U.S. Physical Therapy, Inc. (NYSE:USPH) Q2 2023 Earnings Call Transcript

U.S. Physical Therapy, Inc. (NYSE:USPH) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I’d like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Christopher Reading: Thank you, sir. Good morning, and welcome, everyone, to U.S. Physical Therapy’s Second Quarter 2023 Earnings Call. With me on the line include Carey Hendrickson, our Chief Financial Officer; Eric Williams and Graham Reeve, our Co-COO; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President of Finance and Accounting. Before I provide a little color on the quarter, we need to cover a brief disclosure statement. So Jake, if you could take that, please.

Jake Martinez: Chris, this presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the company’s current views and assumptions. The company’s actual results may vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Christopher Reading: Thanks, Jake. So this morning, I’m going to keep my commentary kind of at a high level, and then we’ll turn it over to Carey to go through the financials in more detail. I want to start by thanking our partners, our operations leadership team, sales and marketing directors and our digital marketing support and development teams, all of whom are working hard every day to drive patients to our door, we can effect life-changing care, allowing them to quickly return to work sports into all those activities that support families uplift parts as well as communities. This would not be possible if not for the care, connection and dedication of our front line caregivers. Many therapists across our more than 150 individual partnerships.

In these first 6 months, first 2 quarters of 2023 as a result of the excellent care and outcomes, you continue to provide our patient — you continue to provide our patient demand has been greater than ever before in the history of our company. Quarter 1 delivered record visits per point for that, the highest ever for is normally a seasonally slowest quarter at 29.8. March gave us the best single month at that point at 30.7 visits per point per day. I’m pleased and proud to say that despite challenges in the labor market this past year, we were able to continue that quarter 1 momentum. In fact, we’ve turned it up even more in the second quarter new record volume in April and May at 30.9% for both months and overall Q2 volume at 30.4% visits per clinic per day on average.

We produced some very good additions, both acquired and de novo since quarter 2 a year ago. We’ve added 48 clinics in total this year 22 de novo clinics through the end of July which, as you know, earlier, mostly during our overall average until we get fully speed with staff and overall community involvement and for penetration. These new facilities, of course, become much more highly productive in the years to come, and they will continue to grow for many years serving patients and families. This quarter, our mature facility same-store volume grew 2.6% and against the strong comparative quarter in 2022. Our same-store for the year is up 4.2% overall. is not an issue for us. Also on the very positive side of the equation, general cost improvement, especially in light of the very significant labor scarcity and general inflation has played every corner of our country these past 4-plus months.

In spite of that, we’ve seen salary and related costs per visit as well as total cost per visit declined now 3 quarter in a row at the peaking in the third quarter of 2022 as inflation began to quickly accelerate last year. Our team is making real progress to very focused multifaceted efforts to address costs, streamline operations where possible and innovate with new solutions some of which are so long out across our main partnerships, which is to say that we’re not done yet, and we have more progress to make. In the area of commercial payer contracts, we continue to make progress with rate increases and at the same time, absorbing the 2% Medicare rate reduction this year and the 1% sequester relief phase out, which impacted us in this quarter.

This rig area is where we continue to work on multifaceted approach and where we have more opportunity to further improve. What we have seen over this past year was tighter than normal labor dynamics and extremely high volume demand is that on a small percentage basis, the number of licensed PT assistance that we have hired to fill a very strong demand has increased over where we’ve historically been. That in combination with the high demand has resulted in a greater percentage of Medicare visits being touched by a PT assistant with a further 15% PTA reduction reimbursement reduction creates a negative impact on our net rate. So we’re in the middle of a large-scale push to elevate this issue across our platform to retrain any and all of our front desk staff to better optimize scheduling to make sure that our clinical leadership is doing everything possible to ensure that we have optimal scheduling and clinically directed resources to not only provide exceptional patient care, but to be sure that we get fully paid for providing that care.

We believe this heightened awareness, which may have been diluted a bit dealing with front office turnover a late 2022 and early 2023 coupled with the high demand for our services has resulted in some addressable inefficiencies which flow through to a net rate. Given the already very low cost nature of the incredible care that we provide, this becomes an all-hands-on-deck effort to ensure that we have paid at a level that aligns with the results we are achieving. We’re not there yet, but we are very focused on working hard to make the necessary adjustments. Other positives for the quarter. Drew where our company completed a secondary offering at the end of May, which has proven to be very successful allowing us to pay off our highest interest rate debt further invest the remaining significant proceeds directly to further grow our partner-centric company.

