U.S. Physical Therapy, Inc.

Good day, everyone, and welcome to the U.S. Physical Therapy fourth quarter and year-end 2021 conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-answer session. You may register to ask a question at any time by pressing the star and the number one on your touch-tone phone. I will be standing by should you need any assistance. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Chris Redding, CEO.

Thank you. Good morning and thanks everyone for joining us for our U.S. Physical Therapy fourth quarter and year-end 2021 earnings call. Several of our team are on the road this morning working on new opportunities. They include Eric Williams, our Chief Operating Officer for the eastern half of the country, Rick Binstein, our Executive Vice President and General Counsel. On the line we have Kerry Hendrickson with me here in Houston, our Chief Financial Officer. Graham Reeve, our COO for the western half of the company, along with John Bates, our vice president and controller. Before I provide some color on the year and the quarter, I need to cover a brief disclosure statement. John, if you would, please.

Thanks, 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, and the company's actual results can vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.

Thank you, John. So I want to start this morning and cover some highlights on the year. For the year, operating income increased $18.2 million or 34.8% compared with 2020. Reported revenue increased 17% to $495 million. PT net revenue increased 17.4%. As you're aware, in 2021, we were hit with reduced Medicare pricing, which in turn impacted our net rate, which dropped slightly from 105.66 in 2020 to 103.88 in 2021. Our visits were very strong throughout most of the year, up 19.4%, despite the fact that Comparable numbers in the latter part of 2020 were also very strong. Volumes for most of the year beginning March and continuing through year's end were at record highs for us, exceeding 29 visits per clinic per day for those 10 straight months. Visits for mature clinics increased 17.8% for the year. Management contract revenue was up 17.2% on the year. and our injury prevention services revenue increased 12% on the year and 38.5% in the fourth quarter. Our total operating costs were impacted in 2021 by inflation along with some labor escalation. In spite of that, and in spite of the The net rate impact from Medicare, we finished with total operating costs as a percent of revenue at 76.3% versus 76.7% in both 2020 and 2019. Further, our total operating costs per visit decreased slightly in comparison. In 2021, we finished the year at 79.70 per visit, And in 2019, again pre-pandemically, we were at $81.38 per visit. The team has worked really hard all year to balance and control the cost equation, along with their growth in visits per clinic per day. I think they've done an excellent job. Total salaries and related costs held up well for the majority of the year, although we did experience some slight upward migration in the latter part of the year. Despite that, we finished 2021 with salary cost as a percent of revenue at 56.3% compared to a pre-pandemic level in 2019, 56.9%. Salary and related costs performed well this year, ending at 57.20 on a per visit basis. for 2021 compared to 57.26 in 2020. And as you know, 2020 included a period of significantly reduced salaries early on in the pandemic and continuing actually through a good chunk of the year. We also compared very favorably to where we were in 2019 at 59.24 per visit. That's a 350 basis point improvement from that pre-pandemic year. Our gross profit was $117.2 million in 2021, an increase of 19.1%, and our gross margin ended up 40 basis points better on the year at 23.7%. Our PT margins were up 70 basis points to 23.8%, while management contract margins were down slightly to just under 16%. Our injury prevention business which has been impacted by remote workers as well as COVID, finished at 24.4%, down slightly from 25.7% on what was a very tightly controlled expense year in 2020 with very little travel and no major conferences attended. Our performance included the addition of our newly acquired industrial injury prevention business late in the year. This business has a slightly lower margin profile compared with our legacy business, and the combined margins will be reflective of that difference going forward. Operating income for 2021 increased 18.2 million, or 34.8% from 2020. Operating income margin improved 190 basis points. to 14.3%, despite the many challenges we have faced throughout the past year, including COVID, staffing, inflation, and all the rest. In 2021, our company deployed significant acquisition-related capital across several deals in the PT space, two in the injury prevention area, including our largest to date, which we announced late in the fourth quarter of last year. Terry's going to review with you our total use of free cash flow, and I think you'll find it pretty impressive on the year, what we were able to get done while still keeping our debt to EBITDA ratio in very good shape. In response to the company's strong performance in 2021 and our continued confidence in our ability to grow, a board of directors has voted to increase the first quarter dividend from $0.38 per share The 41 cents per share, which is an increase of approximately 8% from the last dividend, but an increase of approximately 12.3% when compared to our average dividend paid in 2020. You may recall that midway through 2020 for the third and fourth quarters, I'm sorry, for 2021, for the third and fourth quarters, we increased our dividend. As I stated in our press release, I'm immensely appreciative of the fine work and results produced by our partner-led teams all year. All of them, along with our home office support group in Houston, have not only functioned well in these exceedingly difficult and rapidly changing times, but we have worked effectively under difficult circumstances to produce a record earnings year for the company. are services which keep people on the job and healthy, along with those who may have suffered a serious musculoskeletal injury. They help make people's lives better, more enjoyable, more productive, and ultimately, with the documented improvement in overall health and well-being, this allows people to stay in the workforce as well as to do productive and enjoyable things with and for their families at a time when our nation needs all of those things very much. Speaking of the labor market, I would like to address staffing for a minute. While I would characterize the current environment as challenging, but for finding staff and for the increased time that it takes to do that right now, our turnover rate for licensed clinicians is actually down slightly as compared to where we ran on a pre-pandemic basis in 2019. Let that kind of sit for a minute. So when you look at our turnover rate for our most important group, which is our clinical group, our licensed clinicians, it's actually down as a percentage compared to where we were in 2019. We thought 2019 as being a very normal operating and hiring environment. Now, On our front desk and our unlicensed support staff, our turnover rate is definitely higher, and we're working hard and making some continued adjustments to overcome that. But I will say that our partners along with our revamped recruiting group have worked their tails off all year to stay on top of this issue and to deliver good, strong candidates where we needed them as a result of some normal turnover, whereas the case has been through much of the year as a result of some very strong expansion and volume growth, which required the need for additional clinicians. So while the environment is definitely challenging, in some cases we are seeing an upward migration in terms of salaries. Overall, I think we've done a pretty good job in this area as evidenced by a strong result for the year, both in terms of cost and also our earnings growth. So that concludes my prepared comments. Terry, if you would, please cover some of the additional aspects of our financial performance as well as our guidance before we open it up for questions.

