Operator
Good day and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2024 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 1 on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star 0. I'd now like to turn the call over to Chris Redding, President and CEO. Please go ahead, sir.
Regulation G.
Thanks, Jamie. Good morning and welcome, everyone, to our second quarter 2024 U.S. Physical Therapy earnings call. With me on the line this morning, I've got Carrie Hendrickson, our Chief Financial Officer, Eric Williams, our President and COO, East, Graham Reeve, our Chief Operating Officer, West, Rick Binstein, our Executive Vice President, General Counsel. Before I make some prepared remarks relating to our quarter and year, I'll ask Jake Martinez to cover a brief disclosure.
Jake Martinez
Jake Martinez Thank you, Chris. This presentation includes forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information. This presentation also contains certain non-GAAP measures as defined in Regulation G. The related reconciliations can be found in the company's earnings release and the company presentations on our website.
Regulation G.
Chris? Thanks, Jake. So let's get started. My discussion this morning will cover a variety of highlights. We've definitely made some progress in some key areas. We will also touch on one of our primary challenges as well. Let's start with the fact that this was a very solid quarter from a volume perspective, the best visit per clinic per day quarter in our history. April was our high month at 31.2, marking a high also for the year, followed by May nicely over 30, June just under 30 at 29.8. And all of this follows our normal seasonal progression with school finishing and summer vacations kicking off for a bit before things get back to normal, as they've begun to do with schools starting up here in Texas this week in many places. Speaking to our expectations, our total visits are ahead of where we budgeted them to be at the midpoint this year, better by approximately 6,600 visits. and ahead of last year's same period by over 108,000 visits. Our partnerships are doing a great job addressing demand and doing a terrific job with patients in what seems to be a rather tight labor market. More on that in a minute. Kudos are due to our contracting team. We're starting to see their hard work over the past 18 months really beginning to bear fruit. That rate for the quarter progressed nicely and finished at $105.05 per visit, up a little bit more than $3 per visit over the same quarter in 2023. As you might remember, last year we renegotiated a large volume of commercial and more comp-related contracts. While those adjustments took a little time to phase in, We're doing some really nice progression that we are seeing and expect to continue as the year goes forward. We have also seen a work comp volume move up. And while the aggregate percentage has changed a little, it really shows up when you see the number and rate of year-over-year change in work comp visits, which I'll have Eric cover as we open it up to the public. for a discussion after these prepared remarks. The culmination of rate for commercial plans and our faster than average work comp growth is resulting in a very nice uptick in our net rate so far for the year. And actually, we expect that to continue as we go forward. On the injury prevention side of things, we had a very good quarter. Revenues grew by more than 23%. We also saw a nice margin improvement of about 70 basis points to 21.4%, with an increased profitability of more than 27%. And I was just out in Denver, spent a few days with our Biotics partners. They're working to integrate our recent Atlas acquisition. And that opportunity is going very well. And the integration of our teams is progressing nicely with what I think will be some enhancements that will be beneficial to us in the long run once this combination is fully complete. Both of our injury prevention partnerships, East and West, are doing well in getting new customers and have a better-than-expected, better-than-budget trajectory on the year so far. Where we have more work, and frankly, we are behind where we're expected to be at this point, and really our primary point of struggle is around our PT-related costs for labor. Carey will cover the per visit percent of revenue costs in detail, but the sum of it all is that the people we have hired this last year and likely in that period slightly preceding that are at a higher rate given inflation and employee scarcity than we've experienced in the past. Therapists overall are about 4% more on average before incentives. Front office personnel are about 5% more. Additionally, in a handful of markets, we have greater than expected use of contract and travel-based labor. That obviously has hurt us in impacting our performance and our margin, despite the strong gains in net rate that we've made. it's a little bit of a two-edged sword and that we have good demand in and across most of our partnerships and addressing that immediate demand in the current environment has necessitated that we bring on more contract labor than we initially envisioned our ops teams are very aware where we are and where we would like to be and working hard to ensure that we have the staffing balanced appropriately for the season and we have sufficient resources to meet the demand but remain highly efficient at the same time. Additionally, we have made numerous investments in the areas of recruiting that we expect to bear fruit and some longer-term initiatives with respect to school relationships, partnerships, and affiliations. These are all things you should expect us to be doing over the coming months and quarters as we look to readjust to the market factors that are currently influencing our outlook for the remainder of the year. Let me say this. While I know our cost issue is an unfavorable development we have to overcome, When you look at our key focus areas over time, we have a very good history of overcoming obstacles. We have a dedicated and capable group of partners, a great ops team, all of whom are working to get this dialed in over the coming period. One final note, we're busy and remain committed on the development side of things. A few of our deals have pushed out a little bit due to factors that we don't control on the seller side of the equation. But rest assured, we're working hard and we expect a strong finish through the year for our development efforts with some exciting markets and partners who we are anxious to make part of our family as we look ahead. That concludes my overview and prepared remarks. Kerry, as he always does so well, will cover the detail behind these themes. Go ahead, Kerry.