We are currently busy doing just that, and you will continue to see us add new partners and experience in new states, while we also explore offerings and other adjacent service areas we believe we can further strengthen our business in physical therapy as well as our injury prevention business services. On the IP front, this year seems to be unfolding much the way we expected. We have seen major increases in spend across some of our longest tenured relationships and as we discussed last quarter, we’ve seen some companies fearful of a pending recession pull back from prior levels of spend and engagement in a defensive move for them. Counteracting that, our teams have done a great job replacing the vast majority of that pull back with exciting new business that I’m happy to say we’re able to staff now with greater efficiency much less time than where we were 9 months ago.

Both of our IP partnerships are working hard together to cross-sell and expand programs we’re looking for new opportunities. We continue to explore acquisition-based opportunities as well as expect that our reinvigorated balance sheet will provide us with dry powder and runway to do that over the coming quarters and years. Finally, I want to end my comments much the way I started by thanking those colleagues and many dear friends who’ve been with me now as I close in on my 20th anniversary here with the company. It’s been an amazing fun and exhilarating ride with more good things to come. I feel extremely glad to be working alongside so many talented and committed team members across our home office support group as well as our many partnerships around the country.

We’ve made a huge difference in the lives of millions of patients, and I’m proud to say that my life and I think the lives of many of our partners and staff has been made better as a result of the work that we do as well. And we’re not done. As you’ve heard, we always have challenges to tackle on things to address. That has been the way — has been the way it’s been for the entirety of my 38 career, including the early chapters of treating therapists and clinician. And we continue to have the energy and the drive to fight for better reimbursement for the life improving work that we deliver so consistently every day for rules and regulations that make sense and increase access to the very [indiscernible] treatment that we provide versus the much more costly and often riskier inventions, it should not be positioned as first choice options.

I believe physical therapy should be first option primary care equivalent for prevention and treatment of musculoskeletal enduring disease, we will continue to fight for that rightful place in the health care continuum. And for those of you who are listening from other companies please get dialed into the constant work we are doing within APTQI. We need you to fight alongside us with us as we work towards these important goals. That concludes my prepared comments. So Carey, if you would cover the financials in more detail. Carey?

Carey Hendrickson: Great. Thank you, Chris, and good morning, everyone. We had an excellent second quarter in many respects. We had all-time high patient volumes. We had strong growth in revenue, continuing downward trend in our salaries and total operating cost on a per visit basis. We had growth in our physical therapy operating income and our physical therapy operating margin percentage and year-over-year growth in our total company’s adjusted EBITDA. And in addition, as Chris noted, we completed a successful equity offering that further strengthened our capital structure, providing significant capital for future growth initiatives. The equity offering provided us with approximately $164 million in net proceeds for the issuance of 1.9 million shares.

We used $35 million of those proceeds to pay down the debt on our revolving credit facility which at the time was at a variable rate of about 7.2%, leaving approximately $129 million. They also lowered our leverage ratio, resulting in a 25 basis point decrease in the rate on our outstanding $150 million term loan based on our leverage grid. We’ve invested that cash at this point at a high-yield savings account prior to deployment into acquisitions. The savings and interest expense and the interest income on the net proceeds makes the offering immediately accretive even with the issuance of the 1.9 million shares. And of course, the return on those net proceeds will increase substantially when we deploy them into acquisitions. We reported adjusted EBITDA for the second quarter of $21.7 million which was the second highest quarterly EBITDA amount in our history and an increase of $0.4 million over the $21.3 million we reported in the second quarter of 2022.

Our operating results, which includes the impact of higher interest expense, was $0.76 per share in the second quarter of 2023. Our total company revenues increased 7.7% in the second quarter growing from $140.7 million in the second quarter of last year to $151.5 million in the second quarter of ’23 and our total company gross profit increased $1.4 million from $30.8 million in the second quarter of last year to $32.2 million in the second quarter of ’23. As Chris noted in his remarks, our average visits per clinic per day in the second quarter was 30.4%, which is the highest volume for any quarter in the company’s history. April and May were both at 30.9%, highest volumes for any month in our history, and our average visits per clinic per day in June was 29.6%, which is a normal seasonal decline related to vacations taken in the summer months and higher than the 28.9% that we had in June of last year.

