U.S. Physical Therapy, Inc. (NYSE:USPH) Q2 2025 Earnings Call Transcript

U.S. Physical Therapy, Inc. (NYSE:USPH) Q2 2025 Earnings Call Transcript August 8, 2025

Operator: Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy Second Quarter 2025 Full Year Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions] I’d now like to turn the call over to Chris Reading, Chairman and CEO. Please go ahead, sir.

Christopher J. Reading: Thank you. Good morning, everyone, and welcome to U.S. Physical Therapy Second Quarter 2025 Earnings Call. With me on the call include Carey Hendrickson, our Chief Financial Officer; Eric Williams, our President and Chief Operating Officer in the East; Graham Reeve, our Chief Operating Officer in the West; Rick Binstein, our Executive Vice President and General Counsel; Jason Curtis, our Senior Vice President, Accounting and Finance Area. Before we begin today’s call, we need to cover a brief disclosure, which I’ll ask Jason to go ahead and read.

Jason Curtis: Thank you, Chris. The 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, and the related reconciliations can be found in the company’s earnings release and the company presentations on our website.

Christopher J. Reading: Thanks, Jason. So guys, I’m going to do this, I think, a lot like I did it last time, more of a candid overview allows me to tell the story a little bit better. I want to start out by thanking our partners, our staff and our home office support around the country. They’re just doing an excellent job. I’m going to share with you some statistics that we don’t normally share. We haven’t shared before as it relates to our patient sentiment around our care. So the clinical staff, our partners, they’re doing a wonderful job. We’ve had good strong focus and execution in a number of different areas this quarter, we’ll talk about. I also want to mention our industrial injury prevention partnerships. Both are really firing on all cylinders at this point.

We’ve added a number of very large opportunities, some of which haven’t even started yet. And we continue to be very, very bullish about that part of our business. As we go through the stats, you’ll understand why. So for the first — so for the second quarter, talk about physical therapy first and volumes, a record second quarter for us. As you guys know, second quarter is typically our busiest quarter in terms of peak volume. And so every second quarter, pretty much last year, the same was a record quarter for us a year ago. This year, our visits per clinic per day jumped to 32.7, up really nicely from, again, last year’s second quarter record of 30.6. So the drivers around this, I think, more than anything, are happy patients who love us at the end of their care, who refer their family and friends and neighbors to us.

And when pickleball happens a year or 2 down the road, they come back and see us. This is the stat I want to share with you that we really haven’t talked about before. It’s not a new stat for us. We measure it every quarter. We have an outside company, tabulate our surveys. This is company-wide. Our Net Promoter Score is 93.5. Now just to give you some perspective before this call, I Googled what’s a good Net Promoter Score for a health care company. And I got 2 answers. good was 30 and excellent was 50. And so the way that we get these results tabulated, we’re able to see what percentage of patients are active promoters of our business, and we’re at 95%, only 1% of our patients as a negative or a detractor. So that puts us in amazingly good standing in an amazing category.

Part of the reason for our success, obviously, it’s what we try to do every day. On the injury prevention side, again, I can’t say enough good things about our teams. Both partnerships doing really well. Revenues up 22.6%. Gross profit up 25.8% compared to the prior year quarter. And again, we’re working on some really large contracts, one new in the auto industry, actually several new, many, one really large one and one very large one to come here later in the year. Revenues in PT were also strong, increasing 17.3%. We added over 50 net clinics compared to the prior year period. And for the first time through this first 6 months, we exceeded 3 million visits on a year-to-date so far. We’re also able to drive a slight increase in our net rate despite the Medicare headwinds, which you guys know all too well about.

And I just want to point out that if you go back to when just the period before these Medicare cuts started, which have been now sequential layer cuts for a number of years, the impact in this year on those stack cuts is right around $25 million. That’s straight off profit line. It’s been a huge impact. It’s been a major headwind on a year-over-year basis, I can’t remember exactly, Carey can tell us, but between $5 million and $6 million compared to last year and this year. That’s 8%, 8.5% of our earnings on last year’s number, maybe even a little bit more than that. And so to grow over 20% with that kind of a headwind consistently, we’re really happy about right now, things are coming together. Our cost — our salaries and related cost was up on a per visit basis, ever so slightly, less than 1%.

But our overall cost per visit was down slightly. And really, I think, beginning March and continuing forward, we’re beginning to get traction on a number of the initiatives that we’ve been working on that will help us impact cost, that will help us continue to drive more volume, and we’re feeling better about things right now than we have in some time. When you look at PT, our gross profit margin, and we’re going to say adjusted very, very slightly, I think around a couple of hundred thousand dollars only relating to an incentive payment that Metro had as a result of closing that deal. Our gross profit margin came in at 21.1% for the quarter. So that is a nice move forward as well. On the development front, we’ve added home care business, a couple of physical therapy acquisitions.

We have more to come for the remainder of the year. And we intend to focus hard on our injury prevention business, given the organic and the overall growth elements in that business, the margins, just the performance of both those teams. We widened our industry verticals in that space. We widened our service offerings in that space. We’re competing and winning large contracts. We’re able to do that with some margin improvement as well. And so that business is very strong for us and has continued to be strong really for a very long time. The combination of these positive factors has caused us to look out over the remainder of the year and increase guidance, which is now between $93 million and $97 million in adjusted EBITDA. And then before I turn it over to Carey, because I skipped through a lot of things, I wanted to tell the story.

