U.S. Physical Therapy, Inc. (NYSE:USPH) Q1 2024 Earnings Call Transcript May 8, 2024
U.S. Physical Therapy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I’d now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.
Christopher Reading: Okay. Thanks, David. Good morning, and welcome, everyone, to our U.S. Physical Therapy First Quarter 2024 Earnings Call. With me on the line this morning include Carey Hendrickson, our CFO, and Eric Williams, who is our COO East, and Eric will be assuming a larger role in our company as he takes over as President in just a few weeks after our Annual Meeting later this month. So we congratulate him on that. Graham Reeve, our COO West; and Jake Martinez, our Senior Vice President, Finance and Accounting. Before we begin our prepared remarks, I’ll ask Jake to cover a brief disclosure statement.
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. I’m going to keep my remarks reasonably brief, but I do want to give you kind of an overview of what I think are some important takeaways for the start of the year. So let me begin by saying that while these past few years have not been easy for anybody in our industry, I think our team has done some remarkable things in that period. We feel like we’re off to a good start for this year as well. For some of you, I know that it may feel like this first quarter is a little bit of a disappointment, having enjoyed an all-time record Q1 in 2023. This quarter was actually ahead of where we expected to be and that expectation was baked into our original guidance, which you will see we are updating today.
While we experienced a tough start to the year, not based upon demand, which has been very strong, but a rough weather start for sure compared to last year. However, we bounced back very quickly and visits have again been at or above previous record levels for visits per clinic per day, visits per clinic were all-time highs for both February and March of this year, and I’m happy to report that April is another all-time high for that month as we have built slowly but steadily in our volume progression so far this year. So what does that mean? Well, for one, it means that our facilities are being recognized and sought out for the great care we are providing to patients and the families and by the physicians who refer to us and so demand has been very high.
I will also tell you that staffing while improved, is really still the gating factor to being able to capture even more volume. We’re working hard on that. We have a new leader over that recruiting department. And I expect we will continue to make adjustments that will further assist us in meeting the demand that we’re seeing for our services. Our partners are working with the ops team to network differently than maybe we have done in the past, to increase the number and the quality of seeds planted, so to speak, with respect to talented clinicians in their markets. It’s an all hands-on deck exercise, but I’m buoyed by the fact that demand is really strong, and that underpins all of this. Coupled with strong demand and record monthly volumes once we get outside of January is the progress the team has made with respect to net rate.
In spite of the impact of a rather large approximately 3.5% Medicare reduction to start the year. We were able to produce some uplift in our rate and some improvement in our work comp mix. It created some overall incremental improvement that we hope to build upon as the year progresses. For this first quarter, we saw non-Medicare rate improved another 2.8% overall from Q1 2023 and up 5% since the same quarter in 2022, and we’re not done yet. We continue to work to lift reimbursement for the life improving work that we are delivering across the more than 5 million patient in
while demand is also improving where demand is also improving is in our injury prevention business. First, you saw our recent acquisition announcement with respect to a really terrific company led by a fine team, who recently joined our Briotix partnership, — that opportunity will further — will help us to further broaden our exposure to several additional industry, we call them verticals, essentially industry types where over time, we expect to gain additional sales traction as well as cross-selling opportunities, given that we have a much broader subset of services available now to sell.
For the quarter, revenue grew 9.8%, which in turn produced a gross profit increase of over 15%. I’m very proud of our teams and our partnerships in this area. They continue to attract opportunities for further expansion while they make a large difference for these companies in terms of the injuries they event and the cost that they save as a result of the fine work of our embedded clinical and technical resources. We have other highlights to cover. So let me turn the call over to Carey to discuss our results in more detail before we open things up for questions.
Carey Hendrickson : Thank you, Chris, and good morning, everyone. Our first quarter results, as Chris noted, we’re better than we anticipated coming into the quarter, driven by strong volumes in February and March and a growing net rate. As we noted in our release and also in our year-end earnings release, we had the significant adverse weather events in January of 2024 that Chris noted that we knew we’re going to make comparisons to the first quarter of 2023 challenging since there weren’t any significant weather events in the first quarter of last year. Volumes in January of 2024 were light as expected, but volumes hasquickly picked up back up in March — February and March, and we experienced record volumes in each of those 2 months.
Our hard work on rate negotiations and our focus on increasing workers’ comp as a percentage of overall business continue to take root in the first quarter of 2024 and resulted in a net rate increasing year-over-year despite that Medicare rate reduction that was in effect for most of the first quarter that Chris noted. From an EBITDA standpoint, we reported adjusted EBITDA for the first quarter of 2024 of $16.7 million compared to $18.5 million in the prior year. We noted in our earnings release that the Medicare rate reduction brought our 1Q ’24 EBITDA down by about $1.7 million and then the adverse weather in January was a negative impact of about $1.3 million. Our operating results were $7.7 million and built the first quarter of ’24 and the first quarter of ’23.
