U.S. Physical Therapy, Inc. (NYSE:USPH) Q4 2023 Earnings Call Transcript

U.S. Physical Therapy, Inc. (NYSE:USPH) Q4 2023 Earnings Call Transcript February 29, 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 US Physical Therapy fourth-quarter 2023 and full-year earnings conference call. [Operator Instructions]. I’d now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Christopher Reading: Thanks, Shelby. Good morning, and welcome, everyone, to US Physical Therapy’s earnings call this morning. With me on the call today include Carey Hendrickson, our CFO; Eric Williams, our Chief Operating Officer; Rick Binstein, our Senior Vice President and General Counsel; Jake Martinez, our Senior Vice President of Finance and Accounting. Graham Reeve happens to be on a plane this morning and won’t be joining us. Before we begin with some prepared remarks, I’ll ask Jake to cover a brief disclosure statement. 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. I’m going to go ahead and start this morning with particular thanks to our clinical teams led by our capable partners around the country for their efforts in delivering exceptional care, returning a record number of patients to the things that they enjoy the most and to our prevention partners for weathering what we expected to be a more challenging year in ’23, with great continued success in keeping thousands of workers and companies that we serve healthy and injury-free. They finished the year in really strong fashion with 9.7% revenue growth in our final quarter and a 330-basis-point improvement margin in what has been a seasonally slower quarter for this subset of our business, all of which sets the table for good growth year ahead in 2024.

Past year was one of persistently high demand for our physical therapy services. Each quarter in 2023 produced a record for volume across a growing network of clinics finishing the year for the first time in our history at 30 visits per clinic per day visits, grew to more than 5 million for the year, up 11.6% in 2023. Demand remained strong throughout the year. Coming to meet this demand, our clinical teams did an exemplary job caring for our patients, which in turn creates additional demand from happy customers who refer their colleagues, friends, and neighbors to us. Despite a rather tight labor market, we were able to attract and hire therapists to enable us to achieve these record volumes. Our team led by our locally strong partners around the country helped to limit turnover at a time when demand has remained at record levels.

And our clinical cost efficiency improved in 2023 despite significant inflationary pressures. I am particularly proud of our ops team and their efforts to keep these many factors and forces in bounce throughout the year, all while juggling numerous initiatives, including opening and tucking in 35 clinics and working to integrate an additional group via acquisitions in both PT as well as injury prevention. Additionally, we worked to overcome the Medicare cuts, which made our lives more difficult these past few years despite physical therapy saving the system significant cost when compared to more expensive, invasive, and often unnecessary musculoskeletal procedures. Our team renegotiated a significant number of payer contracts in 2023, which is bearing fruit for us in and across our commercial contract base.

And we have a good work planned for 2024 to carry on that work and to impact rates further. Finally, you saw in the release that we announced a small dividend increase, which started this year with the majority of our attention focused on deploying capital through carefully vetted acquisitions in the quarter in years to come. The partners we added in 2023 are ahead of plan and doing terrific, including the industrial injury prevention partnership that brought us our first software product, which is getting strong reviews [Technical Difficulty] great overall year in injury prevention. On the PT side of things, we are busy at varying stages of diligence and completion, several opportunities that we have included in the guidance we provided in our release.

While the environment isn’t easy by any stretch [Technical Difficulty] by a fantastic team whom I love and respect, and I can assure you everyone is working very hard to produce a good year ahead. We have a lot of detail to cover. Carey always does a great job with that, so I’m going to turn it over to him to dive in before we open up for questions.

Carey Hendrickson: Great. Thank you, Chris, and good morning, everyone. Despite challenges as we enter 2023, including the 2% Medicare rate reduction that we’ve talked about on a tight labor environment, our team produced strong results in 2023. As Chris noted, we recorded the highest patient volumes in the company’s history in 2023 at 30 patients per clinic per day. Our physical therapy revenues increased more than $50 million in 2024, which was a 10.6% increase over the prior year. Our physical therapy operating costs decreased by $0.55 per visit for the full year. Our industrial injury prevention business strengthened as the year progressed, with fourth-quarter revenues up 9.7% over the prior-year fourth quarter and IIP fourth-quarter operating income up almost 30% over the prior year.

And we achieved year-over-year growth in both adjusted EBITDA and operating results. We added 46 clinics, the acquisitions and de novos in ’23, 31 on a net basis after closures, and we added to our IIP business as well. Further, we strengthen our capital structure with a secondary offering in May 2023, which was done on an accretive basis, providing us with cash to deploy the growth opportunities. So despite the challenges as we began the year, our team produced some very good results, and there was a lot of good work done in 2023 that positions us well as we go forward. We reported adjusted EBITDA for the fourth quarter of $19 million, an increase of $1.1 million over the fourth quarter of the prior year. Our operating results were $0.59 per share in the fourth quarter of 2023, which is an increase over the $0.58 reported in the fourth quarter of last year.