Carey is going to go through the numbers with a little bit more granularity. Again, I just want to thank our teams. At times, we endeavor every day to try to make a difference, to try to make a positive impact in the patients’ lives or within the injury prevention space and the lives of the workers who are working at our nation’s largest companies, most prestigious companies. And we’re having an impact, and we’re making the world in our little way better. And we feel really good about that. And so again, I want to thank everybody that’s involved in that. It’s making a difference, and we appreciate it very much. Carey, if you would, go ahead.

Carey P. Hendrickson: Great. Thank you, Chris, and good morning, everyone. As Chris mentioned, we’re very pleased with our second quarter results and a few performance metrics that stood out to me. We achieved a new record — company record 32.7 average visits per clinic per day. That was the highest in our history. Our salaries and related costs, as Chris mentioned, increased slightly to 0.7% compared to the prior year. That’s the smallest increase in that metric we’ve had since the fourth quarter of 2023. Our total operating cost per visit actually decreased year-over-year. Our PT margin, as Chris noted, improved to 21.1%, up from 20.1% in the second quarter of last year. Our IIP revenue, excluding acquisitions, so on an organic basis, grew 18.4% and our IIP gross profit increased 21.8% on an organic basis.

Our adjusted EBITDA increased to $26.9 million in the second quarter of 2025, which was up $4.7 million from the second quarter of last year. And then our adjusted EBITDA margin expanded to 17.5%, up from 16.4% in the second quarter of last year. So all of those metrics, I was really pleased with. Turning to patient visit volumes. Our average visits per day were 33.0 in April. They were 32.9 in May and 32.3 in June. That slight taper in June is consistent with our historical summer patterns when volumes dipped slightly in the summer months before rebounding again in mid-August. We recorded 1,530,263 visits — clinic visits in the second quarter and then also had 28,493 home care visits. This is the first time we’ve reported home care visits separately from our in-clinic visits.

They stem from the home care business that we acquired through the Metro PT transaction in New York in the fourth quarter of last year, and we’ll continue to report those separately going forward. For reference, we had 22,943 in-home visits in the first quarter of this year. And that number is — the year-to-date number is in the release, too, just so you’ll have that for going forward. Our net rate per patient visit was $105.33. That’s ahead of the $105.05 we achieved in the second quarter of last year, but it is slightly less than what we had in the first quarter at $105.66. As a reminder, we absorbed the 2.9% Medicare rate reduction that took effect at the beginning of the year and also our largest payer in Michigan, which is our third largest state with 56 clinics implemented a policy change on April 1 that negatively impacted our net rate a little bit, so in that state.

So that was a bit of a headwind, too. Even with those headwinds, though, our net rate held up well in the second quarter, and we expect it to grow from there. We continue our efforts to have a strategic focus on increasing reimbursement rates through targeted contract negotiations as well as efforts to grow our higher net rate workers’ comp business. Workers’ comp represented 10.4% of our net patient revenues in the second quarter with visits increasing 8.4% year-over-year. We remain fully committed to all of our rate-enhancing initiatives, and we’re working on those every day. Physical therapy revenues were $168.3 million in the second quarter of 2025, which represented a $24.8 million or 17.3% increase compared to the same period last year.

The majority of that growth was driven by acquisitions completed since the second quarter of last year, most notably that Metro acquisition that we made in New York last November, that was $19.6 million of the $24.8 million. Physical therapy cost — operating costs were $133.1 million. That was an increase of $18.4 million or 16% over the prior year quarter. Importantly, we managed costs effectively. Our salaries and related costs, I mentioned, were just up 0.7% at $6.08. And our total operating costs, as I also mentioned, were actually down year-over-year. Our physical therapy profit margin, I noted already, 21.1%. That’s our highest quarterly margin since the second quarter of 2023. And that, of course, reflects solid revenue growth and the cost management.

Our IIP team delivered another strong performance in the second quarter. Our IIP net revenues increased $5.3 million or 22.6% compared to the second quarter of 2024 and income rose $1.3 million or 25.8% over the prior year quarter. And then I gave the organic numbers earlier. IIP revenues increased 18.4% and gross profit up 21.8%. The IIP margin for the second quarter was 22%, which is up from 21.4% in the same quarter last year, reflecting strong top line growth and continued focus on operational execution. Our corporate costs remained in line with expectations. They were 8.7% of net revenue in the second quarter. That compares to 8.5% in the second quarter of last year. We’re in the early stages of implementing a new enterprise-wide financial and human resources system.

Implementation costs related to that project will continue through 2026. And consistent with our practice for similar nonrecurring costs, we’ll add those costs back in our adjusted EBITDA calculation. Year-to-date, we’ve incurred $221,000 in implementation costs that was really related to the selection part of our implementation, and we’ll start full bore on our implementation in the third quarter. And that will always be atomized on our non-GAAP reconciliation page. Operating results were $12.4 million, up from $11 million in the second quarter last year. And on a per share basis, we were $0.81 versus $0.73 in the prior year quarter. Our balance sheet remains in excellent shape. We currently have $135 million on our term loan with a swap agreement in place that fixes that interest rate at 4.7% that extends through mid-2027.

In addition, we have a $175 million revolving credit facility that had $24.5 million drawn on it at June 30, 2025. We ended the quarter with $34.1 million in cash. As disclosed in our earnings release, the Board of Directors authorized a share repurchase program this week, providing us the flexibility to repurchase up to $25 million of our shares through December 31, 2026, if market conditions are appropriate. We view this as a prudent tool to have at our disposal. However, acquisitions will continue to be our primary capital allocation priority, consistent with our strategic growth strategy. Our performance in the first half of the year has been strong, exceeding our expectations coming into the year, and we believe we’re well positioned for a solid second half as well.