Thank you, Chris, and good morning, everyone. We're very pleased with the results our team achieved in 2021. We had significant growth in all of our team metrics, many of which Chris noted in his remarks. Our operating results, excluding relief funds, finished at $3.17 per share for the full year and at $0.72 per share for the fourth quarter, both of which were higher than the high end of our guidance that we provided and were higher than analysts' consensus estimates as well. Not included in these numbers is another $4.6 million in CARES relief funds that we received and recorded in the fourth quarter of 2021. Our $3.17 of operating results excluding relief funds are 32.6% higher than the $2.39 we reported on the same basis for 2020, and they're 12.4% higher than the $2.82 we reported for the pre-pandemic year of 2019. Our fourth quarter 2021 operating results excluding relief funds of $0.72 per share compares to $0.85 in the fourth quarter of 2020, which benefited from reduced expense levels due to the pandemic and a slight rate adjustment we had related to earlier 2020 periods. And it's 12.5% higher than the $0.64 we reported for the pre-pandemic fourth quarter of 2019. Our adjusted EBITDA excluding relief funds was $74.3 million for the full year of 2021, which was an increase of 31.5% from full year 2020 and an increase of 2.1% from pre-pandemic 2019. The same measurement was $17 million in the fourth quarter of 2021 compared to $18.3 million in the fourth quarter of 2020, and it was 10.9% higher than the $15.3 million of adjusted EBITDA that we reported for the fourth quarter of 2019. Our full-year 2021 revenues increased to $495.0 million, a 17% increase over full-year 2020, and our fourth quarter of 2021 revenues increased to $129.8 million, which was a 10.5% increase over the fourth quarter of 2020. Our physical therapy patient visits per clinic per day continued at a record pace in the fourth quarter, finishing at 29.8 for the fourth quarter of 2021. The only quarter higher in our company's history was the second quarter of 2021, when our average visits per day were 30.0. and for the full year, our average visits per clinic per day finished at 29.1. Prior to March of 2021, we'd never had a single month at 29 average visits per clinic per day. And this year, we finished for the full year above 29, a real testament to our operating team. Our net rate for our physical therapy operations was $103.88 for full year 2021 as compared to $105.66 for the full year of 2020 and our net rate was $103.53 in the fourth quarter of 2021 compared to $107.05 in the fourth quarter of 2020. Our 2021 full year and fourth quarter rates reflect the 3.5% Medicare rate cut that went into effect in January of 2021 as well as some shift in the mix of our business. High rate workers' comp visits have not yet returned to pre-pandemic levels, while Medicare visits, which are paid at the lesser rate than overall average rate, have increased above pre-pandemic levels, which puts some downward pressure on our overall rate in 2021. Also, that net rate in the fourth quarter of 2020 was high. It included the slide adjustment related to earlier 2020 periods that I mentioned earlier. Our physical therapy revenues were $441.3 million for the full year of 2021, which was a 17.6% increase over 2020, and they were $114.2 million for the fourth quarter of 2021, which was 8.6% higher than the fourth quarter of 2020. In the industrial engine prevention business, full year and fourth quarter 2021 revenues were all-time highs of $43.9 million and $13.4 million, respectively. That was a 12% increase over 2020 and a 38.5% increase over the fourth quarter of 2020, as Chris noted in his remarks. The fourth quarter of 2021 included the one month of operations related to the November 30 acquisition that we made of an industrial injury prevention services business. Our operating costs were well contained in 2021, as Chris noted in his remarks, and were well aligned with our growth in revenue. Our cost per visit did increase from the third quarter to the fourth quarter of 2021, with most of the increase in salaries as we continued to build our staff to the levels needed to support our record volumes. And also, we had some higher contract services costs in the fourth quarter due to having a higher number of employees out due to COVID. Our gross profit was $117.2 million for