Our total company revenues increased 9.6% in the fourth quarter, growing from $141.2 million in the fourth quarter [Technical Difficulty] to $154.8 million in the fourth quarter of ’23. And our total company gross profit increased $2.7 million or 9.6% from $27.8 million in the fourth quarter of ’22 [Technical Difficulty] in the fourth quarter of ’23. Our average visits per clinic per day in the fourth quarter were 29.9, which is the highest volume in the company’s history for fourth quarter. October was at 29.9; November was at 30.3; and December was at 29.5. All three months were higher than the same month in the previous year. Our net rate was $103.68 in the fourth quarter of 2023, which was a meaningful sequential increase from $102.37 that we reported in the third quarter of ’23 due to the cumulative impact of progress in our rate negotiations and some operational efforts we’ve been working at all year.

[Technical Difficulty] from the $104.28 reported in the fourth quarter of 2022 due to the reductions in Medicare rates, which represent about one-third of our payer mix. All other payer categories increased 2.1% on a combined basis over the prior year. Our physical therapy revenues were $134.6 million in the fourth quarter of ’23, which was an increase of $11.8 million or 9.6% from the fourth quarter of ’22. The increase was driven by having 45 more clinics on average in the fourth quarter of ’23 than in the fourth quarter of ’22, coupled with record fourth-quarter average patient visits per clinic per day, which was partially offset by the decrease in net rate. Our physical therapy operating costs were $108.4 million, which was an increase of 10.3% over the fourth quarter the prior year also due to having 45 more clinics on average than in the fourth quarter of ’22.

On a per-visit basis, our total operating costs were $84.09 in the fourth quarter, which is basically flat with the $84.05 that we had in the fourth quarter of ’22. For the full year of 2023, our operating costs were $82 — excuse me, $83.34 in full-year ’22, and they moved down to $82.79 per visit for the full-year 2023. Our salaries and related costs decreased to $59.72 in the fourth quarter, down from $60.04 in the fourth quarter of 2022. For the full year, salaries and related costs were down $0.33 per visit versus the previous year. Our physical therapy margin was 19.5% in the fourth quarter of 2023. That was down slightly from the 20% we had in the fourth quarter of ’22, with the change 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 7% in the fourth quarter. As I mentioned earlier, our IIP business saw nice growth. In the fourth quarter, IIP net revenues were up $1.8 million or 9.7%, and our expenses were up only $800,000 or 5.3%. So that resulted in a $1 million increase in IIP income in the fourth quarter of ’23, which was an almost 30% increase over the prior year. Our IIP margin increased from 17.9% in the fourth quarter of ’22 to 21.2% in the fourth quarter of ’23. Our balance sheet remains in an excellent position. We have $144 million of debt on our term loan with the five-year swap agreement in place that places the rate on our debt at 4.7%, and we expect to remain at that rate going forward.

As you know, that’s a very favorable rate in today’s market and well below the current Fed funds rate. In the fourth quarter of 2023 alone, the swap agreement saved us $900,000 in interest expense with cumulative savings of $3.3 million for the full year of 2023. Our interest expense was $2 million in the fourth quarter of ’23. In addition to the term loan, we also have a $175 million revolving credit facility that had nothing drawn on it during the fourth quarter, and we have approximately $120 million of excess cash over and above what we need for working capital ready for deployment into the growth initiatives. We also noted in the release that our Board raised our quarterly dividend rate by $0.01 per quarter in 2024. At the new rate, our full-year dividend paid would be $1.76 per share, which is a dividend yield of approximately 1.7% based on our recent stock price.

As we noted in our release, we expect our EBITDA for full-year 2024 to be in the range of $80 million to 85 million. The 3.5% Medicare rate reduction that went into effect on January 1 results in a $6 million reduction in revenue and a $5.3 million reduction in EBITDA net of minority interest. So the $77.7 million of EBITDA reported in ’23 becomes $72.4 million as we begin 2024 due to the Medicare rate reduction. The 2024 EBITDA range is an increase of roughly 10% to 17% from this starting point. We have tremendous confidence in our team to produce EBITDA growth in 2024. We’ll benefit in ’24 from the full year impact of rate negotiations that we completed in ’23 and in the partial year impact of negotiation work that we do during 2024. We also expect to continue to increase volumes at our existing clinics in ’24 and will maintain our discipline in expense control.

We’ll also been benefit in ’24 from the full-year contribution of our acquisitions that we completed during 2023. In addition, we have several acquisitions that we expect to close in the near term by roughly the middle of 2024. So we’ve included the expected EBITDA contribution from those acquisitions in our 2024 guidance. The acquisitions we’re including are similar in size of those we’ve completed in the normal course between $1 million and $3 million of total enterprise EBITDA with us purchasing between 50% and 90% of those companies. We expect our 2024 EBITDA by quarter to lay out a little differently than it did last year. As a reminder, we had no significant weather events the first quarter of 2023, which resulted in the best first-quarter volumes we’ve ever had by a sizable margin.

In January of this year, we did have some significant weather events, which was more in line with our historic experience. So we’d expect our year to get off to a little slower start than it did last year. And then to gain momentum as we layer in rate increases, volume growth, and acquisitions as the year progresses against the backdrop of our normal seasonal patterns. As a reminder, we expect our outstanding shares to be a little over $15 million shares in each quarter of 2024 and for full-year 2024, which is where it has been since we issued the $1.9 million shares with our secondary offering in late May of 2023. That will impact our comparisons for our per-share metrics in the first couple of quarters of 2024. In closing, we feel very [Technical Difficulty] growth in 2024, and we look forward to producing strong results for all of our stakeholders in 2024.