And as a result, we’ve raised our full year 2025 adjusted EBITDA guidance from a range of $88 million to $93 million to the new range of $93 million to $97 million. In effect, the high end of our prior range becomes the low end of our new range with a $4 million increase at the top. So with that, I’ll turn the call back over to Chris.

Christopher J. Reading: Thanks, Carey. Appreciate it. I want to mention one more thing. We’re happy with where we are this quarter and the progress still have plenty of things to work on, right, which to me is also encouraging because we’re not there yet. We have room for improvement. One of those things I want to point out as a matter of perspective relates to our same-store growth in mature facilities, which this quarter was a little bit lighter than maybe everybody expected. It was over 1%, but not in what I would call our normal range. We still have a few markets where staffing is a little tight and with cost control that probably put a little bit of a damper on us. I want to point out one thing. Back in the spring, we initiated a staged rollout of cash-based programs.

We haven’t spent a lot of time talking about it as with anything, it takes a little time to get traction, getting real traction with that now. And so in our other income line, this doesn’t show up as additional visits, although some our patients are coming in for these cash-based services. We have generated about $900,000 worth of additional revenue, a lot of that coming from our cash-based services, which are continuing to ramp up as we go forward. And so that’s an added benefit that we really haven’t had before. We’re seeing some of our partnerships do extraordinarily well with that. So with that, that concludes our prepared and our candid comments, and we’d like to go ahead and open it up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question will come from Brian Tanquilut with Jefferies.

Brian Gil Tanquilut: Congrats on a solid quarter. Chris, maybe I’ll start with a follow-up or a question around your last comment. So as I think about your same-store outlook, how would you characterize demand for your services or just broadly in the market versus like you were saying, kind of like pulling back and managing the cost because of the clinician labor situation? And then maybe how do I think about your capacity versus thinking about maybe de novo builds in the future as you start bumping up against capacity constraints potentially?

Christopher J. Reading: Yes. Well, demand really, Brian, demand is really solid pretty much everywhere. Now there is a little push-pull that we have to manage always when we’re trying to get costs under control and so you’re trying not to be fat to use that term, to have too many select resources yet you’re still trying to meet demand. And we certainly — it’s not perfect. We have some markets where the market is still a little tight where we have additional FTEs, we need to hire that — where the demand is strong and yet we need some more resources. Other places are being dialed in where they need to be. So that’s a work in progress. The cash-based programs are helping us to generate additional revenue. And so that — it’s been kind of a net add for us that we haven’t had before. And then I’m trying to remember the second kind of part of your question.

Brian Gil Tanquilut: Good. Yes. Just as you think about capital deployment into maybe de novos as you start bumping up against capacity constraints. Yes.

Christopher J. Reading: On the de novo side, look, we’re going to — we’ve had this market where we’ve had some headwinds, and we’ve had to deal with that. This is going to be probably the strongest de novo year that we’ve had since I’ve been with the company. So de novos are going to be good this year. They’re on a really good pace. We’re making adjustments and have made adjustments on the recruiting side of the house. On the residency side, which get more students into our programs. And so we think we’ll be able to continue to ramp into the demand. We just have to keep it dialed in right now. But I don’t see it impacting our de novo openings. And frankly, in markets like New York, where net rate is considerably higher than most of our competition, particularly our small competition.

We’re able to do these small [ aqua novos ], which, frankly, we don’t even announce, but we’re able to do those at very, very nice multiples and get a nice rate lift as a result and a lot more resources to help them grow and scale. And so that is going to continue to be strong as well.

Brian Gil Tanquilut: Chris, to follow up on that. I mean, as we think about capital deployment, obviously, the announcement of the dividend is positive. So just curious how you and the Board thought about that decision to introduce a dividend just when it sounds like this is going to be one of your best de novo years. Maybe just thinking about the balance sheet, the cash generation and then just the decision to do the buyback.

Christopher J. Reading: Yes. So you mentioned dividend. The dividend is ongoing, and so we’ve been paying the dividend for a long time. The buyback is new. Look, we feel like the stock has been undervalued for some time. We understand health care services having a little bit of a tough year, and we’ve had some Medicare headwinds and yet we’re making progress and continuing to grow the company. So we wanted to be in a position to have flexibility at a certain level where we could go in and demonstrate our belief that we’re going to continue to grow this company and do well over time. So it gives us flexibility. As Carey mentioned, it’s not our first preference for capital deployment. I would say our first preference right now, frankly, is directed toward injury prevention where the embedded organic elements of that business are really, really strong.

And the next would be PT and then on from there. We’ll be disciplined about any share buyback, and it’s going to be dependent upon other capital demands and really where the stock is at any given time.

Brian Gil Tanquilut: Got it. Chris, if I may throw one more question. As I think about just the efficiency of your physical therapists, we hear about AI tools in the market aimed at physical therapists. I mean is that something that you’re throwing in the mix that’s helping you out? And then maybe kind of related tangentially, you talked about your home PT business. Just if anything is out there that you can share with us in terms of the dynamics there because obviously, it’s new to us investors on what that business looks like.

