Good day, everyone, and welcome to the U.S. Physical Therapy Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Thanks, Ashley. Good morning, and welcome, everyone, to our third quarter 2022 U.S. Physical Therapy earnings call. Today I'm calling in from Denver, where we have the largest aggregation of private practices for the annual physical therapy private practice meeting. It's a great place for us to seek friends and colleagues and work on deal-related opportunities for the future. Additionally, this year in conjunction with this PPS meeting, we held our annual APTQI Board meeting, where we continue to work on behalf of our profession in areas such as fair reimbursement for the amazing life altering results we produce for our patients. We continue to push the reduction -- for the reduction of administrative burden. We're working to ensure that we have an adequate supply of therapists to serve the growing needs of our aging population, replacing unnecessary and excessive pharmaceutical and other more expensive interventions with proven functionally restoring care. We focus on other legislative and long-term efforts. I'm proud of the work that we're doing within APTQI and our member company's ongoing support of those efforts, which to date have helped mitigate some of the significant harmful cuts proposed by CMS these past few years. Joining me on the call this morning include Carey Hendrickson, our CFO. I'm really happy Carey's part of our team. He arrived here 2 years ago as we worked our way through year 1 of the pandemic. He's doing a great job. Eric Williams, Graham Reeve, our co-COOs, are also here with me. They've been working extremely hard, along with our regional presidents in conjunction with our partners and our local staff who work every day to provide outstanding care, while we work to make ongoing adjustments during what has been a rather continuously evolving environment in this year to include a rather sharp and significant inflation across all cost areas, coupled with some employee scarcity, which I think we're beginning to deal with more effectively at this point. Finally, Rick Binstein, who, in addition to being our Executive Vice President and General Counsel, is my right arm in so many important areas and ways, including, especially in our acquisition-related work, where we've tried hard recently to make sure Rick stays as busy as possible. Rick is also unfortunately a Phillies fans, so that's the only real strike against him at this point. Before I continue further, I'll ask our Senior Vice President of Finance and Accounting, Jake Martinez, to please cover a brief disclosure. Jake, if you would.

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.

Okay. Thanks, Jake. I'm going to start this morning with some color on highlights on our third quarter performance, and then Carey can fill in any gaps as he thoroughly reviews our financial results. This year, we have seen the resumption of our long-standing seasonal pattern, which seems to really be absent in 2021. With the advent of summer and school letting out, we normally slowed just a little bit and then later we pick up. And that return as per our normal seasonal pattern this year. June, July with vacations and travel slowed modestly with July coming in at 28.4% visits per clinic per day, and then started to pick up with the kickoff of fall football and the start of school. Ultimately, we finished the quarter averaging 28.8% visits per clinic per day in spite of a very active de novo and development year, which can sometimes mute those volumes somewhat. And considering we were impacted about 3,500 visits at last week of September, and into early October -- into the early October quarter by Hurricane Ian, which devastated parts of Florida and did considerable damage across several Southern states along the Southeast Coast. Overall, patient visits increased 2.8% from the prior year quarter. One of the bright spots showing up this quarter from the very good work our payer contracting team has initiated around negotiating some of our payer contracts, which has been a stated focus of ours all year, those efforts are beginning to bear fruit. Our net rate for physical therapy came in at just over $104, which was $1.08 improvement from our Q3 2021 performance and $0.83 sequential improvement from Q2 this year. I will point out, we're still in very early innings here. We've got a lot more work to do and a…