With that, I’ll turn the call back to Chris.

Christopher Reading: Yeah. Thanks, Carey. Great job. Operator, let’s go ahead and open it up for questions.

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Q&A Session

Operator: [Operator Instructions]. We’ll take our first question from Brian Tanquilut with Jefferies.

Brian Tanquilut: Hi, guys. Good morning, and congrats on the strong quarter. Maybe for both Chris and Carey, as I think about the fact that you included some M&A — expected M&A contributions in the guide, just curious in terms of your visibility into the timing of the deals that you embedded in the guide? And then maybe Chris, more broadly speaking, how are you thinking about the M&A landscape this year in terms of what you’re seeing in the market in terms of competition for deals and also like the deal flow that you’re seeing within your own pipeline?

Christopher Reading: Yeah. In terms of the timing, I think we’ve tried to speak to that. I mean, one of the reasons we added it into our guidance this year is just due to the relative proximity to when we were going to do this announcement, this release. So I would say between now — and because these sometimes aren’t certain between now and July is what we’re looking at for the ones that are in queue right now. In terms of the broader landscape, we’re as busy as we’ve ever been. Competition is changed or changing some because some folks have more sidelined than they have been for quite some time just because of leverage and the rates that some of these companies are having to carry. And so it’s a good opportunity for us. That said, we continue to be selective, and we continue to look for our kinds of partners and attributes. And so that part isn’t changing. We’ll continue to be disciplined, but it’s good opportunity right now. We expect to be busy this year.

Brian Tanquilut: No, it’s awesome. And then maybe, Carey, as I think about the gross margin side, you highlighted your success there, and it obviously is very impressive. So just curious in terms of what you see as the remaining opportunity either to hold the gross margin line steady as you grow volumes this year, or are there remaining opportunities to drive some margin expansion?

Carey Hendrickson: Yeah, I think it’s going to depend on how much we can do on the rate side this year. We expect to do well there. I think we’ll be able to at least maintain our margins where they have been, if not grow them slightly in 2024. Yeah. But it’s going to really give me a function of how much we can push on the net rate side. And then to the extent we’re able to keep our costs in line. So it’s either flat on a per-visit basis or slightly better than that. And if we do that, if we push both of those really well, I think we can see a little margin improvement.

Brian Tanquilut: Maybe Carey — for Chris, actually, as I think about just that last point that Carey made on the ability to drive rate growth from commercial payers? How are you thinking about that in terms of what the discussions are, and what inning are we in terms of trying to get more rate growth across the portfolio of contracts that you have in the different markets that you’re in?

Carey Hendrickson: But yes, so we’ve had really good success in these in these discussions, I’d say they’re based around outcomes, and they’re based around the value that physical therapy provides. And the fact that it’s a way to actually decrease cost of the overall patient’s care. And we’ve been successful in those conversations. We have of a team that [Technical Difficulty], and we’re working on our most — the ones we concentrate on the most are the five largest carriers and our top partnerships. And we’re going to keep it that work during 2024.

Brian Tanquilut: So what inning would you say?

Carey Hendrickson: Inning? I would say we’re probably in the — maybe the fifth inning or so. We’ve made some good progress so far in the last 18 months, I’d say. But we still have some more we can do. We still have — we definitely have work we can do. The good thing is, Brian, we’ve built in step increases. As we’ve renegotiated these contracts, we’ve been trying to build in one, two — I mean three-year step increases so that we’re not having to revisit all these contracts each year. Because we have, as you know, look, 1,700-plus contracts that we’re always having to come back to and renegotiate. So the three-year step increases have really helped because we get that automatically as the one year lapses. So that’s been good.

Christopher Reading: And I would say that [Technical Difficulty] when we get to the ninth inning, we’re not done. We’re going to play a new gam. So we’re going to start over. So this is going to be a perpetual thing, and I think over time, how we get paid maybe changes, and maybe we have a little bit more latitude to focus on the results and not count minutes like we do right now. It’s just crazy way to do it, but I think we’ve got continued opportunity.

Operator: We’ll take our next question from Larry Solow with CJS Securities.

Larry Solow: Good morning, both of you. I guess just continuing on just on that line of question, just on the commercial side, you mentioned a nice 2% increase this quarter or 2% ex the CMS impact. Do you have what it was for the full year, and you expect a similar improvement or maybe even a little bit better in ’24? I think using that baseball analogy of we’re in the top of the fifth inning, you get some stuff from the bottom of the fourth that wasn’t necessarily in ’23 and —

Christopher Reading: Yeah, for sure.

Carey Hendrickson: Yeah. So for 2023, if you take all the categories except for Medicare and combined them on a combined basis, they were up about 1.5% in 2023. So it obviously accelerated in the fourth quarter being up 2.1%. So it’s been accelerating as years gone along, and I think — I’m sorry. Go ahead, Larry.