U.S. Physical Therapy, Inc. (NYSE:USPH) Q3 2023 Earnings Call Transcript
U.S. Physical Therapy, Inc. (NYSE:USPH) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Good day. Welcome to the US Physical Therapy Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions]. I'd like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.
Christopher Reading: Thank you. Good morning, and welcome, everyone, to our US Physical Therapy third quarter 2023 earnings call. With me on the call this morning, include Carey Hendrickson, our CFO; Eric Williams and Graham Reeve, our Chief Operating Officers; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President Accounting and Finance. Before we being our discussion around our third quarter and year-to-date performance, we need to cover a brief disclosure. Jake, if you would please.
Jake Martinez: 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.
Christopher Reading: Thanks, Jake. So my commentary this morning is going to be at a high level, and following that Carey will cover the majority of our very detailed release more completely. Let me start with where volume is. Overall, we've been [ph] number of really good things, which our team of clinicians, partners and support staff were able to deliver this quarter. And there are a few challenges which we're continuing to work on as well. First, and importantly, volumes have been very strong this year and remain so throughout the third quarter, including during our normally seasonally slower summer months. Visits per clinic per day came in at 29.7, which is an all time high for us for any third quarter in our company's history.
It serves as the best indication related to both the overall demand for our services and the way we're viewed by patients and referral sources alike, in a market where there is an abundance of choice. Truly our partners and our staff locally are providing care which is not just excellent, but which our patients and referral sources around the country are seeking out. My sincere thanks to all of you who are listening. That care you provide is not only changing lives for the better, but it is being recognized for driving the highest level of volume ever delivered by us at this time of the year. For the quarter that throughput, coupled with the strong development work, we've continued to produce, helped drive volumes year-over-year by 10.8%. Part of those volumes have come through de novo and tuck-in acquisitions with 31 additional clinics so far through October, which as you know, depresses our volume per clinic average some, drags a little bit on results early on.
We've added nine de novo clinics in the quarter, and five of those are added in September. Keeping that strong de novo growth in mind is a bit of a near term drag through the nine months. Our PP operating income, in spite of this strong de novo openings, it's grown 10.9% for the year. So looking back to the quarter revenue grew 9% which was impacted by the Medicare rate reductions we have absorbed this year, coupled with a slightly higher percentage of PTAs on-boarded over the past 18 months or so, due to the nationally tight staffing market. So let me explain. If you call having PTAs touch a Medicare patient in the course of care results in a 15% reimbursement reduction. And while we have we are focusing on that, and in the middle, particularly in Q3, rolled out some new retraining because we have a slightly higher proportionality of PTAs compared to where we've historically run that's increased the Medicare rate reduction ever so slightly.
So our challenge at present is to offset the hole in the bucket that Medicare has created with additional better paying business and at higher negotiated rates. This is an area where we expect to see continued improvement as we work and achieve additional successes in our contract negotiations. And in some longer term initiatives around further diversifying away from Medicare. Additionally, we've added to our leadership on a revenue cycle area. We are optimistic, we will identify some opportunities to further enhance our already strong collections effort to further bolster our net rate and time. We have renegotiated a very significant number of contracts in a very positive way. As we explained last night, to a couple of different analysts who follow the company, from the time of negotiation until the time that those contracts, there's new rates getting implemented.
Oftentimes, there's a several month delay, but we are making progress, I think good progress. I'm happy with the percent rate increases. Just need to see them pick up and gain traction as they are implemented. On the injury prevention side of our service offering, we let the market know at the beginning of this year that we expected growth to be a little bit more muted, with pauses and some limited drops from a few of our customers who are expecting their business to be negatively impacted by the heavy inflationary environment coupled with the fear of a coming recession. The good news is that our geriatrics [ph] team has been able to replace their lost business with new business that will again provide us with growth when moving forward into the 2024 year, while our progressive partnership has added a great deal of new business as well, while suffering a loss of one plant in the auto industry, which as you know that industries has been hit particularly hard this year on a variety of fronts.
From my perspective, the majority of the counts, well, we've done exemplary, exemplary work over the years, but maybe who have paused or dropped some service component temporarily. I expect many of those will come back once our economy is in more stable growth mode. Furthermore, we recently just added to our injury prevention core with a recently announced acquisition and includes both traditional injury prevention business, as well as a new service offering delivered via a well developed recently introduced software program and ergonomics, which fills the service gap that existed previously with our offering. We're excited about the team and we look very forward to helping them meet the needs of this growing and important market. Finally, our injury prevention teams have done a very nice job overall adjusting and responding to the tighter than usual labor market, which has allowed our quarter-over-quarter margin percentage to improve 80 basis points, from 21.9% in Q3 last year, to 22.7%, this most recent quarter.