Thank you, Chris, and good morning, everyone. As you saw in the release, we reported adjusted EBITDA for the third quarter of $17 million and operating results per share of $0.58. Like all companies, we're dealing with inflationary cost pressures and labor pressures. We expect those factors to continue to impact us in the near term, but our volumes remain strong by historic standards, and our team is focused, as always, on finding ways to become even more efficient so we can produce the best possible results for all of our stakeholders. Looking at our volumes. Our physical therapy patient volumes per day per clinic, as Chris noted, were 28.8% in the third quarter. That's the second highest per day volumes in the third quarter in the company's history. By month, our average visits per clinic per day for all clinics were 28.4 in July, 29.0 in August and 28.9 in September. Chris noted, we had some impact from Hurricane Ian. We lost about 3,500 visits at the end of September for that. That we would have been at about 29.0 in September as well were not for those lost visits. We expect October volumes to be similar to August and September, which is a good place to be given some of the lingering impact of Hurricane Ian in Florida, Georgia and South Carolina in the first couple of weeks of October. Our net rate for our physical therapy operations was $104.1 for the third quarter of 2022. That compares to $102.93 that we reported for the third quarter of '21. Our rate has increased each quarter this year, moving from $103 in the first quarter to $103.18 in the second quarter and then to $104.01 in the third quarter. This is despite the pressures on Medicare rates, some reductions…

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

[Operator Instructions]. And we'll take our first question from Brian Tanquilut with Jefferies.

I guess my first question, good rate growth performance this quarter. Chris, is this early signs of progress in terms of trying to negotiate better rates with payers? And how should we be thinking about the remaining opportunity to drive rate growth going forward?

Yes, it's a good question. Yes, I do think it's early progress. The team's worked really hard. Our injury prevention team is having success there, too, although that doesn't show up in our net rate that you just referenced. We've got a lot more work to do, though. We have some contracts that just kicked in, in October that aren't in those numbers. But I would encourage you guys not to get too far ahead of this. This is not going to be a linear process that's easy necessarily to predict quarter-to-quarter. So hang with us. We're continuing to work on it. And as I said, we're early innings on this. So more to do, more to come.

Appreciate it. And then, Chris, obviously, good acquisition announced the other day, good size. It looks like it's a good business. But as we think about the environment right now for deals with rates where they are, private equity, in theory, kind of like a little bit maybe slowing down. What are your conversations like now with some of the targets that -- I know you cultivated a lot of these relationships over the years. So just curious what those discussions are today? And how should we be thinking about your opportunity set going forward?

Yes. The conversations haven't changed much. In fact, we're at the annual private practice meeting. I think the environment, as you referenced, certainly has changed. I think the multiples will change, quite frankly, they need to, and I think they will. And so we'll see what that does over the long run. I mean these are moment-to-moment conversations where you pick up the phone and say, okay, the world is different. But people -- the conversations I've been having, people understand the marketplace is changing. There are deals that have been right at the closing point, not our deals, but others that have stopped stalled or have been taken off the table, presumably because of leverage or bank issues and other things. And so that's going to begin to seep in to this process. And whether that slow deal flow or just adjust expectations, we'll have to wait and see. We continue to be active, and we continue to know that we'll be able to get things done, and we expect to make some adjustments accordingly.

And then, Chris, last question for me. As I think about the broader health care space, right, I mean there's a lot of discussion about tightness in clinician labor. But I know you guys have done better in that front. But obviously, the center of your business is still the therapist in the centers and the PTAs. How are you thinking about turnover? And what are you seeing in terms of your ability to recruit clinicians in this supposedly tight labor market?

Yes. I think our -- it's feeling to me, like the recruiting side, we've made some adjustments. We've invested in some new tools. We've been able to, through the summer with the graduating classes to pick up a number of key people, moving some people from competitors in some cases. It's not easy, but it feels better than it did maybe 5 or 6 months ago. I think it's feeling better for us as well on the injury prevention side. Again, I wouldn't consider it normal. At our APTQI meeting yesterday, one of our members presented an analysis -- and I don't have it in front of me at the moment. Actually, I may be able to hold up on my phone. But it indicated that there were 21,000 physical therapists that fell out of the workplace in -- actually, 22,000 that fell out of the workforce in 2021, 300,000 total health care providers out of the workforce, 22,000 PTs. To give you some perspective, the average graduating class that aggregates all of the PT clinics in the country produced 11,000 graduates per year approximately. So it's 2 years' worth of new workforce that evaporated at some point last year. As you remember, last year was a blow and go year for us. We had record earnings last year and record volumes. So we're making adjustments. Those adjustments take some time. It's beginning to feel a little bit better. And I think, for us, the important thing is that the clinicians, our partners understand the importance of their work that connected to the difference they make. They're given the support that they need, which we're working hard to do, and we'll work our way through it from that.