Kerry
Great. Thank you, Chris, and good morning, everyone. We saw some really good things inside of our numbers for the second quarter, things that we expect to continue to benefit us through the remainder of the year and beyond. Chris mentioned some of them in his remarks, but they're particularly notable and worth repeating a few of them. Our hard work on rate negotiations and our focus on increasing workers' comp as a percentage of our overall business continue to take root in the second quarter, resulting in a substantial year-over-year increase in our net rate. Also, our average visits per day in the second quarter are a record high for the company. And our IIP business grew at a mid-teens rate in the second quarter, even before adding the acquisition that we made on April 30. Our salaries and contract labor were higher than we would have liked in the quarter, but the business itself is strong as we continue to see meaningful growth in these key indicators. We reported adjusted EBITDA for the second quarter of 2024 of $22.1 million in compared to $23.6 million in the prior year. Our adjusted EBITDA margin was 16.4% in the second quarter of this year, compared to 17.7% in the second quarter of the prior year. Traditionally, most calculate our EBITDA margin without the benefit of knowing what our adjusted revenue for minority interest is, which makes it appear that our margin is lower than it actually is. This adjusted EBITDA margin that I just quoted is 16.4% in the second quarter, is calculated on an apples to apples basis with both revenue and EBITDA adjusted for minority interest. Our operating results were $11 million in the second quarter of 2024, which is an increase of $600,000 over the second quarter of 2023. On a per share basis, operating results were slightly lower than $0.24, than $0.23 at $0.73 this quarter, and $0.76 in the second quarter of last year. That small decrease is related to the increase in shares that were associated with the secondary offering that we completed in May of last year. Our average visits per clinic per day in the first quarter was 30.6, which is the highest volume per quarter in the company's history. Chris noted what the progression was throughout the month. The lower number in June, as he mentioned, is our typical seasonal pattern, as both patients and our clinicians take vacations, and the schedule just changes a little bit in the summer there for families. In July, our average visits per day was 29.8, which is consistent with July of last year, and it's in sync with our seasonal expectations. Our net rate was $105.05 in the second quarter of 2024, which was $3.02 per visit or 3% higher than the second quarter of last year, even with another 1.8% Medicare reduction by CMS that was in effect in the second quarter of 2024. This was the highest quarterly net rate we've had since 2020 while enduring four Medicare rate reductions by CMS since that time. Excluding Medicare, our rate was up $4.80 per visit or 4.5% over the second quarter of last year. The increase was largely related to our strategic priority of increasing reimbursement rates through contract negotiations with commercial and other payers and our focus on growing our workers comp business. We're also focused on maximizing our cash collections through improvements in our revenue cycle management. Each of our major category of payers increased year over year. Workers comp, which is one of our highest rate categories, increased from 9.6% of our revenue mix in the second quarter of 2023 to 10.1% in the second quarter of 2024. These rate-enhancing initiatives will remain high priorities throughout 2024 and beyond. Physical therapy revenues were $143.5 million in the second quarter of 2024, which was an increase of $11.2 million or 8.5% in the second quarter of 2023. This increase was driven by having 25 more clinics on average in the second quarter of 2024 than in the second quarter of last year, as well as an increase in our visits at mature clinics and, of course, the increase in our net rate. Physical therapy operating costs were $114.7 million, which was an increase of 10.3% over the second quarter of last year, due in part, again, to having 25 more clinics on average in the second quarter of last year, as well as the increases in salaries and wages and contract labor costs that we've mentioned. On a per-visit basis, our total operating costs were $84.46 in the second quarter which compares to $80.61 in the second quarter of 2023. Our salaries and related cost of visit were $59.66 in the second quarter of 2024, compared to $57.59 in the second quarter of 23. And our physical therapy margin was 20.1% in the second quarter of 24. As Chris noted, our IIP team produced excellent growth in the first quarter. IIP net revenues were at $4.5 million, or 23.2% over the second quarter of 23, with IIP income up $1.1 million, or 27.4%. Excluding the acquisition that we closed on March 31, 2024, our net revenues were still up 13.5%, with our gross profit up 15.7%. Our IIP margin increased from 20.7% in the second quarter of 23 to 21.4% in the second quarter of 24. Our corporate office costs were $14.2 million, which is 