the full year of 2021, which was a 24.1% increase over full year 2020. Our gross profit for the fourth quarter of 2021 was $27.2 million compared to $29.1 million in the fourth quarter of 2020 and $27 million in the fourth quarter of 2019. Our gross profit margin was 23.7% for the full year of 2021, It was 22.3% in full year 20 and 23.3% in full year 2019. So it was higher than both of those four year margins. Our corporate offers costs were $46.5 million for the full year and 10.7 million for the fourth quarter. If you exclude the incremental equity compensation expense that we had in 2021 related to the retirement of our COO for the West Division, our corporate office costs were 9.1% of revenues for the full year of 2021, which is lower than the 9.6% of revenues for the full year of 2020 on the same basis and 9.3% of revenues for pre-pandemic 2019. Our net income that was attributable to our non-controlling interest was $17.1 million for the full year of 2021, which was 13.9% of our profits. This compares to 16% for the full year of 2020. The reduction in our non-controlling interest percentage is primarily due to our purchase of non-controlling interest from existing partners in 2021. In 2021, we purchased $31.1 million of non-controlling interest from our existing partners, representing EBITDA of approximately $4.1 million, with $14 million of those purchases occurring in the fourth quarter of 2021. The fourth quarter of 2021 non-controlling interest as a percent of our profits was 13.3%, which compares to 16.3% in the fourth quarter of 2020. Our balance sheet remains in an excellent position, and our cash generation remains strong. We ended the year with $114 million in a revolving credit facility, including approximately $62 million added to the line on November 30 for the acquisition of the Industrial Injury Prevention Services business and about $3.5 million for the acquisition of three clinics on December 31. Our net debt at December 31, 2021, was $94 million, which includes $114 million on our credit facility, $4.2 million in deferred payroll taxes under CARES, and $4.4 million in notes payable net of our $28.6 million in cash. So that's net debt December 2021 was $94 million. Our net debt at December 31, 2020 was $11 million. So in 2021, we funded acquisitions totaling approximately $87 million. We invested $8.2 million in fixed assets. We paid back $14.1 million in MAP funds. We paid back $4.1 million in deferred payroll taxes under CARES. We purchased non-controlling interest from our partners of $31 million, paid dividends of $18.8 million, and paid off $4.9 million in notes payable, all of which totaled $168.1 million, but our net debt position increased by only $83 million. Our low leverage and our strong cash generation provide us with tremendous flexibility and sufficient capacity for the right growth opportunities as we identify them. As we look to 2022, we're optimistic about our prospects for the year and our team's operating ability to successfully manage through the Medicare rate reductions for 2022. We managed very successfully through the 2021 rate reduction and we're confident we'll do so again. In our release, we provided a range of $3.25 to $3.35 in operating results per share for 2022. The range considers the following, all of which we had previously announced, a Medicare reduction for the full year of 2022 of approximately 0.75%, The phase-out of sequestration relief, which results in a 1% reduction in the rate applied to all Medicare payments for the second quarter of 2022 and a 2% reduction in the rate applied to all Medicare payments in the third and fourth quarters of 2022. It also includes a 15% decrease in rate for care provided to Medicare patients by a physical therapy assistant effective January 1, 2022. All together, these Medicare rate reductions are expected to reduce our 2022 revenue by approximately $4.2 million, which amounts to 21 cents per share. As a point of information, Medicare visits represent approximately one-third of our total patient visits. As usual, the range does not include any potential acquisitions we may make in 2022. The guidance range implies a 10% to 13% increase in our operating results per share before the Medicare rate reductions and a 2.5% to 5.5% increase in our operating results, including the Medicare rate reductions. With that, I'll turn it back to Chris.