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

This is actually Madeline Mollman on for Matt Larew. I know you mentioned last quarter that you were engaging in some cost control efforts, including switching suppliers. And I was wondering if you could sort of quantify the impact that you've seen from that this quarter and what you see going forward into 2023? And then, also I know that contract labor was a big headwind last quarter, and it was an impact on the take down of your guidance. I was wondering if you could talk about whether you think the contract labor costs are going to be more transitory or if you see those continuing into 2023?

Well, we definitely see contract labor continuing. We're never without contract labor. I think this environment would be crazy to think that we're going to be without it. I would tell you that the guidance change was not particularly impacted by the amount of contract labor, certainly slightly, but that was a minor part of our guidance adjust much more significant on the cost of capital side and on the general inflationary side. So we continue to work. Look, the works -- we're working our way through this. We're rolling out, as you mentioned, some vendor changes through a GPO rollout that's in its early stages. We continue to make careful adjustments with respect to our staffing. We're rolling out some improvements in our onboarding for our patients at our front desk areas that will hopefully, as we get in further into 2023 will allow us to make some further adjustments in our front office staff. But this is going to be kind of a slow study process. This isn't a one-and-done kind of opportunity. It's going to take us a little bit more time.

And then just as you think about acquisitions, I know you mentioned that you drew down on your debt to fund the most recent acquisition this week. Is there a leverage ratio that you want to stay below? Are you focusing more on acquisitions you can pay for in cash in order to not draw down on the debt? Just wondering how you're thinking about that.

Yes. Well, I mean certainly, we have covenants and us understanding with our bank, those ratios right now, we get credit from prospective EBITDA that gets annualized in these deals. But our leverage ratio, including that prospective credit would be at 3x, and we'll stay under that.

Just to be clear, that's the covenant. Just making sure that's clear. We're currently at about like 6x or around that. So go ahead, I'm sorry, Chris, go ahead.

Yes. No, that's fine. I mean the point is we're well within those ranges that keep us comfortable. Will we use cash? Look, we always have cash available, $20 million and $25 million to fund the ongoing needs of our business will actually pay down that credit facility, that $5 million that we borrowed as we're able and then re-borrow as we need to. And so, that will be a rather fluid process that occurs each and every week, in fact, depending upon cash availability and outflow.

[Operator Instructions]. Then we'll go next to Mike Petusky with Barrington Research.

So I guess I wanted to ask just on the -- and I understand it thoroughly, but on the GPO rollout, I mean, what kind of buy-in or pushback are you getting from your therapist partners? I mean are they sort of getting onboard? Or was this somewhere in between?

Yes. This is Graham. So far, it's been well received. I mean we're working through partner by partner. But so far, we've had a good adoption on it, and we're working to move it out for more people.

Yes, Mike, I think like anything else, will it be 100% uniform? And will the sensitivities around it be 100% one way or the other? No. But I think our partners understand where they are and where we are and where the world is right now. And buying the same stuff and paying more for it just doesn't make a lot of sense. And we have a new opportunity, and it will be changed, but we're working our way through it.

And Chris, I guess, given that you're in a meeting, I'm extra curious what the current view is in the industry, yourself as far as reimbursement sort of a more rational reimbursement approach, including specifically for 2023, any thoughts?