On a share basis, on a per share basis, operating results were $0.51 in the first quarter of this year versus $0.59 in the first quarter of last year, and that’s because of the decrease related to some shares that we had associated with the secondary offering that we completed in May of ’23. Our average visits per clinic per day in the first quarter was 29.5%, which is the second highest volume in the company’s history for first quarter, second only to the $29.8 million that we had in the first quarter of 2023. January was at 27.4%, and that compares to 28.9% in the previous year. So we’re down from 28.9% to 27.4%, but then February was at 30.4% and March was at 30.8%. And both of those months, as Chris noted, we’re higher than the same months in the previous year.
Volumes continued strong in April with our average visits per day just north of 31, and that’s a record high average visits per day number for the company ever and the first time we’ve ever had average visits per day at or above 31 per month. Our net rate was $103.37 in the first quarter of ’24, which was an increase of $0.25, again, despite that Medicare rate reduction that was, in fact, for most of the first quarter of 3.5%. The increase was largely related to our strategic priority of increasing reimbursement rates through contract negotiations with commercial and other payers and then our focus on growing our workers’ comp business. Excluding Medicare, our net rate was up 2.8% versus the first quarter of last year with increases in each of the major categories other than Medicare.
Workers’ comp, which is 1 of our highest rate categories, increased from 9.3% of our revenue mix in the first quarter of ’23 to 10% in the first quarter of ’24. And both of those initiatives increasing net rate to rate negotiations and the workers’ comp business will remain high priorities throughout the year. Our physical therapy revenues were $134.4 million in the first quarter of 2024, which was an increase of $5.3 million or 4.1% from last year despite the setbacks that we had from weather and the Medicare rate reduction. The increase was driven by having 28 more clinics on average in the first quarter of this year than we had in the first quarter of last year, coupled with the increase in our net rates. Our physical therapy operating cost were $110.4 million, which was an increase of 8.1% over the first quarter of the prior year, due in part to having 28 more clinics on average in the first quarter — than in the first quarter of last year.
On a per visit basis, our total operating costs were $85.50 in the first quarter, which was up from just under $82 in the first quarter of 2023. Our average cost per visit was high in January because we had less operating leverage due to the lower number of visits, and then it returned to more normal levels in February and March, which averaged $82.90 per visit. Our salaries and related costs was really the same story. They were $61.42 in the first quarter of 2024. That was up from $59.14 in the first quarter ’23 but again, those salaries-related costs were high in January, but then they return to more normal levels in February and March, which averaged $59.42 per visit, which is comparable to that $59.14 that we saw in the first quarter ’23.
Our physical therapy margin was 17.9% in the first quarter of ’24 that margin was also impacted by January due to having less operating leverage, but then it increased to 20.6% for February and March on a combined basis, which is back to very close to the first quarter ’22 and [indiscernible] margin, which was 21%. Chris talked about IIP and what a great job they did. In the first quarter, revenues were up almost 10%. IIP income was up 15.1% and and that our margin increased — increased from 19.5% in the first quarter of ’23 to 20.4% in the first quarter of 2024. Our balance sheet continues to be in an excellent position. We had $143 million of debt on our term loan with a swap agreement in place that places the rate on that debt at 4.7%, which, as you know, is a very favorable rate today’s market, and it’s well below the current Fed funds rate.
In the first quarter of 2024 alone, the swap agreement saved us $900,000 in interest expense with cumulative savings of $4.2 million since we put that in place in the third quarter of 2022. In addition to the term loan, we also have a $175 million revolving credit facility that had nothing drawn on it during the first quarter, and we have approximately $105 million of excess cash over and above what we need for working capital, ready for deployment into growth initiatives. Including the April 30 acquisitions that we announced last week, we’ve deployed just over $40 million of cash into acquisitions so far this year. As we noted in our release, we’re raising our EBITDA guidance range for the full year of 2024 to $82.5 million to $87.5 million.
That’s an increase of $2.5 million on both ends of the range. Our guidance previously considered that a 3.5% Medicare rate reduction versus last year’s rates would be in a place for all of 2024. However, as we noted in an 8-K that we put out in March, Congress addressed the Medicare reduction in the Consolidated Appropriations Act of 2024 and adjusted debt reduction from 3.5% to 1.8% that’s effective March 9 through the end of 2024. It was not retro to the beginning of the year, but it will be from that March 9 forward at 1.8% reduction rather than 3.5. The outperformance of our internal expectations in the first quarter of 2024 due to our strong volumes in February and March and our continued progress in that rate gives us confidence to raise the range by more than just the $2 million effect that’s related to the Medicare rate change, even though it’s early in the year.
As a reminder, the expected EBITDA contribution from acquisitions we’ve closed so far this year and another 1 that we expect to close by the end of July are included in their guidance just as they were in our previous guidance. In closing, our first quarter was ahead of our internal expectations. February and March were strong months from a volume, revenue, EBITDA and margin perspective. Our net rate grew in the first quarter over the prior year, even with a 3.5% Medicare reduction in place for most of that first quarter, and we had very good momentum as we start the second quarter as evidenced by our average visits per day in April. And we increased our full year guidance by $2.5 million to reflect all of those things. So with that, Chris, I’ll turn the call back to you.