Our net rate was $102.03 in the second quarter of ’23, which was a decrease of 1.1% compared to our net rate of $103.18 in the second quarter of last year. The net rate for our commercial and workers’ compensation visits both increased approximately 1%, while the net rate associated with Medicare visits was down 3.5%. As we noted in the release and as Chris mentioned, the Medicare rate decrease was primarily due to the 2% rate reduction from CMS that was effective at the beginning of this year. Coupled with the effect of the second quarter of last year included a 1% sequestration relief on Medicare rates. As we’ve talked about on our last couple of earnings calls, we’ve either renegotiated or terminated the subset of our Medicare Advantage contracts that reimburses at a rate that’s less than what it costs us to serve our patients.

The terminations were effective in June in July and most of the associated renegotiated rates are also now in effect, so we expect the impact of this work to begin showing up in the second half of 2023. We also continue to focus on renegotiations of commercial contracts and as Chris noted, we’re making other necessary adjustments to adjust our net rates. Physical Therapy revenues were $130.1 million in the second quarter of 2023 and which was an increase of $11 million or 9.2% for the second quarter of 2022. The revenue increase at our same-store clinics was 1.3% and the patient visits up 2.6% versus the prior year. Our physical therapy operating costs were $102.1 million, an increase of 10% over the second quarter of the prior year. On a per visit basis, our total operating costs were $80.61 in the second quarter, which was a decrease of 0.6% compared to $81.09 per visit in the second quarter of the prior year.

And we were pleased to see our physical therapy operating cost per visit decreased for the third consecutive quarter after peaking in the third quarter of last year. Our total operating costs were $85.14 per visit in the third quarter of 2022 and decreased to $84.5 in the fourth quarter. They declined further to $81.97 in the first quarter of ’23 and then declined again to $80.61 in the second quarter of 2023. Our salaries and related cost per visit decreased 1.2% in the second quarter of this year versus the prior year, and they’ve also declined for 3 consecutive quarters. From $60.99 in the third quarter of ’22, down to $60.04 in the fourth quarter, down to $59.14 per visit in the first quarter and then down to $57.59 per visit in the second quarter of 2023.

Our Physical Therapy margin also improved for the third consecutive quarter increasing from 18.7% in the third quarter of ’22 to 20% in the fourth quarter, 21% in the first quarter of this year and ended 21.5% in the second quarter of 2023. Really pleased with the progression that we’ve seen in all of those metrics. Our IIP revenues were $19.2 million in the second quarter, which is down slightly from the second quarter of ’22. And our IIP expenses were even with the prior year at $15.3 million with IIP operating income of $4 million, and our margin and IIT business was 20.7% in the second quarter of ’23. Our interest expense was $2.6 million in the second quarter of this year, which was an increase of $1.6 million over the second quarter of the prior year.

Of course, that higher interest expense is due to the increase in our debt-related acquisitions we closed during or since the second quarter of last year and also a higher interest rate in the second quarter of this year versus last year. Our balance sheet remains in an excellent position. We have a $150 million term loan with a 5-year swap agreement in place that fixes that 1-month term SOFR rate on that $150 million at 2.8%. And including the applicable margin based on our leverage ratio, all-in rate of our $150 million of debt was 4.9% in the second quarter, a very favorable rate in today’s market, and it’s below the current Fed funds rate. And as I noted earlier, the net rate on that term loan moved down 25 basis points to 4.65% after the secondary offering.

In the second quarter of 2023 alone, the swap agreement saved us $800,000 in interest expense with cumulative savings to date related to the swap of $1.5 million over the first 12 months. In addition to the term loan, we also have $175 million revolving credit facility that had approximately $35 million drawn on that prior to the completion of the equity offering of course, we paid that down with some of the net proceeds. And so there’s no — there’s nothing drawn on the revolver. Borrowings on the April 1 through May 30, we’re at a variable rate just north of 7%. In closing, we’ve had a very solid first half of the year, and we’ll continue to work hard to produce the best results possible for all of our stakeholders this year. The strength of our results in the second quarter give us continued confidence in the adjusted EBITDA guidance range we provided at the beginning of the year of $75 million to $80 million.

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

Q&A Session

Christopher Reading: Thanks, Carey. I appreciate that. Operator, let’s go ahead and line up for questions.

Operator: [Operator Instructions]. And we’ll go first to Brian Tanquilut with Jefferies.