Christopher J. Reading: Yes. There are some cool AI tools right now. We’re deploying AI-backed technologies for clinical documentation, which is helping people get through their least favorite thing of the day if you’re a clinician, which is to document all the cool stuff that you did with somebody. And in physical therapy, you have to document a lot of things, sets and reps and weights and motions and joint related movements. And so it’s tedious. It takes time. And so this ambient listening AI-driven assist is helping our clinicians get through that much quicker, much more efficiently. We’re just on the front end of rolling that out, but that’s been well received. And we’re rolling out what I would call broadly a semi virtualization of the front desk, which enables us not to go completely virtual because I don’t think we’re ready for that yet nor do I think patients are ready, but an augmented situation where we’re able to focus efforts from across multiple clinics through one individual that may be on-site or remote somewhere and be much, much more efficient and save the number of front desk FTEs, which continue to be a labor challenge for us just in terms of longevity, unlike our PT group, which, frankly, right now, we’re having the best least amount of turnover that we’ve seen and maybe my recollection, really good right now.

And so these tools are helping us get some margin and efficiencies in areas where we just haven’t been able to do that in the past. And we’re early, but it’s directionally encouraging.

Operator: Our next question will come from Joanna Gajuk with Bank of America.

Joanna Sylvia Gajuk: So maybe first on the metric that really stood out besides the visit per clinic, but the cost per visit decline, [ sort of ] cost, right? So maybe in that context, can you walk us through or give us some update on your labor management strategies, the wage, maybe talk about turnover and other, I guess, metrics you can share because it sounds like you’re doing a pretty good job there.

Christopher J. Reading: Yes. Eric, do you want to go ahead and take that, talk about turnover and some of the things we’re working on and what we’re seeing.

Eric Joseph Williams: Yes. This is — again, you recall from our quarterly conversations here, we made a lot of investments in systems and resources in 2024 that are really starting to pay dividends for us in 2025 as it relates to recruiting and retention. We’ve seen a 25% increase in student clinical rotations across our partnerships in 2025. Part of that was participating in a student rotation matching program with software, the exact software that’s being used by all of the PT schools out there. So we’ve seen almost a 200 student pickup this year. We put in a new applicant tracking system in 2024 that’s also given us better company-wide visibility across our partnerships to all the applicants who are applying for jobs. It gives us better opportunity to follow up with these applicants, track them, pre-hire, post-hire.

And then for the ones, of course, that don’t take jobs with us, we have this huge database that we’re building of people that we can go back to when we do have job openings. So systems have made a big difference, putting in some additional resources to help us on the recruiting front made a big difference for us. And the mentorship piece has been a major focus for us. And we really pushed that hard with our partners to make sure that we’re connecting and spending time with the younger therapists that we bring on board in order to reduce turnover rates. As Chris mentioned, these are the lowest turnover rates we’ve seen for the 6 months this year, January through June, lowest numbers we’ve seen in the last 7 years. So it’s absolutely making an impact for us.

The pieces that we’re really excited about, and Chris referenced one of them, I’ll touch base on that in a second. This mentorship piece, while we’re really focusing it on a partnership level, which is where our clinical staff goes to work, we’re in the process of building out a platform here, a software platform that’s going to allow us to expand our mentorship programs beyond the 4 walls of the clinic and beyond the existing partnership. It’s going to give us the ability to connect 2,600 clinicians across our company with each other so that people that have particular interest for specialties have an opportunity to connect with people that might not have that specialty within the partnership, but have an expertise and we can take advantage of that across our entire company.

So we’re excited about that. We think that will pay dividends for us as well as it relates to our ability to retain staff. Those are the big ones. Chris, you mentioned AI. I’ll talk about that as well. So we are in the early innings of using that voice recognition technology that Chris talked about it. I think we have that in the hands of 200 or 250 PTs right now. It’s been really, really well received. And I think that is going to have an impact for us over time with retention as well. I mean if you can reduce documentation, it’s the things that clinicians hate to do the most. And right now, we’re — there’s a lot of people dabbling in it. I think we’re farther ahead than most. I think we’re farther ahead than most large platforms experimenting with that right now.

And I think that is going to help us attract and retain staff going forward.

Joanna Sylvia Gajuk: Are you willing to share the turnover — the turnover numbers that you track?

Eric Joseph Williams: We actually — we post — we will report that publicly at the end of the year, and you’ll find that in our ESG.

Christopher J. Reading: Yes, Joanna, I don’t want to be in a position quarter-to-quarter to add to our already exhaustive list of metrics, but we’re in a good spot right now. We’re in a really good spot.

Joanna Sylvia Gajuk: Yes, it sounds like it. And if I may, another topic. Medicare rates, right, have been a headwind for a couple of years now, but it sounds like ’26 is going to be a better rate update. So the overall physician fee schedule is going up like 3.5% or more, 3.6%, 3.8%. So we had estimated like a 2.5% or so physical therapy codes. But can you talk about your estimate for your company in terms of how the rate increase would translate for your portfolio into next year?

Christopher J. Reading: Yes. Let me make a quick comment, and then I’m going to kick it to Carey, and he’ll get you through the specifics. This year, and this is proposed rule. So there’s going to be a lot of commentary and certainly a lot from the PT industry. This year was the most complicated of any year that I can remember literally in my career. They changed a lot of — think about turning kind of metaphorically turning knobs. They turned a lot of different knobs for RVUs, for work values, for geographic index factors. And there were particularly large swings on the geography side, some so much that both us and the APTA thought that some of the tables weren’t correct. And so our overall assessment is Carey can get into. But the takeaway is positive. No longer a headwind. We haven’t had any kind of a tailwind in a while, and we’re happy that it’s forward, but we think there’s more work to be done, obviously, with CMS. Carey, why don’t you go through the specifics?