Yeah, good job, Kerry. Thank you. Okay, Operator, let's go ahead. I'm sure we have questions, so let's go ahead and open up for questions.

At this time, if you would like to ask a question, please press star 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question, and we'll take our first question from Larry Solo with CJS Securities.

Good morning, Larry. Good morning, Larry. Good morning. Good morning, guys. Quickly on the guidance, I guess there's two questions on the guidance. Maybe just some high-level. Can you just give us a high-level sort of what you're sort of thinking about same-store sales volumes? And then in terms of margin, just directionally, you know, if you can give us any thoughts on that. And then part B of that question is sort of, I know you don't dive quarterly, but how should we think of cadence? I missed the first couple minutes of the call, but Q1, obviously, there's actually early in the quarter, you know, a big flurry of COVID, and we all know somebody, if not ourselves, who was out for five days, Thank you for joining us.

You know, between Omicron, COVID, and the weather, which we always have in the first quarter, yeah, first quarter is going to be the lighter quarter for the whole year, no doubt. I will tell you on a positive note, while we were hit heavily in January with COVID, and you're right, a lot of people, very effective, and We've seen shorter quarantines and shorter out periods as a result of updated CDC guidance, but a lot of folks out combined with weather. But the COVID thing has begun to dramatically improve over the last couple of weeks. So we've seen a big drop off there, drop off being an improvement. and now we just got to get through the rest of, we're getting some weather again this week, but we just got to get through the rest of the weather and then, you know, get to work. Larry, as far as the

Mature clinics and the growth expected in 2022, inside the guidance is built in about a 2% to 3% increase in volume for mature clinics. And then the net rate, you know, with all things considered, is going to be down about 1% or a little bit, you know, a little bit north of 1%. So, you know, That's the pieces of that for mature clinics. And then from a margin standpoint, I think, you know, you should probably expect something like what we had in the fourth quarter going forward in 2022. Okay.

And in terms of pricing, obviously, we know the government pricing. So it sounds like Medicare and Medicaid, you're assuming private pay, commercial pay is about flat, it seems like, right?

Yeah, well, yes. Yes, we've assumed that in the budget. On some very capable shoulders here, we've placed an enormous focus around contracting this year. And then aside from just straight contracting with commercial payers, it's something that I can't go into a great detail yet, but we're about to kick off a program that we think will help to fill in some of the Some of the dirt that we're, you know, we're losing as a result of the Medicare cut. And so that's, we're on the cusp of that as well. So we're working on it, and it'll be a focus all year for sure.

And I would think, you know, maybe not in the immediate term, but over the, you know, midterm, with this kind of inflation, right? I mean, your cost of care is, you've got some leverage. I mean, I'm sure the payers are going to always push back, but I would think you have Some leverage there against them on that, right?