Christopher Reading: Really appreciate it, Carey, great job. Thank you. So operator, let’s go ahead and open up for questions or comments.
Operator: [Operator Instructions] And we’ll take our first question from Brian Tanquilutit from Jefferies.
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Q&A Session
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Brian Tanquilut: Eric congrats. Chris or maybe my first question, as we think about your commentary that Q2 — or Q1 was essentially in line with internal expectations. The salaries cost stands out to us up is 3.5% sequentially. So just curious, what are you seeing there? And what needs to happen for that to maybe normalize? Or are these the normalized levels that we should be thinking about from a salaries and related costs as a percentage of revenue perspective going forward?
Christopher Reading: Yes. Well, I think — and I may pull Carey back in for part of this. Certainly, I think the impact in January on light revenue, like volume impacted us there on a percent of revenue basis, when we look at the rest of the quarter, the February and March numbers, which I’ll get Carey to revisit here momentarily, those return to a more normal level. And I think that’s a better indication of where we think this will be going forward. So Carey, you want to hit those again quickly? .
Carey Hendrickson: Yes, you bet. So salaries and related costs in February and March, they were $59.42 per visit. And that is up only slightly from $59.14 in the first quarter of 2023, which is a good comparison because the January were so different in each year, January of last year didn’t have any weather. And of course, we know we had the weather event and other events in January of this year. So I think that’s a better comparison and something you should look at for going forward is something around that $59.42 kind of per visit from a salary standpoint. And that will actually probably go down, look it varies because there’s a certain amount of your salaries related costs that are relatively fixed. So a lot of it varies with the cost per visit, but you do have just some base level of employees that are on — that make that fixed.
So it will vary and probably come down a little bit in the second quarter from the first is what I would anticipate, given that we’ll have — that’s 1 of our — it’s actually usually our highest volume quarter. So that may be a little less in the second quarter, but then vary a little bit from that as we go into the third and the fourth. So I feel like we’re in a decent place from salaries and related costs. It’s just that, that January impacted that number quite a bit. because we didn’t have the operating leverage that we did in the February and March months.
Christopher Reading: Brian, is that yes, that makes a lot of sense. Yes. Okay.
Brian Tanquilut: And then maybe my follow-up question, Carey. As I think about — I appreciate your comment that Q1 was within your internal range and you’re obviously raising guidance for the year. Any color you can share with us to help us think about how your — or what your internal expectations are for Q2, understanding that you’re off to a really strong start in April?
Carey Hendrickson: Yes. I mean, gosh, we don’t usually give guidance by quarter, but I would just say, we expect it to be at a level that is — that is up from last year’s first quarter — second quarter, excuse me, and certainly up from where we were in the first quarter of this year. It’s a lot of it — honestly, a lot of it’s going to depend on what net rate, obviously, and then just how strong those volumes are in April, May and June, but that’s certainly an expectation. I mean we’ve added acquisitions since the second quarter of last year. We’ve — and we’ve improved our net rate since the second quarter of last year, it certainly should be up.
Christopher Reading: Yes, Brian, I mean, we’re not going to get to the point, and I know you’re not asking us to do this where we’re going to guide by quarter. ATI just did that. I don’t think that’s the right move for us. But we’re comfortable in the guidance that we updated for the year. And you guys have the hard job of trying to parse that out between quarters.
Operator: We will take our next question from Joanna Gajuk with Bank of America Merrill Lynch.
Joanna Gajuk: So I guess coming back to volumes and the comments around February, March were pretty good months. And then I guess, April, in particular, looks like it’s pretty good. So — the question is, what is driving this had this better volume here? And also, what do you assume, I guess, for the rest of the year?
Christopher Reading: I got to tip my hat to our clinicians and our partners, 95% of whom are clinicians. They’re doing a great job with patients. we’re doing, I think, a better-than-ever job in outreach, not just the physician referral sources, but to communities, social media, other things, driving patients frankly, our demand is high enough that if we could just magically import staffing on an incremental basis, where and when we need it, we could drive volumes even higher. And so the gating factor for us right now is staffing teams worked very hard, turnover for this quarter is at the lowest level that I can remember since I’ve looked at turnover going back many, many years. So our partners who largely influence that are doing a very good job. We’re continuing to work to try to get it down even further. But staffing is really the gating factor. Demand is high.
Joanna Gajuk: That’s great to hear. So essentially, my demand there. So for the turnover, are you willing to share the actual percent of turnover you’ve seen among your clinicians?
Christopher Reading: It’s nicely below 20%. I don’t want to get into a pattern where we’ve got to put it out every single quarter because it’s going to move around a little bit. But it’s lower than it was last year, and it’s well below 20 at this point.