Carey P. Hendrickson: Yes. Thank you. So Joanna, we’ve looked at it, looking at the various geographies and what the changes were in those geographies. As Chris mentioned, that varies a lot. Based on where we are and the rates increases in those geographies, I think we’re probably going to be somewhere between 1% and a 1.75% increase, something like that. For us, again, positive. We’re just — we’re happy to have a positive increase and not be looking at negative numbers for next year. So we’re really pleased about that. That — if it’s in that 1% to 1.75% range, that would be somewhere between $2 million and $3 million of a positive for us next year on the top line. And then from an EBITDA standpoint, it would translate to somewhere between $1.5 million and $2.5 million.

So in that range is kind of what we’re looking at, at this point. Again, this is a preliminary ruling. We’ll know the final ruling in December, and we’ll see if anything changes, but that’s kind of where we see it today.

Joanna Sylvia Gajuk: All right. This is very helpful. And I guess, so you made it sound like there’s going to be pushback on that level. So is it your expectation maybe the final is a little bit better than proposal or I guess too early to say?

Christopher J. Reading: Yes. We certainly hope that it will be the — the irony is, unfortunately, if you get under the hood and see how the sausage is made is that the specialties that have the most extraordinary increases in the cost of equipment, so very expensive equipment and have the most highly litigated where there areas where there’s exposure to litigation and other things, which you just heard the number of patients that love us on a percentage basis. So physical therapy in general doesn’t have that problem. And so we’re making a decided push where we know that we save the system a lot of money. In fact, in the state of Maryland, where physical therapy on a pilot program with CMS is in the position as kind of a primary care for musculoskeletal, they determine the physical therapists do what happens in the case.

There’s a massive aggregate savings. And we’re hoping to use those results with CMS to extend that equipped pilot beyond the state of Maryland, which could be a big pay for a reasonable, rational annual cost of living increase for the fee schedule, and we think we should be front and center in that. So yes, we’re pushing. We hope it gets better. We think there’s some flaws in the existing methodology, and we’re going to be working on that between now and year-end.

Operator: Our next question will come from Benjamin Rossi with JPMorgan.

Benjamin Michael Rossi: So turning to the IIP segment performance. You mentioned adding some services here over the course of the year, certainly seems to be off to a strong start to the first half with margins expanding year-over-year. Is it fair to say that, that segment is coming in ahead of your initial expectations of a $3 million absolute increase in gross profit, particularly as we head into the seasonally stronger 3Q?

Christopher J. Reading: Yes, I don’t have in front of me exactly what our budget was, but we’re definitely ahead of budget for the year. Second half is — there’s a little different seasonal pattern with injury prevention. We tend to be pretty strong through the year, a little light in January like everywhere else and a little light in December, where in some of the big auto manufacturers and some of the nation’s biggest manufacturers, there’s an early shutdown in December. And so that blunt our earnings a little bit. But if you go back, not just this first half or this quarter, but on a year-over-year-over-year basis, injury prevention has really done well for us and had really strong organic growth contributed to it. So we continue to be bullish. We’re spending more time in development in that area, and we’re identifying good companies. And of course, like anything else, we’ve got to get things done, but we expect to continue to deploy capital directionally there.

Benjamin Michael Rossi: Got it. And I guess just as a follow-up to your comments on Medicare PFS rates. Obviously, it seems like the change for 2026 is kind of amounting to more like a onetime fix, and it doesn’t necessarily address anything in 2027 and doesn’t obviously take you out of that $25 million hole you described after decreases in recent years. Can you just walk us through where your conversations stand with your counterparts at the federal level and maybe how they are framing the decision to include that onetime fix for 2026 in the OBBBA?

Christopher J. Reading: Yes. I think it depends on who you talk to, but nobody in Congress is happy that this is an annual issue. But this isn’t the only annual issue that the government faces these days. It seems like that’s how we fund the government each year is through this crisis management process that eventually ultimately gets done with a lot of chicken on both sides. And so it’s not the optimal way to do anything, but certainly not fair to providers to have a 1-month runway basically where you’re notified in December what the final decision is and then you have until all of January through the holiday to get things ready to go. We should have a multiyear plan. It should be locked. All of the lawmakers believe that’s the way it should be and yet, let’s call it, a 10-year kind of permanent fix on the physician fee schedule, about $100 billion event.

And so they need savings to be able to do that. One of the big areas that we think is a saver, and we’re through APTQI, the Alliance for Physical Therapy Quality and Innovation, group that I’m heavily involved in and with all the other big companies in PT, we’re going to have a pretty significant spend this year to use an outside Beltway analytics group to take the results that we’ve seen from the ECLIPSE study in Maryland and extrapolate those real results, not theoretical but actual over the nation and create what we think is a massive savings for the system with physical therapists in that key role as kind of the primary care director of the musculoskeletal case. And so that’s a possible pay for a physician fee schedule fix. It’s gotten a lot of very positive attention among our lawmakers, our Congress on both sides.

CMS, I would tell you is kind of a difficult place to be because it’s so siloed. And so people have one intestinally small fraction of what amounts to a very complicated series of areas and rules and responsibilities. And so it’s a little bit different to get a clear picture there, a little bit difficult. But with Congress, we — as long as we can come up with some savings that we can get out of this deficit spending that we’re in, maybe hear about tariffs and all the revenue that’s creating, we’ll see. But we need more than a 1-year fix for sure. And we have the AMA and the Hospital Association, everybody else wants more than a year-to-year fix. It’s unsustainable.

Operator: Our next question will come from Larry Solow with CJS Securities.