Yes. So we had our APTQI meeting. Again, that's the vehicle that we use to do a lobbying our congressional work, all of the important work that we're doing to elevate. Physical therapy, there are a few good studies out right now that indicate that not only this physical therapy been downward and light in their health care span. And so the congressional champions that we're speaking to, they understand that. Many of them have had physical therapy themselves. We're now collectively of the age where people have things that are beginning to happen. All of us do, our kids do our parents, certainly, and they recognize it. So CMS is not the rational arbiter now at this point of where rates should be. And we hope and expect that we'll get some relief here at the end of the year with group and with some congressional action that isn't certain at this point. It won't be certain until it happens, but we're making progress, and we expect to be there. Longer term, look, I think we're going to begin to see a shift in commercial payers. And this is just my view. This is not based on anything else. But I think payers are beginning to see that they can't eliminate physical therapy and they can't cut their way to improving the total cost dynamic because if people don't have access to PT, which is what's going to happen. I mean, we're in the process right now, quite honestly, looking at contracts that no longer make sense to us to take at a certain reimbursement rate. We've actually begun to drop some of those contracts. And so with anything, I think as there's consolidation in our PT world, we have larger companies with more resources, better ability to negotiate. Some of this low-hanging fruit for these payers are making immense on Medicare Advantage and booking record earnings. It's going to have to flow to providers, and we're certainly going to fight for our fair share. I'm tired of taking low rates, frankly.

This one is more of a housekeeping, but does anybody there have the payer mix for the quarter?

Sure.

Jake?

Yes, I got it. So for commercial insurance, it was 45.7%. Medicare was 34.4%. Medicaid was 4.1%. Workers' comp was 9.5%, and then everything else together was 6.3%.

Okay. And just a quick follow-up related to that. Honestly, over time, Medicare, Medicaid has sort of moved up a bit as a percentage, workers' comp looks like it's moved down over time. I mean, is there any way for you guys to sort of intentionally take steps that can sort of shift towards the $130, $140 reimbursement versus whatever it is, $95 or whatever that might be government paying?

Right. Yes. A few months ago, I think effective beginning July, we brought back the key exec who had actually been the driving force and the author behind a lot of our comp-based activities a number of years ago, which helped us meaningfully grow our comp rate. Obviously, at the beginning of the pandemic, our comp and from my perspective, a lot of our competitors' comp business fell. And we've yet to get that back, as you pointed out. But we've added resources in this area, rolling out new programs. We've updated our training. We've updated our web presence and our marketing and our sales efforts. And we've yet to see meaningful change, but we're beginning to feel like we're moving back in the right direction. And we hope to make some progress there. We're obviously early, but we're focused on it.

Okay. Can I sneak one more, quick one. Just on the recent acquisition, the one from earlier this week. The press release was sort of vague. It's sort of seemed to say that the 14 facilities maybe were in a single state, but maybe that could get bigger. Can you just talk about what's the possibility, either geographically, if you're willing to talk about that, or from a facility standpoint, how much that particular practice could grow?

Yes. That practice is primarily in one state, although it does technically cover 2 states. Let me tell you, Mike, these guys are as capable as any group that we've ever worked with. They opened new clinics, which get the profitability in what I think is a record time. We have a number of new clinics slated to open with them. And we have some activities that are beyond the 2 states that they're in currently, again, primarily one, technically 2, that would take them in some other areas. And they have relationships that go beyond those 2 states. So I think this is a group that can grow very, very significantly over the next few years and then beyond that. So very excited about it. Happy to have them part of the team and the family and looking forward to helping them recognize their vision.

Are you willing to share the geography or no?

Not right now, and it sounds fun. But the reason is we have so much in development with them. They want to jump on the market before the word gets out so that people don't shore up their defenses. And so it's crazy as it seems. We're going to keep that quiet as long as we can. It's a good market, though.

[Operator Instructions]. And there appears to be no further questions at this time. I'll turn the call back over to the speakers for any closing remarks.

Okay. Ashley, thank you. Thanks, everyone. We appreciate your time this morning. I'm going to be tied up a little bit this afternoon with activities that are slated at this private practice conference. I think Carey is expected to be available. And certainly, I'll be available once I get back. So thank you for your time, and have a great day.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.