8.5% of revenue, right in line with expectations in the second quarter of 2024. That compared to $12.1 million, or 8% of revenue in the second quarter of 23. The second quarter of 23 included a downward revision in our bonus accrual, causing it to look a little bit better as a percent of revenue than in the second quarter of this year. Our corporate costs in the second quarter of this year were actually lower than our budget by about $400,000. Quickly turning to our balance sheet, it continues to be an excellent position. We have $142.5 million in debt on our term loan with a swap agreement in place that places the rate on our debt at 4.7%, which you know is a very favorable rate in today's market and well below the current Fed funds rate even. In the first half of 2024 alone, the swap agreement saved us $1.8 million in interest expense with cumulative savings of $5.1 million since the third quarter of 2022 in interest expense. In addition to the term loan, we also have a $175 million revolving credit facility that had nothing drawn on it during the second quarter. So that's all available capacity. And we have approximately $90 million of excess cash over and above what we need for working capital ready for deployment into growth initiatives. We deployed $40 million of cash in acquisitions so far this year and expect to deploy more before the end of the year. As we noted in our release, we're updating our EBITDA guidance for full year 2024, returning to our original range of $80 million to $85 million. The change in guidance reflects our updated expectations for salaries and related costs and contract labor through the remainder of the year related to the continuing challenging employment environment particularly for our clinicians and our front office staff. We expect our patient volumes to continue to be strong during 2024, and we expect to make additional progress on net rate throughout the year. With those details, Chris, I'll turn it back to you. We'll take questions.
Regulation G.
Okay, Gary. Great job. Thank you. Jamie, let's go ahead and open it up for questions.
Operator
Certainly. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Should you find your question has been answered, you may remove yourself from the queue by pressing star 2. Once again, that is star 1 to signal for a question and star 2 to remove yourself. We will pause for just a moment to allow questions to queue. We'll go first to Ryan TenQuillette with Jefferies. Please go ahead.
Ryan TenQuillette
Hey, good morning, guys. Good morning. Chris, maybe I'll start with you. The labor challenges that we're seeing here, I mean, I guess two questions. It doesn't seem like it's impacting your ability to drive volume growth. So is this just a matter of basically a reset in the baseline for what your therapists are making? And then maybe the second part of the question would just be, how are you thinking about strategies and initiatives to drive and improve that labor situation?
Regulation G.
Yeah, good question. So first part is, you know, the perspective that it hasn't impacted our volume because the volume's been pretty good. I think it has impacted our volume in a negative way. I mean, it's, you know, we've beefed up our recruiting teams. We're doing better, but we still have markets where, you know, if somebody does leave us and turnover's been good, If somebody does leave us, they relocate their family to another state or another place. It takes a while to fill that spot, and we do feel it. And so I think if the labor market eases, I think it reciprocally will have a further uplift on volume. But demand's good. Look, the operations team, it's a tough balance, particularly as we have gone into, you know, and through now vacation season with our staff working hard to deal with the volume that they have and, you know, the necessity to bring in some other or ancillary staff to fill those gaps, to keep volume up. Ops team's very aware of it. Eric and Graham and our regional presidents. And it's, you know, it's tough. But we've got to just keep everything very dialed in. We had a greater number of techs hired in the period than I kind of expected. So they're digging into that a bit. That may just be a seasonal thing. And we're coming out of that season now that school's back in. And then just on the demand side, you know, anytime that there's pressure around hiring, the tendency is to pay more to just lock it down. And so we need to do a better longer term job on widening the funnel. And so we're making some adjustments in some investments in the part of our business that really interfaces most closely with the PT schools around the country and offering, you know, I think a wider complement of things that we can do for those programs to help them and reciprocally help us as well. And so it's a little bit longer term program and project, but all those things are in the works right now.
Ryan TenQuillette
Maybe my follow-up question would just be on the turnover. Are you seeing any change there? Or is that something that's just stable and then what we're seeing is just a replacement cycle that's consistent with the historical trend?
Regulation G.