Last week, myself and a few of our executive and development team members attended the annual private practice section meeting, which this year was held in Austin, Texas. This is for us the most important meeting every year. On the development side of things these past 12 months, and when I say 12 months, I'm looking from November really current period to a year ago, been a very active period for us. We've purchased an additional 54 clinics over that period. In that same period, we're on pace, where we've currently open 72 clinics, added 72 clinics overall. While many of our competitors are hamstrung a bit right now with extremely high debt levels, which can impact a lot of factors, including their ability to sometimes even close on deals, we've got a clean balance sheet and we are working hard to put money we raised at the end of our quarter two secondary offering for.
This past week was the busiest we've ever been at the private practice conference. We scheduled double the number of individual meetings and held two large offsite gatherings, which we believe will continue to help us to drive and differentiate our partner-centric model, a model which distributes cash to these newly acquired partners throughout the entirety of the partnership month in and month out with no on top debt burden from the acquisition itself. That and the back end, flexibility and guarantee regarding purchase methodology gives us another meaningful difference with our competitors which should further aid us as we work to significantly grow our partner centric company. One final bit of commentary that now Carey and I want to speak to really directed toward our analysts and our shareholders, we've been fielding a lot of questions related to the impact of Ozempic like drugs on our physical therapy business.
Taking a step further, there been a number of articles in The Wall Street Journal and other notable publications, relative to the massive, in some cases negative impact on multiple areas of the healthcare system through the expanded use of these drugs, which as you know how people lose weight among other uses. So let me hopefully help create some perspective here. First, I truly believe physical therapy is going to continue to grow with or without these drugs. It's estimated that currently only about 10% of people with musculoskeletal issues ultimately end up in a physical therapy office. That number is growing and changing. That number will grow and change in time, because there are numerous studies that indicate that physical therapy done early for other much more costly and invasive treatments, or worse, with only palliative narcotic-only pain treatment, not only does it save the patient, as well as the payer system, significant dollars, but results in better overall health, and less downstream cost of medical care for that person for an extended period of time.
Presumably, because they get moving again, to get their health back related to the things that they enjoy doing, either work, or at home, with family, socially with friends, resulting in a healthier, happier person. That message will be hammered and marketed to groups like our Alliance for Physical Therapy, Quality and Innovation, which we refer to as a APTQI. And I believe with grassroots marketing, we'll continue to expand the physical therapy first initiatives that we have across our space. Secondly, and importantly, the vast majority of our business comes about the injuries caused by activity, not simply because somebody is obese. Unfortunately, the disease of obesity in people ultimately results in them not being able to do a lot of the things that they otherwise might enjoy.
But for the limitations created by their weight. While obesity can result in hip and knee arthritis over time, and some of these ended up as strong replacements, the bigger majority of joint replacements come as a result of activity created injury, often to the meniscus, or the fiber cartilage in the joint, which eliminates the padding and then creates osteoarthritis over time. These injuries occur in sports and daily activities, just like squatting and twisting, gardening, running various types of sports, which are done by people a bit more fit. We, as a general rule, don't see hip replacements very often in our clinics. And really only talking about knee replacements as potential impact, I think the market is ignoring all the other possible activity based injuries, while often not severe come as a result of enjoying life in a physical way, hiking, gardening, running, and of course, our beloved pickle ball.
So many other things that people can participate in and enjoy if they're not obese. So I believe that potential exists. These drugs are successful, long term don't create unintended health issues, but it'd be more patients as a result, not less. So that concludes my prepared comments this morning. Carey, go ahead and walk us through the financials in greater detail, and then we'll open it up for questions.
Carey Hendrickson: Great, thank you, Chris. And good morning, everyone. In the third quarter, we had continued strength in patient volumes, strong growth in revenue, growth and our physical therapy and total operating income and year-over-year growth in both adjusted EBITDA and operating results per share. In addition, we added 19 clinics during the third quarter through acquisitions and de novos, with just three closures. We've now added 72 new clinics since the third quarter of last year through acquisitions and de novos, which is 14 closures which is a net addition of 58 clinics over the past year. We reported adjusted EBITDA for the third quarter of $18.6 million, which was an increase of $1.6 million over $17 million reported in the third quarter of 2022.