Brian Tanquilut: I guess, I’ll ask the question. It sounds like based on the metrics that Carey shared with us this morning, whether it’s productivity of the clinic, cost per visit and all these KPIs, it looks like you’re executing very well. But as I think about some of those key points, right? I mean the productivity of the clinic and the cost to do deliver care how much runway do you think there is left to drive some of those metrics?

Christopher Reading: Yes, it’s a good question. So I mean individual clinician productivity, there’s not a lot of elasticity there. Individual clinic throughput, I wouldn’t call it out productivity, but just being the number of patients that we can get through an individual clinic. We’ve got as much room as we had probably 4, 5, 6 years ago. I mean we constantly adjust our hours. We can expand our hours most of our clinics are not open on Saturdays. A lot of our clinics, I think to say this, that a lot of our clinics in certain markets closed early on Fridays. We’ve got capacity on a per clinic basis, to continue to have that number increase. So that’s not going to be a limiting factor. And we certainly have room to move this in that rate this quarter, a little bit of a disappointment as we’ve really got extremely granular with where that issue is, I think the fact that we had the turnover that we had and the scarcity we had in ’22, particularly at the front desk.

This caused us not to be as valid in as we need to be from a scheduling perspective. I’m actually encouraged by the fact that it’s, I think, addressable the team, the clinical services team in conjunction with our operations group is on top of that, and they were holding out some very, very detailed training, not just on that and a couple of other areas that I think will help us as we going forward. So on one hand, for the quarter, a little better — but we have made progress, as you pointed out, in all of the areas that we’ve been focused on. I think we’ll make progress there. We know what to do.

Brian Tanquilut: Got it. And then maybe since you mentioned rate, obviously, 1% net rate growth on the commercial side being offset by some of the Medicare stuff. But as we think about maybe the number of contracts that you have, without going to percentages, right? I mean how much opportunity is left to, number one, drive positive rate trend within the portfolio of contracts? And maybe the second would be to push our rate increase above, say, a 1% number.

Christopher Reading: We have so many contracts to happen any as we do just because of our companies configured across more than 150 partnerships. But we’ve got a lot of contract negotiation left in us to do Carey, I don’t know if you want to comment further.

Carey Hendrickson: No, I agree. We have lots of contracts. It’s a constant focus for us, Brian. We’re up — and we’re having good success. I mean we’re having success in these rate negotiations I’d say the big payers are the ones that just takes longer to get — make progress with them. And so we’re continuing to work at it every day.

Christopher Reading: Brian, some of these contracts we’re getting increases now, but we have been sequential annual increases that are yet to come even on the one you’ve completed already.

Carey Hendrickson: Yes. We’re working to build in 3-year step increases for the most part. So we’ll have less to touch each year. We know we’re going to be getting those contractual rate increases as the year goes along. So that’s the move to…

Brian Tanquilut: Last question for me, Chris. I mean, obviously, you guys did the raise, you’re sitting on a bunch of capital right now, a lot of balance sheet flexibility. I mean what does the market look like? I know your space is obviously dominated by a bunch of PE-backed players. And I know your appetite has been more on the smaller side rather than the big platforms. But what does the market today look like in terms of either competition for deals or opportunities popping up that probably are more scaled given your capital availability?

Christopher Reading: Yes. I think the opportunity is still strong. I think what we’re seeing right now is a lot of the PE-backed companies have been decidedly more flat this year, particularly because a number have either done significant deals themselves or gotten to the point where I think interest rate increases were leverage is high and I think, to a certain extent, the reality that many of these individual operators have kind of missed the peak as said in this year. I mean we’re not in 2019 anymore at the height of this or even early ’21 when things were still really, really hot and I think there’s a little timing remarks in the market. Having said that, we’re busy. Now for us, sometimes, we’re ready to go and then the partner has something and things push a little bit.

And that’s happened on a couple of occasions this year. We’ll still get those things done. It’s just taking a little bit longer. But we’re looking at bigger deals too and opportunities not just in PT, but in injury prevention. So it’s going to be lumpy. It’s always been lumpy, but we’re going to get good things done.

Operator: We’ll take our next question from Joanna Gajuk with Bank of America.

Joanna Gajuk: So in terms of this commercial rate increases, if I can just follow up there. So the 1% I guess experiencing right now. Are you kind of suggesting that as you negotiate incremental the additional contracts that rate increase could actually accelerate into next year?