I think the turnover has actually been pretty steady. Steady meaning it's been good for the last year and a half, two years. I think the groups done a good job on that. You know, where, where we have, where we've seen pressure is, you know, this year, we had to, we gave probably larger than average raises, just because people were pressed and the markets tight and very competitive. And then newer people coming in. You know, we know we're paying a bit more than we were a couple of years ago. And so I think it's that combination where I think we're going to have to retest. And I don't know that it'll be on the clinician side of the market, but, you know, on our hourly wage area in our front desk and looking maybe for some more efficiencies there. We're retesting the numbers that we've been paying this last year to see if we can add inflation. I debated a bit to see if we can get those back down a little. And so all those factors, along with making sure, and our cash flow has been fantastic, our collections have been really good, and our executive who handles that area is doing a great job, and just making sure we're as efficient as we can. need to be and can be on the backside of our operations as well. And so that in combination with the fact that I expect it will still see some more rate growth. I'm really pleased with, you know, all of the reports and how that is lining up. And Karen, I both expect to see that to continue to progress. over the coming period. And so it's going to have to be that combination of operational focus, seeing what we can do in terms of rate at the front desk and some efficiencies in some other areas. And hopefully we can get it down a bit.
Ryan TenQuillette
Awesome. Thank you.
Regulation G.
Thanks, Brian.
Operator
We'll hear next from Larry Solo with CJS Securities. Please go ahead.
Larry Solo
Great. Thanks, Kim. Good morning, Chris. Good morning, Carrie. Just a question on the volumes, maybe a little bit of a follow-up to Brian's question just on the having constraints so volumes are you know as you you know pointed out at record levels and in a seasonal strong quarter um just curious of like we look year to date we're pretty much flat right on a same store basis i know q1 was maybe that's a little unfair because there was some weather but um yeah you've grown two to three percent volume the last 10 years so is there you know as we get above this 30 per visit per day and i've asked this question before Are there constraints? I mean, clearly it sounds like, I would guess, staffing is one of them. You know, just, and you did mention that volumes are sort of in line with your expectations. So do you kind of bake in a little bit of a slower volume year this year, or just any color around that would be great?
Regulation G.
Yeah, I don't think 30 is the threshold for anything. You know, I mean, a lot of our workforce are part-time employees. um you know regular committed part-time but part-time moms that are working um you know part-time with with kids still at home other things um and so we do have the ability to flex staffing assuming that staffing is available and and people are available and i think that's been the biggest limiting factor so far this year and you're right we're we're flat on the year after having a lighter than expected first quarter. Second quarter came in about where we expected. It was a little bit lighter in June than I think we had modeled, particularly after a strong April. But volume, generally speaking, demand for new patients is there. We just have to be able to assess it from a staff perspective. And so I don't think this is a ceiling for us. We certainly don't have a ceiling from a facility standpoint when you look at physical plant and things like that. And it's all about creating incremental staffing so that we can continue to grow.
Larry Solo
Right. And I'm pricing, you've done a great job, obviously, made some good strides. It feels to me like hopefully, you know, you continue to negotiate and renegotiate, right? Because physical therapy, as we know, is a cost saver, right? And with these inflationary pressures, you should be able to go back and some industries are getting so much more price, right? So, I feel like you guys have, right?
Regulation G.
Had four years worth of cuts.
Larry Solo
Right. And just on the Medicare side, any update there? I think they came out with their proposals. Maybe this is the last year of proposed cuts. Any thoughts longer term? Maybe, you know, go into a CPI-based index pricing on the government side or anything there?
Regulation G.
Yeah. That's what's supposed to happen now. In the interim period, this comment period following the July release, Now we're pressing hard. I mean, having five years worth of cuts, you know, in a row in succession, it just makes making operational adjustments very, very difficult. And I think we've squeezed and maneuvered and managed you know, not perfectly by any stretch, but I think pretty well. And yet, I don't know that I can name another industry that's had, you know, maybe home health in some stretches, you know, this kind of punishment unnecessarily. And it all, frankly, comes from the mistake that MedPAC made when this all began, where they didn't realize that physical therapy was part of the code set that they were impacting. They thought they were impacting interventional pain management specialists, PM&R doctors, and orthopedic surgeons, the guys at the top of the food chain. It's unfortunate, but we're in it. We're almost out the other side. I can't imagine that this is going to continue without some reversal. And we're spending a lot more time in D.C. with the lobby group, our industry group, APTQI, with the APTA, with our congressmen and women. And hopefully once this election cycle is through and, you know, we get some daylight on the other side and people can focus on governing, you know, we can make some progress.
Larry Solo
Got it. And the proposed cut, I guess, for 25, I believe, is just similar to the initial proposal for 24, just under 3%. Is that right?
Regulation G.
Yeah, I think that.
Larry Solo
Okay. All right. Okay. Go ahead, Larry. Go ahead. No, go ahead. Your comment, I just had a quick question, a random one. Just go ahead. What was your thought there?