Lawrence Scott Solow: Most of my questions have been actually answered. Just a couple. I’m just curious, so the 7% or nearly 7% year-over-year increase in just visits per day per clinic and also the very modest growth in labor and then less contractual overall operating expenses per visit. How much of that just relates to the — you had an acceleration in closures last year. I know you closed like 30 clinics at the end of — back in Q3, I think. So it feels like a lot of that just more efficiencies driving these gains. Is that fair to say? And then second part of the question is I know you had set out — you discussed last year some cost-cutting initiatives. You didn’t really put a number on it, but you sort of thought you could add up to maybe even double-digit millions over the time. So I’m curious how that has played into the big performance this quarter.

Christopher J. Reading: Yes, it’s like bacon cake. There’s a lot of ingredients that go together. And at the end of the day, you hope it tastes good. I don’t have in front of me the relative pieces parts of every one of those ingredients. And in fact, some blend together. So it’s a little bit hard to measure cost efficiencies on one hand, create some both challenges and opportunities sometimes in terms of volume-related aspects. And so we’re trying to do the best we can to balance technology, efficiency, appropriate levels of labor, which minute-to-minute are never perfect, perceived demand expansion. It’s pretty complicated. It’s running a business, and there are a lot of moving parts. And so all those things are coming together.

What you’re hearing is we’re feeling more confident that the things that we’ve done, which, again, as you point out, are multifaceted, are coming together in the right way. But as I pointed out earlier, it’s not perfect. We still have plenty to work on. There’s still plenty of opportunity. Team is focused on it. But where we are feels a little better than where we’ve been for maybe a while now.

Lawrence Scott Solow: Right. And…

Carey P. Hendrickson: Factor in the visits per day growth is the addition of Metro in November. And so it’s been higher since that point in time. We were probably running at about 31 before, and then that’s kicked up a little bit because they averaged about 45 visits per clinic per day there at Metro. So that does look a little bit, but there’s still really good growth in that overall visits per clinic per day.

Lawrence Scott Solow: Well, that’s a good segue then Carey, into Metro because I know that was your — I think, your biggest acquisition historically. So curious, it sounds like that’s progressing really well. And I know when you acquired — at the time of the acquisition, you spoke about a lot of opportunities. And I guess the [ de aqua ] — de novo openings sounds like that’s happening at Metro. And I assume since New York has better — one of the better rates that probably benefits you guys disproportionately too.

Christopher J. Reading: Yes. We have a strong team there. Michael and his team are strong. They’re very strong. clinically they’re strong, operators are strong in development. And so yes, we’ve got plenty of opportunities to chew on and work our way through for what should be a long period of time. Aqua novos being just one of those. So they’re doing well.

Carey P. Hendrickson: That’s been really positive there, and we’ve talked about this before, is the net rate increase we’ve seen at Metro since we acquired them. That’s one of the things that we do with acquisitions. We look at trying to increase their contracts as we bring them over. When we first — the first month for Metro was around $101 net rate. And then that increase like averaged $104.50 in the first quarter. It was $107.50 in the second quarter. So we’ve really seen some nice rate improvement there. That doesn’t show up in the mature clinics line and then it shows up in the clinic additions line. But I just wanted to point out that we’re seeing really good net rate increases there at Metro. So that’s helpful as well.

Lawrence Scott Solow: And did you just — can you just walk through just the pricing breakout in the quarter? I guess did you discuss that? Usually you give us kind of what commercial pricing was in the quarter? I mean I heard you discuss the workers’ comp piece. Did you give any more detail on the commercial side?

Carey P. Hendrickson: Sure. I’m sure, happy to look at that. So it was $105.33 overall. Commercial rates were about around $105.50. So that was a nice increase in commercial rates. Medicare is a little north of $92. Workers’ comp was still a little bit north of $150 per visit, which is really good. So those are the 3 primary categories. The others were relatively stable as well, Medicaid, personal injuries, self-pay.

Operator: Our next question will come from Jared Haase with William Blair.

Jared Phillip Haase: Chris, maybe for you, I wanted to ask another one on the IIP segment and nice to see the continued momentum there. I think you mentioned a number of larger opportunities that haven’t started yet. So I’m wondering if there’s any way that you can contextualize, I guess, what that backlog looks like or any way to frame up what the incremental revenue opportunity is and how that might compare to prior years?

Christopher J. Reading: Yes, I don’t have it — Jared, I don’t have it in front of me. And my preference — and maybe I need to be a little bit careful. My preference is to not constitute revenue ahead of when we’ve generated it either in development or otherwise. And so we’re definitely making progress. We’re having a good year. I’m not prepared to get into. The reason is, frankly, it’s all about staffing. And the team has done a fantastic job, both with the auto industry major contract that we got where we needed to hire 50, 5-0 FTEs to staff that opportunity. But if we hadn’t hired 50, if we had only hired 20 or 30, the revenue generation compared to the potential would have been different. So I really can’t afford to be that far out on the limb and don’t want to be, and so we’re not going to do that. But as that comes about and we’re realizing it, I’m happy to talk more about it once it actually happens.

Jared Phillip Haase: Yes, that’s fair. That totally makes sense. Maybe I’ll ask a follow-up. And I think you all have made some public comments in the past about some of the virtual PT applications that are out there. And I think recently, one of the larger ones announced they’re building out sort of a network of in-person providers as a way to kind of supplement their digital offerings. So I’m wondering if you have any more that you can say about that? Would you consider participating in a virtual network like that — or excuse me, in a network like that with a virtual partner? How are you thinking about maybe the potential opportunity in terms of, call it, patient acquisition or opening up any referral channel?