Yeah, I don't know if it's a leverage, but it's certainly rational response would seem to be that, you know, payers are going to have to understand that everybody's cost is going up. And if rates don't go up, that's the problem.

Right. And then just last question on the turnover. So it sounds like it's not really a clinician issue for you guys. more back office admin staff and stuff like that, I guess, right?

Yeah, and I will say, even with that, I will tell you, and Kerry can maybe speak to it, a revenue cycle group has done a great job for the year. Just hats off to them. And they have, in some cases, you know, struggled to replace people quickly. But even with that, I got to tell you, our people really stepped up this year, and not just this year, but the last couple years in so many ways. And so, Kerry, I don't know if you have any thoughts.

Despite all the number of employees we had throughout the year, the team just worked incredibly hard to keep our billing and our collections well in line with where they've been in previous years, certainly with pre-pandemic 2019. And we were able to close a few of our central billing offices and move them into more profitable ones and that kind of thing. So we made some headway this year.

You did a great job. Great. I appreciate it, guys. Thanks so much.

Our next question comes from Steph with Zoop of Jefferies.

Hey, Steph. Hi.

Thank you for all of the information, everybody. I do have another follow-up question just on the cadence. I just want to make sure we're hearing you correctly in terms of how you expect sequentially the business to kind of build back. And as you think about the acquisitions that you've completed last year and plugging those into the productivity wheel, how we should be thinking about The organic nature of the contribution of growth from those kind of late-stage acquisitions in 21.

Yeah, well, the ones we did late in the year will certainly will have the benefit, you know, through the entirety of this year. So the cadence, we had one in June. We had one, I think, in March, end of March. We had a small injury prevention deal in September. The Big Injury Prevention Deal at the end of November, and then a small deal, a PT deal right at the end of the year. So all those will layer in accordingly, all for sure for the first quarter. My mention on cadence had more to do with you know just the environment coming out of the gate in January between weather and COVID January maybe the first week of February or so with COVID and weather and and so therefore I think we'll see some some you know some forward waiting you know and and not equal waiting through the quarters which is really our typical cadence more than anything but you'll see that again this year.

Q1 is always lower for us, kind of getting started out of the gates, and because of weather issues and the kinds of things we're having this year, just like we normally do. The second quarter, typically in March or April, is when volumes really begin to pick up, and that was the case last year for sure, and it continued from that point through the rest of the year. But the second quarter and the fourth quarter are typically our higher quarters. And then the third quarter, you know, has a little bit of a lull because of summer and people being off. And so that's typically the pattern. And I think that would hold into 2022 as well. And the acquisitions, the largest one, of course, is the one that we did in November, on November. And I would expect that to perhaps start off a little bit slower in the first part of the year and grow as the year goes along is what I would expect from that one. Yeah, I agree.

Okay, very helpful. And then just my follow-up is on the waves of COVID that we've seen. I'm hoping you can kind of compare and contrast Delta versus Omicron. It sounds a little bit like your Omicron impact was a bit more intense but over a shorter period of time. Is that a fair assessment, or how would you kind of help us think through what you're observing in your business in terms of recovery post-waves?

Yeah, definitely fair assessment. Omicron was... I actually think we had more people out with Omicron than we did even with Delta, but the out time was shorter, and the drop-off has been pretty precipitous since things have settled down. And so, you know, fingers crossed that there's not, you know, not another Greek alphabet letter waiting for us, but, you know, right now we're doing better.

Okay, we're with you on that hope. Last one for us is just on ability to recruit and retain. Any changes in the labor environment that you'd want to flag for us or considerations as you're thinking about your underlying de novo growth and then staffing up into some of the acquisitions that you've completed?

Yeah, let me kick that over to my COOs, to Eric and Graham. They're frontline, and so I'll let them comment.