Kerry
I was just saying, in the meantime, we can't control what Medicare does, what CMS does, unfortunately. But in the meantime, we're trying to control what we can control, and that's putting a lot of effort towards contract and rate negotiations for commercial, for workers' comp, for all those things. We're seeing really good progress there. And you'll remember when we did these negotiations, many of them, we built in three-year step increases. They continue to produce fruit each year to have continual step increases in our rates. So that's good, and that's going to benefit us going forward. It's already benefited us. We're really starting to see the impact of it now, and I'm pleased with our team that's done a really good job on that, as well as the increase in workers' comp, the number of visits in particular, and as a percent of our mix, it's a really good thing because that's one of our highest rate categories. So, you know, we're working hard to move that rate, even with the pressure from CMS.
Larry Solo
Great. I was just going to ask you to start off the ball, but just with the hurricane barrel, I know it caused a little bit of a lateness in your results and some shutdowns around in Houston. I know you guys have a decent amount of facilities down there. Was there any volume impact we should expect in Keeter?
Kerry
Thanks. We lost about 2,600 visits as a result of that. But I noted in my comments that our – average visits per day in July was 29.8. So it's still right in line with what June was and, you know, right in line with our expectations and right about the same place it was last year in July of 23.
spk10
Great. I appreciate all the call. Thank you.
Operator
We'll go next to Joanna with Bank of America.
Joanna
Hi, good morning. Thanks so much for taking the question here. So I guess on the labor, since we're topical here, but my question is, because to your point, you've been hiring these workers for a year or maybe even longer at this high rate. So My question is, why such a surprise on labor during this quarter? I mean, you've been talking about, like, you know, staffing improving and turnover below the industry, which I guess that still holds. But I guess, you know, why were you so surprised with this quarter? Why, I guess, it didn't transpire, you know, in Q1? Yeah, it's a good question.
Kerry
I was just going to say one of the things that play into, I think, was we expected to be able to transition from contract labor to permanent employees in some of these markets that we're really challenged with. And so that would have helped us, but we had higher contract labor and, you know, that was part of the equation. But, Chris, go ahead.
Regulation G.
No, I think, you know, I think part of it was we had a really strong April, really, really strong April. And spring quarter is usually a very strong volume quarter for us. And I think the combination of starting the quarter with a lot of demand resulted maybe in us having slight increments here and there of staff beyond where we needed as the quarter progressed. You know, we're still peeling the sun in a bit. As Kerry said, we have a handful of markets that kind of stand out as markets where at least I believe that we shouldn't have as much contract labor as we do. We should be able to find you know, long-term employees that, you know, are committed and part of our staff. We have good teams there, but for whatever reason, we're struggling in those central markets. And so Eric and Graham and the rest of the team, meeting with partners, working on that, we're trying to look at some of the underlying factors. But, you know, as Karen mentioned, we didn't expect to be carrying as much of contract labor as we have. Then honestly, you know, I thought as inflation began to subside a bit, we could get, we could get our offered hourly rates down. I don't know that we've seen that transpire yet, but we're going to have to test it. Um, because I think, you know, particularly at our front desk, we're too high. Um, And we're going to have to see what we can do there. And so combination factors, I wish it was perfect. It's not, of course. And we'll have to make some adjustments.
Karen
And Chris, this is Eric. Oh, go ahead. The only other comment I want to add to that is while our turnover rate is low and we are back going clinical and non-clinical positions at a higher rate, There's also an impact on the existing staff within the business. I mean, when you start bringing in newer people, potentially less experienced, it does have an impact in terms of doing market adjustments to hang on to existing staff. So it's something that we're battling right now. There's no question I think there's a couple of things that we're in the process of doing now that will have an impact for us. We're certainly going to Chris's point where we saw labor ads in the business taking a hard look at ensuring that the productivity we have within that clinic is consistent with our staffing ratios for clinical and non-clinical staff. So the people that added staff to get the volume to leverage those additional expenses. I will say that looking a little bit deeper in this, and to Chris's point, we still are peeling the onion a little bit. The 23 de novos that we had in place didn't lever costs as effectively as they should, so we're in the process of evaluating those businesses to see what we can do in terms of changing their trajectory. We did expect them to contribute a little bit more than they did from a net income perspective, so that's a place we're going to have to revisit. um there's no doubt that the additional resources that we're putting in here will help us and it particularly in recruiting are going to help us i think we've added roughly a 40 increase in recruiting staff to help us in those problem markets where we've over relied on contract labor so i think most additional resources will help us there and my hope is the additional resources will also decrease fill times to bring PTs on board where we do have turnover. Because to Chris's point, there is a volume impact associated with turnover that's reflected in these first two quarters and numbers for us. So it's an area that we're just going to continue to have to focus and invest in going forward here over the balance of the year.