will have a tough comp, but I guess what was the same store I guess volume growth for 2023, the full year, and then how do you think about volume, you know, same storethat keeps growing for this full year ‘24?

Yes, I mean, we hope to have strong volume. Really, that’s going to be - that’s one of those factors that we have an amount to plan, and we - it’s a nice mid-single digit kind of growth number, 3-5% probably growth for our existing clinics, and we think that’s achievable in 2024.

Okay, thank you. And last one, I’ll follow up on the discussion around pricing and the commercial traction there. Can you talk about the Worker’s Comp? I guess, two things, [Unintelligible] getting there and also the mix that you include or increase in the Worker’s Comp mix, and I get that, that will be helping that, the average rate as well, right?

Yes, the mix has stayed pretty consistent. The good news is we’re growing - the other categories - you know, well too. So, Worker’s Comp is growing. It’s had really nice increases that so has commercial, so is Medicare. We’ve just had a lot of patient volume growth across the mix of categories.

Thank you so much. Just squeeze a very last one. Sorry about that and thank you for taking the question. The comments around margin, so these were on growth margin, when you talk about keeping it flat or even expanding. Any comments around the corporate level cost? You know, how you should think about the number going forward, I guess, it picked up a little bit in Q4, I guess [Unintelligible] $13.9 million corporate [office] growth. So, how should we think about that number going forward? Thank you.

I think we’ve consistently, we’ve been between 8.5% and 9% of total net revenue on net corporate cost number for several years, and I think that’s how to think about it, is as a percent in that revenue, because we do have to add some additional cost related to  clinics that we add as we go forward. So, I think, thinking of it, that 8.5-9% of net revenue, total revenue number [Audio Gap]. Joanna?

And we’ll take our next question from Jared Haase with William Blair. Your line is open.

Jared?

Thanks for taking the question. First and foremost, and maybe just picking with sort of the levers from a margin perspective, and maybe thinking over the next couple of years, I was curious to think about just how the trends from the hiring and staffing perspective I think in recent quarters, you talked about a little bit of the shift in the mix to PT assistants. So, I’m just kind of curious to kind of hear how you’re thinking about that mix and sort of the availability from the staffing and labor perspective. Any trends there to call out from an operating cost perspective?

Yes, I would just say this. The market continues to be tight, but I wouldn’t call it unforgiving for our recruiting team here combined with the partners locally. Our Ops folks, everybody is working together to do a good job to get new clinicians into the company. We’re not - we’ve always been a PT centered company. More licensed therapists, considerably more than PT assistants, who are so also licensed positions. Look, if we have a good opportunity with a great PT assistant, we’re not going to probably pass on it either. So, the relationships have been reasonably steady between PT and PTA the last year. If we can improve those a little bit. Really, where we’re just have to be sensitive to how we  schedule more than anything, with respect to Federal patients. But markets, it’s competitive market but we’re doing okay. Eric, anything you want to add to that.

No, I think you summed it up very well. We continue to invest in additional resources as the company grows to help us in our recruiting perspective. Our clinical turnover number this year was the lowest number we’ve had in five years, and it was 1.5 percentage points better than 2022 which also helped us from a business perspective. So, we continue to get better from retention perspective, and we continue to get better in terms of our ability to source licensed staff across the organization.

Helpful. Then, you’re kind of sticking with theme of levers for margin expansion. Another area I was hoping to hear an update on was - in fact, you kind of talked about rolling out group purchasing across the platform. So, I was just hoping to hear a little bit more color in terms of you just helped penetrated that across your footprint of clinics, and then to what extent you see any kind of incremental leverage or opportunities from continuing to consolidate purchasing.

Yes. I mean, you have two unfortunately diverging factors. You have the rollout of group purchasing which we’ve done and is pretty complete. Then you have, overlayed on that, just general inflation. So, I think it was the right thing to do. I think it was smart to do. We didn’t get it done Day 1 last year so it rolled out across the year. So, we’ll see that carry forward. You saw some of that, probably a small, small part of that show up on our total cost per visit last year. But look, inflation has been a little challenging too. So, I’m sure that what we’ve got, we game some of that back in inflation. So, that’s not a big lever. Our big focus is driving additional volume to our facilities, which give us a little overhead coverage and help us be a little bit more efficient, and that’s really what it comes down to more than anything else.

Yes. And Jared, just to add on that, I will say that you do gain operating leverage as you increase your volumes at your existing clinics because the fixed cost remain relatively the same, right? So, the incremental margin on those extra visits is higher than your overall margin. So that should help us as we go forward. If we can keep those costs in line or maybe even a little bit better on a per visit basis as we go forward, which I think we can do.

So, again, very helpful color. Maybe we’ve kind of talked around - some of the questions take us to the outlook in 2024. I guess maybe just to put a fine print on. When we think about kind of the low to high end of the range for adjusted EBITDA for 2024, is the biggest swing factor, in your opinion, just sort of tightening related to - when you complete - do you have [any idea] that are assumed in that outlook? Is there potentially some variance in your assumptions around the rate trends for the year? I would just love to unpack a little bit about that in terms of just what kind of drives that variance from the low to the high end.