Carey Hendrickson: Joanna, it’s just going to depend on the timing of it kind of like M&A, it’s lumpy, it’s which ones you get and the timing of those. I certainly expect those commercial rates to continue to increase over time. We’re working hard at that as far as the rate of increase, it’s hard to say.

Christopher Reading: These contracts last and they go on for years and every additional one builds on what we’ve done previous.

Carey Hendrickson: Yes. As we just mentioned, too, we also have step increases built in for — on the ones that we renegotiated. So those should continue to help us as we go forward. So I think — I mean, I feel there’s always a lot of work to be done at commercial rates because there are so many contracts. So we’ve got — we’ve still got a bit of work to do, but we’ve made good progress, and I think we’re going to continue to make good progress. I know we are, and we should see those rates continue to grow as we go forward.

Christopher Reading: And Carey, when you say the increases that we’re seeing, the not 1% increase there, in some cases, double-digit price increases. Or 3% to 5% or 6% increase. We’re just not touching the whole portfolio, yes.

Carey Hendrickson: That’s right. We’re getting 3% to 5%, 6% increases in year one. And over a 3-year period, a lot of times, it’s like 10% to 12% increase over that 3-year period that we’ve got built in. And I also say we’re also making progress on some of the other Medicare Advantage contracts because those are a focus for us as well. And those we can impact and we’ve terminated a number of those contracts I mentioned in my remarks, but there are other ones that we can still renegotiate, and we’re working on those as well. Because Medicare Advantage is becoming a bigger portion of our Medicare visits overall. And so we’ve got — and that we can address somewhat. We can’t address what CMS hands down, but we can address at least to a certain extent, those Medicare Advantage contracts and how they relate to those CMS rates.

Joanna Gajuk: Okay. So you say on the commercial, it’s just kind of accumulate over time because you obviously have a 3-year contract, so you renegotiated like 1/3 of your book and then you’re negotiating another 1/3, so kind of like over a 3-year period, are you going to have a the slowing through the book. So eventually, it’s going to be more effective on what’s going on in all of the contracts versus now only 1/3 of this contract. So that makes sense and on this last comment on the MA part of the business. So is there a way to think — I know it’s a small portion, but to your point, is because the Medicare . So how — I guess, how to think about the portion of that business that already kind of was reset and a portion that — how big is the portion that kind of you’re still trying to either renegotiate or drop these contracts?

Carey Hendrickson: So within Medicare, the commercial advantage Medical Advantage. So right now, I’d say the Medicare advantage — I mean it’s grown as a percentage. It’s around 40% to 45% of our total Medicare bucket. So if you look at all the Medicare visits, it’s about 40% to 45% of it and that’s up from where it was in the upper 30s last year at this time. So that piece, there’s been a push to get people to Medicare Advantage. I’d say we’re still early innings on that, too. We’ve done some really good work as it relates to identifying some of these contracts that we just know are not — they’re not they’re not suitable. And so we’ve terminated those. So we’ve identified the primary ones that are in that situation. We’ve got still others that address.

Again, we’ve made progress on those as well, and those are the same kinds of increases we’re seeing. A lot of times, those are double-digit right off the bat because we’re going from — it could be where they paid 80% to 85% of Medicare and bumping them up to 100% or it may be from 80% to 90%, but those are really nice sizable increases on some of those contracts we’re making.

Joanna Gajuk: That’s good to hear. And the last piece, I guess, on the pricing workers’ comp. So what do you spend now in terms of your mix? And I guess because that’s the highest rates of all the different payers, right? So what’s the mix there? And kind of — I know you kind of — the bucket, so to speak, the client are in the pandemic, and I guess was there was some work being done to kind of bringing back maybe to the 14% pre-COVID of any update on that front?

Carey Hendrickson: Yes. So for our mix — go ahead. I’m sorry, Eric, are you going to say something?

Eric Williams: Yes. I was going to weigh in. This is Eric Williams in terms of where we’re headed on the work comp side. So yes, we started putting in a lot of efforts second quarter of last year to rebuild some of the relationships with the networks we brought back in the individual who actually built the work comp program for us years ago. And in second quarter of this year, this is the third straight quarter where we saw an uptick in volume, still a lot of opportunity. The volume we actually saw in Q2 was the highest volume we’ve seen over the course of the last 6 quarters. So we signed some new network agreements here beginning of the year. We’ve got a number of additional contracts in play right now, and we feel optimistic in terms of our ability to continue to drive this as a higher percentage of our mix it was just under 10% here in Q2 of this year.