Yeah, Chris, this is Eric. Yeah, from a recruiting perspective, As you mentioned earlier, I mean, we're down about three percentage points from our turnover rates pre-pandemic in 2019. And in terms of recruiting, you know, the additional investments that we made in the recruiting department, adding additional staff there made a huge difference in terms of our ability to backfill open positions. The biggest challenge for us, again, not clinically, it's just the turnover rates, very competitive out there for front office and admin staff, but we're having success there as well. but turnover rates still continue to be high.

Graham, if you could speak to how that impacts our de novo and what the de novo pipeline looks like for both East and West for this year since we just finished the board meeting. Graham, you there? Eric, do you want to speak to DeNovo and staffing and overall pipeline?

Yeah, so the DeNovo pipeline is really, really strong, but we did see a delay. We actually expected to open up more facilities in 2021, but as a result of, again, you know, a competitive environment out there from staffing has slowed it down. The bigger piece really on the DeNovo front, Chris, was related to the ability to get contractors and permits on a timely basis. That was actually an even bigger impact for us than staffing, but De Novo Pipeline very, very strong here for 2022 as well. Yeah, thank you. Okay.

Does that answer?

Okay.

It does.

Our next question comes from Matt LaRue with William Blair.

Hi, this is Madeline Wollman on for Matt LaRue. I just wanted to touch on the industrial injury prevention segment. We were just wondering, when do you expect trade shows for that segment to begin to sort of restart? And have you, now that Omicron is kind of declining, have you started to have conversations around acquiring new clients for that segment? And then as a follow-up, do you think that the current labor environment and the current employee pressures will lead to greater interest in industrial injury prevention services? Do you think that's going to be a catalyst for growth there?

Yeah, so let me unpack that. So first, trade shows, while we haven't, I don't think yet, have attended many trade shows, I do, I am hopeful, I think the team is hopeful that those will come back sometime this year, sooner than later. I think most everybody's very anxious to kind of get back to, if not normal, you know, directionally headed that way. You know, our ability, we're talking to new opportunities all the time. We're signing new opportunities, you know, as we go. I think certainly the ability to get face-to-face will help that and accelerate that opportunity. It's been some of, you know, the impact that we felt. In spite of that, I think the team's done a wonderful job. I'm trying to remember what – there was another – Oh, the labor environment. The labor environment currently does impact our ability. You know, we sign a new opportunity and then we've got to find staff to do this. So different than the clinics where we may take One person or sometimes two people from an existing staff to go seed a satellite opportunity. We don't always have that ability geographically to pull from somewhere else. So we have to find these people kind of from scratch. They have to be recruited and onboarded. It's taking a little bit longer than normal, so that's been some of our impact. But I'm hopeful that as we go forward, since we have been able to track good clinicians, that that will also improve as the year unfolds.

Great. Thank you. And then just one quick question on M&A. Given some of the unfavorable reimbursement moves this last year, do you think that's been pressuring smaller providers? Have you seen an uptick in inbounds related to M&A?

We're busy right now. We have more scheduled calls than we've had in some time. Now, I'm always cautious. Thank you for having me. Our partners are not afraid. Our potential partners, the people we're talking to, they're not afraid. What they are, in many cases, is seeing opportunities to do tuck-ins and to move market share in their markets, but maybe they need some resources to do that, capital resources or infrastructure resources. Or maybe they just want to take some chips off the table and benefit from the additional resources to continue to grow. But yes, I think anytime there are, you know, storms that are lengthy, and we've certainly been a series of lengthy storms, I think that creates, I think that causes people to look for, you know, a little bigger boat to ride it out the next time. So I think it will be helpful.

Great. Thank you.

Thank you.

And once again, that is Star 1 to ask a question. And our next question comes from the Chair, Ramgobo Wisirati.

Dimitra.

Dimitra, your line is open.

I'll tell you what, Mitra's always good about asking questions. Why don't you go to the next person and maybe we can come back to him in a minute. Is that possible?

There are no further questions.

Okay. All right. Mitra, give us a call. Sorry for the technical difficulty. I'm not sure. But Carrie and I are available immediately following this call and through the rest of Today, we appreciate your interest and your time, everyone. We thank you for the time this morning. I thank my team for all the work that they've done as well, and have a great day.

Discussion group, today's program, thank you for your participation. You may disconnect at any time.