Let me give Carey a break. I’m going to take that. Guys, when you run a company, there are things every day that happen and you try to control as many things as you can. You try to have a great crystal ball. When you’re running close to 700 facilities and you’re delivering care, I mean, it’s not all 1+1=2 every day. So, we have a series of things that we’re very familiar with that we have to do well. We have to drive additional volume, volume that we’re projecting for July, August, and September of the year ahead. We have to get contracts updated and renewed, and carry those contracts forward, and bring in relatively the same mix or a slightly better mix of patients than we’ve had. None of that is certain. All of that requires an inordinate amount of work on everybody’s part, clinically, locally and operationally. Then we have the timing of acquisitions which as you point out has some effect. You roll that altogether and we’ve given you the guidance that we’ve given you. We think we can do better than the bottom and we think we’ll be somewhat in that range and we’ll update as the year goes on according to how things are going if we feel like we need to guide the market in a particular direction. That’s really all I can tell you right now. We’re early in the year. We’re off to a reasonably good start albeit a little weather in January but I think we can overcome that. We plan to overcome it as the year goes on. I wish I can tell you more about it but it doesn’t really work that way when you’re in real life.

Once again if you would like to ask a question, please press *1. We’ll take our next question from Mike Petusky with Barrington Research. Your line is open.

Hey, Mike. Morning. Hi.

Good morning. Can I actually get the - I don’t think you guys mention it, the actual payer mix for the quarter.

Carey, I’m sorry. At least on my end, you broke on worker’s comp. How much was workers comp?

Okay.

Okay. I guess maybe for Chris or somebody else in the room. On worker’s comp, I know you guys have expressed maybe over the last two to four quarters some optimism around possibly changing the trajectory there and getting that back up into the low double digit range. Is that optimism still there or that just a tough needle to move because at one time you did have that probably 12, 14% of overall revenue.

Yes, it’s not dead yet, Mike, but it’s a tough lift and when you’re growing and we’ve been able to grow the whole business, it’s tough to outgrow just one category but we’ve done a lot of training. We’ve signed a lot of new contracts that should drive additional volume. Our partners are focused on it. Eric, do you want to weigh in?

Yes, there were a lot of new agreements that we signed and a lot of those took place at the tail end, late Q3 and Q4 so we actually did see a pickup in Q4 last year. In Q4, work comp was 9.2% of our mix so off a point from we were. I think the work and the things that we actually queued late in ’23 are going to pay dividends to us in 2024 and there’s a handful of additional agreements that are in process that will also get executed as we go through first quarter and the second quarter that will pay dividends for us we believe in the back part of the year. This is an area we continue to really focus hard on, not just from a volume perspective but from a rate perspective as well and do we get a nice pickup in rate year-over-year for our work comp business. Opportunity there but as Chris pointed out, when the whole business is growing, it’s really hard to outkick those other categories on a significant basis but we are making progress here and we expect better things in 2024.

Okay, all right, great. Can I just a quick question I guess on the lack of action of Washington and just the CMS cut this year. I know Chris that you’re very connected and a leader in the industry. Is there an argument to go back to CMS if you look at 25 and essentially say, “Look, we really sort of taken it for the last few years here,” and essentially make the argument that there was no relief in ’24, and that the streak should end at this point. I mean, has there been any talk I guess in - within the industry that there’s got to be an end to this?

Yes, there’s a lot of talk in the industry, I would tell you. CMS is a frustrating play. We seem to have a lot more empathy in Congress. We’re actually going to be in D.C., Nick and I. Nick, who serves as the executive director for APTQI, who also works with us, and a lot of our member companies’ CEOs will be in Washington in another month or so. And we’ll meet with MedPAC to talk about some of their scoring and their lack of ability to score true savers in the system. Like for instance, fall prevention is a saver. We know that if you can prevent a fall, we know measurably what the downstream savings look like and their spectacular level of savings. Based on the rules - again, we’re talking about the federal government now and everything’s got a million rules associated with - based on the rules, MedPAC isn’t able to score a saver as a saver. They have to score it as a cost or - it’s like it’s a new add even though it is  the prevention of a massive downstream expense. It doesn’t make sense. So, there’s a lot of coordination that needs to occur between the lawmaking side and the rulemaking side of government and CMS.

[Audio Gap] an ability to…

Absolutely predict what happened, I would say, is not great but we’re [Audio Gap]. Did I lose you?

Oh, no. No, I think I lost you. But thank you, that’s great. And just one quick one. On the M&A that’s included in the guidelines, that’s all - I’m assuming that’s all PT and no injury prevention? Is that correct?

Don’t make that assumption.

Okay, fair enough. Alright, thank you so much and nice finish to the year. Thanks.

Now, we’ll save it for everybody’s benefit. I mean, statistically speaking, while we’ve been active in injury prevention and expect to continue to be active, the majority of the deals that we get done are in the PT space, but you can expect us to be active in both.

Thanks.

Thanks, Mike.

Sure.

And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

We really truly appreciate your time and attention this morning. Carey and I are available later to answer questions, either today or later this week or next week. We appreciate your interest, and we hope you have a great day. Bye now.

Thanks, everyone.