Carey Hendrickson: And I would just say for workers’ comp increase as a percent of the mix, is really notable because, as you know, our volume has been increasing pretty significantly. So they’re increasing at a pace that is greater than our overall increase. So that’s — that’s good. And they were closer to 9% in the first quarter as part of the mix and workers’ comp is about 10% in the second quarter. To address just kind of the mix overall. Joanna, commercial is about 47% in the second quarter. Medicare is 34%, workers’ comp is 10%, Medicaid was about 3.5% and then there’s just everything else, which is maybe 6% or so.

Joanna Gajuk: Great. And so helpful, if I may, just squeeze last 1 on pricing and I guess the outlook into next year. So the America proposal calls for, call it, all in, 3.25% which that was finalized, would be worse than 2023 rate cut. So what’s your take on that proposal? And how much work, I guess, is being there? And what’s your visibility to Congress, stepping in again and trying to lessen that cut here.

Christopher Reading: Obviously, does that proposed rule came out middle to the end of July as it does every year. So we’re early in that process. Again, I mentioned APTQI in my prepared comments, our delivery partner, lobby group leadership in APTQI, all of our individual member companies who are very active in Washington are all putting a full court press. We just unfortunately, it’s difficult in when we get finalized in December on a short runway changes necessary to immediately come out of the gate and over companies, and this is now a few years overall. We think it’s very misplaced these reductions they’re picking on probably the greatest value in health care for returning people to function from significant injuries and surgeries, which sell work without physical therapy, but it’s early.

And in summer, and so we’ve got not as we have in the past, a lot more work to do. I’m hopeful we’ll make progress. I’m not going to give you much more than that on a crystal ball because I don’t know yet. But we’re going to — the effort is massive directionally in that regard.

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

Lawrence Solow: My question was answered already, but go to see, I guess, the topic to that on the pricing. But it does feel like, I guess, just in terms of your guidance just on the shorter term, you didn’t — it feels like you have a little bit of a tailwind, at least going to the back half just from fixing up some of the scheduling misalignments and walking away from some of these Medicare agreement that you just spoke to, right? So again, not asking you to do it as guide on the back half of pricing, but perhaps this is at least a low watermark for the year, it could slowly work our way up in the back half. Is that fair to say?

Carey Hendrickson: We do believe there’s potential to move that rate out, yes, based on the things that we’ve talked about today, the things we think it’s addressable and related to the work we’ve already done. Yes.

Lawrence Solow: And obviously, the negotiation is much more of a multi-yield thing, and you touched on sort of gas just like not getting 1% price increase you’re getting probably more than that or a lot more than that mid-single digits or whatever, but you have so many contracts, right? So I [indiscernible], that you’re only moving 5% of the time or whatever, right? So it gets divided by 20% or maybe not that much, but a multiplier effect. But so fair to say that you still probably haven’t worked through a lot or majority of your contracts haven’t changed.

Carey Hendrickson: Yes, that’s right. That’s not even close. We’ve got a lot more to do.

Lawrence Solow: Okay. Okay. Great. And just in terms of volume. Obviously, a really good, strong first half, really back half of the year. Is there anything sort of incorporated you kind of — I think the average volume in the first half was like up we look at both quarters. Do you expect those trends to continue in the back half or more historical rate on or 2% to 3%, which is what we actually saw this quarter, but any thoughts on that?

Christopher Reading: I mean if you look back to last year, to the front part of the last year, we didn’t have the scarcity that we really became acute in, I would say, probably in June of last year and forward, we didn’t have the question of all the other things. And so — the first half of this year, actually, the part that we’re in are just completed had tougher comps, the second half of a year ago in ’22 we actually. We couldn’t address all the volume that we might have just because staffing was so tight. And so I can tell you, staffing’s not easy right now, but it feels a lot better than included a year ago, we made adjustments. Our team has done a really good job and so I’m hoping we can expand some of those same-store numbers just because in part, volume has continued to be strong, but our comp is a little bit weaker in the second half of the year.