Christopher J. Reading: Yes. Well, again, I don’t want to speculate too much in hypothetical situations. Have we had discussions with one or more providers about providing a brick-and-mortar opportunity in person to add to a virtual offering? Yes. It remains to be seen whether that’s something that the industry is accepting of or not. And I say that because a lot of the virtual providers have sold, I’m going to use air quotes, the PT service at a very low cost kind of per member pricing level, very generic, not delivered by therapists. It’s delivered either through an app or backed up by call center employees who again, for the most part, aren’t licensed clinical folks. They follow a script. And so what’s been sold is that they can take all comers and any diagnosis and very complicated things, postop reconstructions and rotator cuff repairs.

And frankly, I’ll tell you my opinion is that can’t be done efficiently or effectively. And so I think they are in a tough spot where they have to figure out whether there’s a bricks-and-mortar solution. Reciprocally, we are now using technology through companies like Limber, who’s been a nice partner for us that has an augmented solution that we use with our patients to be able to go into their home and see them complete their home program and actually see objective measures of motion and activity and other things, which help us better — be better informed to guide that care. And there will be a point in time, and we’re not there yet because we’re working on some really important things. There will be a time when we focus more on a broader digital solution that I think will help to augment what we do for our patients and in some cases, make us a little bit more geographically agnostic where somebody is.

But we’re going to approach it very differently than groups that have done it so far. I think they’ve tried to do too much, and I think they’re finding out it’s not possible to deliver it that way.

Operator: Our next question will come from Jiten Sanghai with Corre Partners.

Jiten Sanghai: Congrats on a great quarter and I appreciate the questions and answers here. Maybe 2 for me. One is, is there like a theoretical capacity we should think about? Because clearly, the volume growth, the record Q2 is great. But like is the system operating at 90% or some x percent? Clearly, I asked the question because incremental visits are very, very accretive to margins. And then a related point, as you think about the de novos, how — what is the staffing environment like? How will you attract the number of FTEs? I think, Chris, you mentioned maybe a record year for opening de novos. So I think they both relate to what’s available in the system, but then how will you recruit x number? I don’t know if it’s 50, 100 of FTEs. And finding them is hard, but the question isn’t just finding them, it’s what you pay them and how the economics work. So I think there’s 2 parts to this. If you could address both, that would be super helpful.

Christopher J. Reading: Yes. So on the capacity side, think of it this way. Our capacity really isn’t limited, generally speaking, by physical footprint. So a typical clinic may be opened from 7 to 6, but we have the ability in that same physical footprint which has more peak times and also has slower times. We have the ability to fill in certainly some of the slower times. And then we have the ability to extend hours and do other things. And so our visit per clinic per day number can continue to grow. It’s not constrained by our physical footprint. It may be limited or it correlates without staffing. And so we have to have the staff available, as you mentioned, to be able to see the next 5 or 10 visits per day. And there really is the possibility ultimately of getting that number up much higher than it is right now.

It won’t happen overnight, but a little bit over time as we’ve shown over the last couple of decades. We’ve increased that number really ex COVID every single year. So that part, I think, will continue to move forward as long as we can continue, as you mentioned, to find staff. And I would point you back to Eric’s comments around the investments that we’ve made in recruiting, retention and school affiliations, residency programs, mentorship and other things to try to have a stable bench from which to draw from to backfill our more senior therapists. Those are the ones that go and open the next adjacent clinic, not the new grad, but the more senior person and that more senior person then gets backed up maybe by somebody more junior in a clinic with a lot of people with tenure, so they can grow and learn and it’s easier to absorb that way.

So again, it’s not perfect. The market is competitive and — in some cases, it’s tight, but we’re finding people and we’re growing, and we expect to continue to be able to do that, particularly with the investments that we’ve made over the last 6 to 9 months.

Jiten Sanghai: And Chris, that’s super helpful because what it sounds like is there’s no theoretical capacity. So is the way we’re thinking about it as equity holders the right lens, which is incremental visits are extremely margin accretive. So whatever your margin guide suggests for this year using your updated EBITDA range, as we think about next year or the year beyond, there should be some flow-through or increase in EBITDA. So your sort of margin should expand over time as you have incremental volumes. Is that the right general lens? I don’t know if you can quantify that? Or if that’s just a good soundbite to sort of end on from my perspective?

Christopher J. Reading: No, I think it’s a reasonable soundbite. There’s certainly points of inflection where when you have to go up, you may go back a little bit before you can go forward again. But generally, you’re right. The last few patients of the day are incrementally more profitable. Your fixed costs are covered. I think that’s one of the reasons why you see our total cost per visit come down a bit this quarter is because of the jump in visits per clinic per day. So hopefully, with particularly continued commercial rate wins, continued wins like we’re seeing with Metro with $5, $6, $7 a visit in rate growth with a combination of continued efforts around work comp and other more preferable payers that, that combination gives us more than enough to offset what might be a little bit of wage pressure year-to- year.

That wage pressure for us, I mean, we’re well below right now the average increase that people got at the end of the year. We’re getting that with some efficiencies. And again, I’d point to some of the initiatives around AI and virtualization at the front desk, which are really just now getting started, but should give us some additional lift as we go forward. So you have to deliver it, you have to make it happen, but I’m hopeful at this point that we can continue to execute on that.

Operator: Our next question will come from Michael Petusky with Barrington Research.

Michael John Petusky: Carey, you gave sort of the hard numbers on the rate per visit. But I’m just curious, commercial pricing, was that — I’m assuming that was up a little bit in the quarter. Do you have a percentage that was up versus the comparable period a year ago?