Our operating results was $0.62 per share in the third quarter of 2023, which was a $0.04 increase over the $0.58 we reported in the third quarter of last year. Our total company revenues increased 7.5% in the third quarter growing from $139.6 million in the third quarter of '22 to $150 million in the third quarter of 2023. And our total company gross profit increased $1.1 million from $26.8 million in the third quarter '22 to $27.9 million in the third quarter of '23. As Chris noted in his remarks, our average visits per clinic per day in the third quarter were 29.7, which is the highest volume in the company's history for the third quarter, and it's a 3.1% increase of our average visits per day of 28.8 in the third quarter of last year. July was at 29.9 visits per day, August was a little lower as expected based on normal seasonality at 29.6. And then September came back up to 29.9. All three of those months were higher than the same month in the previous year.
Our net rate was $102.37 in the third quarter of '23, which was lower than last year's $104.01 per visit, but it was sequentially an increase in the second quarter of 2023, which had a net rate of $102.03. The decline of net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about one-third of our care mix as Chris noted in his remarks. All other payer categories, including commercial and workers comp increased over the prior year. As we've talked about, on the last couple of earning calls, we've either renegotiated or terminated this subset of our Medicare Advantage contracts that reimburse us at a rate that's less than what it costs us to serve our patients. And we'll continue to focus on renegotiations of commercial workers comp and Medicare Advantage contracts, and are making other methods necessary adjustments to address our net rates as well.
Our physical therapy revenues were $128.1 million in the third quarter of '23, which was an increase of $10.7 million or 9.1%, from the third quarter of 2022 due to the addition of 58 net new clinics since last year, and our record high third quarter average rate of visits per clinic per day, partially offset by the decrease in net rate. Our physical therapy operating costs were $105 million, which was an increase of 9.9% over last year. That's also due to the addition of 58 net new clinics since the third quarter of last year. On a per visit basis, our total operating costs were $84.49 in the third quarter, which is a decrease of just less than 1% compared to $85.14 per visit in the third quarter of the prior year. Our salaries and related cost provision also decreased about 1% in third quarter 2023 versus the prior year from $60.99 in the third quarter of '22, down to $60.35 in the third quarter of '23.
This is the fourth quarter in a row that we've reported year-over-year decreases in both total physical therapy operating costs for visits and salaries related cost per visit. The increase in total operating cost per visit on a sequential basis for the second quarter from $80.61 to $84.49 is a normal seasonal occurrence. Salary on a per visit basis are higher in the third quarter than the second quarter due to covering the vacations of our employees during the summer months. And then other significant costs like rent and depreciation that don't vary by the number of visits, are spread over a lesser number of visits. Physical therapy margin was 18% in the third quarter of '23 as compared to 18.7% in the third quarter of 2022, with the change due to the decrease in our net rate versus the prior year.
Even with the decline in our net rate versus last year, our PT gross profit increased 5.4% over the third quarter the prior year. And it is increased 10.9% over the first nine months of this year versus the prior year. Our IIP revenues and expenses were both approximately $700,000 less than last year. So we ended up with $4.4 million of IIP income in both years. Our IIP margin increased from 21.9% in the third quarter of last year to 22.7% in the third quarter of this year. Our balance sheet remains in an excellent position. We have $147 million of debt in our -- excuse me $145 million of debt on our term loan with a five year swap agreement in place. The places the rate on our debt at 4.65%. And we expect it to remain at that 4.65% going forward.
As you know this a very favorable rate in today's market and below the current Fed funds rate. In the third quarter of 2023 alone, the swap agreement saved us $100,000 in interest expense with cumulative savings of $2.3 million over the first nine months of 2023. Our interest expense was $2.1 million in the third quarter of 2023. In addition to the term loan, we also have $175 million revolving credit facility that has nothing drawn on it during the third quarter. And we have approximately $120 million or so of excess cash over and above what we need for working capital ready for deployment into growth initiatives. In the release we noted that we expect our full year 2023 adjusted EBITDA to be within our originally stated guidance of $75 million to $80 million, most likely in the low to mid area of such range.
We expect to have continued strong volumes in the fourth quarter as we've had all year. Where we fall within the range, it's going to depend ultimately on the strength of our volumes in the fourth quarter, and how much sequential growth rate we're able to achieve. And our net rate from the third quarter to the fourth quarter. Our operations team has produced solid results in the first nine months of 2023. And we'll all work to continue to produce the best results possible for all of our stakeholders as we finish out this year. And with that, I'll turn the call back to Chris.
Christopher Reading: Carey, thank you. Great job. Operator, let's go ahead and open it up for questions.
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