Carey Hendrickson: Yes. The weakness comment I would say that the first quarter was such a big jump because it was — we just — we’ve never experienced volumes like that in January and February, particularly. And so that was a really nice jump in the first quarter. I wouldn’t expect it to get back like the 6% mature clinic growth in the second half of the year. But as Chris mentioned, the comps are a little bit — are not quite as strong as we go into the back half of the year.

Lawrence Solow: Got you. And you probably — obviously, like you said, what better position at the beginning of this back half anywhere last year to in terms of your staffing. Okay. Just last question, Carey, while you’re here. Just you mentioned you’ve done a really good job and costs on a per visit basis or down overall cost really hung in that overall margin in the last few years has actually been pretty steady despite rapid inflation and price pressure, which we really commendable to you guys. Can you just explain to me how come on a — if I just look on a year-over-year basis, your margins, salary as a percentage of revenue and it’s still up. Is that just more of a function of the acquired clinics pricing? Or what’s kind of driving that?

Carey Hendrickson: Yes. It’s a combo because when you’re looking at those percentages, you’re looking at — there’s a double impact, right? There’s the impact of volume and there’s impact of rate. And so I think that the rate and how that influences revenue when you’re looking at those costs as a percent of revenue is really — is what impacts that.

Christopher Reading: Yes, I still agree with you. It’s driven off. It’s a driver. It’s reflective of the pressure that I think we’ve done it pretty well with the pressure on that rate.

Carey Hendrickson: Yes, and that’s why the best metric we believe to look at for those costs is looking at on a per visit basis.

Lawrence Solow: That’s all. I totally understand why you do that, appreciate that color.

Operator: We’ll take our next question from Matt Larew with William Blair.

Madeline Mollman: It’s Madeline Mollman for Matt. Just one on the segment. I know it was down slightly this quarter, and you mentioned that some contracts — you talked to some customers about delaying contracts or pushing them back or putting pause on them. With the macro environment starting to improve — have you seen these customers reengaging, wanting to restart contracts, beginning discussions for that at all?

Christopher Reading: No. I’m going to tell you, and I don’t know that, that today, close to know if we have certain contracts where people were concerned and now that they’re not. I honestly — I think things are coming still with those few customers, not a lot, and it’s heavily weighted on the tech side of the business. What their business is heavily tech influenced. I still think they’re kind of same outlook as they were before. Having said that, we’ve added a lot of good customers this year and across both partnerships, we further diversified our client base. But to my knowledge, and Eric, you might speak to it. I don’t know if we’ve seen any big reversals that are meaningful yet.

Eric Williams: No, I would agree with that. I think you summed that up perfect, Chris. I mean the IIP businesses have done a nice job of trying to diversify their portfolios. But the tech sector and the automotive sector got hurt really hard. And that was a business that we saw fall away tail end of last year. We’ve seen other customers on the retail side and distribution side actually increased. So on a macro basis, I think things have stabilized. And I think there’s opportunity for growth here going forward, but not near as robust as it was in 2022.

Madeline Mollman: Great. And then again, on IIP, can you talk a little bit about what you expect past 2023? I know this is a more muted year, the long-term growth for that segment to be? I think last year, same-store growth was in the 20% range for the first 3 quarters of 2022. So just what can we expect that segment to grow over time.

Christopher Reading: Look, we haven’t had IIP all that long, and the growth has been extraordinary. So for me, right now, it has many moving parts as we’re in between politics and the economy and interest rate environment and the fed all the many things that influence. CEOs and CFOs to make decisions they aren’t uniform across the country because different sectors, as Eric mentioned, recover at different rates or get hot or cold at a different times. So expect us to be ahead of our PT growth and to be very positive as we go forward. All other macro things being relatively stable and equal. We’ve demonstrated that we can grow this business through acquisition. Our clients, generally speaking, are very, very sticky. They stick with us, most clients expand, particularly those clients that have numerous operations positioned around the country.

But I’m not going to be able to take a growth rate at this point because I just don’t have topics that are clear enough to do that.

Operator: At this time, we have no further questions in queue. I will turn the call back to Chris Reading for any additional or closing remarks.

Christopher Reading: Yes. Thanks, everyone. We know we covered a lot. We appreciate your time and attention this morning and Carey and I are available today and rest of the week and next week, we’ve got board meetings come for next week. But after that, we’ll come back up for air. So if you have any questions or any follow-up necessary, please give us a call, and have a great day.

Operator: Thank you all. This concludes the U.S. Physical Therapy Second Quarter 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.