Carey P. Hendrickson: Sure. I can calculate that real quick. It was up…

Michael John Petusky: And then I guess the second — go ahead, sorry.

Carey P. Hendrickson: Sure. It was up about between — right about 1% to 1.5% versus last year’s second quarter. And second quarter of last year is actually the strongest quarter for commercial rates last year. It’s — it’s up about 2.2% from the first quarter. So we had a nice bump in the second quarter versus the first quarter in that commercial rate.

Michael John Petusky: Okay. And the issue in Michigan with the large payer, how much impact did that have on the commercial pricing overall? I mean, did that take it down 20 basis points more than that?

Carey P. Hendrickson: Yes. It was — again, let me calculate just a second. I know how much the impact is. So — it probably had about a $0.30 per visit impact or so. Yes. So it would have been — we would have been kind of right at the first quarter number had it not been for that Michigan rule kind of payer rule change.

Michael John Petusky: Okay. Okay. So is there anything to suggest that what’s going on in terms of that payer in Michigan could be an issue with other payers elsewhere? Or do you really feel like this is sort of an isolated situation?

Christopher J. Reading: Mike, I mean, each year, I wish it was — I guess I wish it was uniform. Maybe I shouldn’t wish that. I mean we’ve got 48 or 49 of the states where it’s not an issue. So I don’t see a contagion problem necessarily. And Michigan has had some ebb and flow with this payer on a number of different fronts, utilization caps and other things have been challenged and even litigated. And so it’s bounced around a bit. And we’re always going to have that. People are going to try different things at different points in time, and it’s really no different. But that’s one that we’ve called out this year, which is a little bit of a headwind.

Carey P. Hendrickson: Yes. And Mike, as Chris said, there’s always puts and takes on the net rate, and you’ll have things like that, but then we’ve got other things that are overcoming it in other areas. But I don’t see it, as Chris said, as a contagion kind of thing at all.

Michael John Petusky: Okay. Great. That’s what I was trying to get at. So Chris, earlier, you said that IIP you felt like was a top priority in terms of capital allocation. When you were talking about that, were you sort of talking about it in terms of internal investment, hiring trainers and such? Or are we talking about more in terms of external assets that you may try to sort of build on the current base of business or both?

Christopher J. Reading: Yes. Well, it’s always internal. I mean, but that’s really not a problem, and I really don’t think about that, maybe I should. But when I talk about capital allocation, I don’t — that’s just a matter of course. So what I’m talking about is investing in additional companies to continue to fill in our service complement to build on what we have to give us more opportunities for cross-sell and to continue to grow as we have the last few years.

Michael John Petusky: Yes, do you feel like there are assets out there that you’re engaged with in terms of like active discussions? Or is this more like a couple of year, 2-year, 3-year type target?

Christopher J. Reading: It will be ongoing, but we’re actively involved, and we’ve spent more time this year, I think, probably than ever before, attending conferences and getting face-to-face meetings and being active in the space. People now kind of know who we are. And while it’s a much smaller space in aggregate than the PT world, we’re making some progress. And so don’t be surprised if we’re active and continue to be in that area. So it’s important. It works. Team has done and is doing a really good job, and we like the embedded growth elements in this business, particularly, I think, not to make any kind of a political statement, but if manufacturing is going to increase in this country. And I think just with the announcement yesterday on Apple and others, there’s going to be a push to onshore manufacturing. And we’re positioned pretty well to benefit from that. We continue to execute on what we’ve been doing. So I think we will.

Michael John Petusky: Absolutely. Let me just sneak one last one in, and then I’ll let the next person ask questions. Chris, you mentioned on the last conference call that you guys had been involved in sort of a deep operational dive with your top 40 partnerships. I’m just wondering, anything interesting, surprising? Has anything come out of that, that you sort of would be willing to share that might matter?

Christopher J. Reading: Yes. The only thing that I’ll share is that we’re — a couple of things. One, those calls have been important, making progress. I think what partners have appreciated, and it was kind of — was my theory going into this is when you look back beginning with COVID and after — the year after COVID, we were both lean and busy. And it was kind of a good year to benchmark against. But I use the analogy, it’s like your weight that may fluctuate since if you use your college days as being kind of this is a great comparative point or maybe a difficult comparative point. As you go forward, it might not change a lot year-to-year, but the change over time, you kind of lose track of where you were and pretty soon your belt doesn’t fit the same way anymore.

And you lose kind of where you are in space a little bit. And that’s one measure way it’s kind of pretty easy to keep track of, but we’re measuring a bunch of different things in this business. There have been a lot of influences that have caused certain things to happen that are just part of the reality. But I think having now a really visible, tangible tool that our partners get every month that compare where they are now to where they were at the most efficient point and how things stack against that has been kind of a really good yardstick to see change and then to be able to focus on those areas that need focus. And so we’ve used that, and we’re making progress. And I think our partners have been very understanding and appreciative. And we’re seeing change as a result.

Operator: It appears we have no further questions at this time. I’ll now turn the program back over to management for any additional or closing remarks.

Christopher J. Reading: Look, it’s been a good call. Thank you all for your questions. A lot of really good questions. Carey and I are available for the rest of the day. And whenever you meet us, we appreciate your time and attention and particularly your support. We hope you have a great day. Thanks.

Carey P. Hendrickson: Great. Thank you.

Operator: Thank you, ladies and gentlemen. This concludes today’s event. You may now disconnect.