Good day, and thank you for standing by. Welcome to the U.S. Physical Therapy second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. In order to ask a question during the session, please press the star key followed by the number one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I'd like to now turn the call over to Chris Reading, President and CEO. Please go ahead, sir.
Thanks, Gretchen. Good morning and welcome everyone to U.S. Physical Therapy second quarter earnings call. With me this morning include Carey Hendrickson, our Chief Financial Officer, Eric Williams and Graham Reeve, our Co-Chief Operating Officers, Rick Binstein, our Executive Vice President and General Counsel, Johnny Blanchard, our Assistant Controller. Before we begin to review our quarter and year-to-date results, I'll ask Johnny to cover a brief disclosure. Johnny?
Thank you, Chris. The presentation contains forward-looking statements which involve risk 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 filings with the Securities and Exchange Commission for more information.
Thank you, Johnny. Before I start with my prepared comments, I just want to say this. You know, I've seen the reaction this morning. I know this is a little bit of a disappointment. This is a team that's gotten us through this, the bulk of this pandemic in really good shape. Same team that's been together for a really long time. We have some really good things happening, which I'm gonna talk about. We're not, however, unfortunately immune to the environment that we find ourselves in from an interest rate and an inflationary perspective. We're making our way through and I think we'll come out the other side in good shape.
I wanna start out this morning by thanking a very committed and talented team, partners, clinicians, front and back office teams in our corporate support group for the work, not only this quarter and the year, but throughout these two and a half years that we've worked our way through this pandemic and the collateral effects it has generated. I'm gonna try to keep my comments at a high level, to talk a little bit about where we are and what we're working on, where we're making progress and where we're still working through adjustments. I'll let Carey do most of the lifting this morning around covering the finer details for the quarter and the year, with some exceptions that I intend to cover here.
Despite the challenges presented by the current economic operating environment, overlaid with the persistence of COVID, I really do think our team proves how resilient it can be to deliver what amounts to. This is the second highest earnings quarter in the history of the company. This is a quarter where we produced all-time high revenues, up 10.8% for the quarter. Record PT visits up 5.7% year-over-year and 7.8% from the first quarter. Our industrial injury prevention revenue, which approached the doubling for the quarter, up 93.7%. Same store injury prevention revenues up over 25% for the year. I feel like in terms of the things that we could absolutely control, the team did an exemplary job. What don't we control?
Clearly, we don't control interest rates or inflation. Both have risen dramatically, but anticipating at least a part of that, Carey and team did a terrific job securing a new credit facility, expanding our borrowing ability up to $325 million while hedging the rate on the new facility. All this will give us needed additional capacity to execute on our long-term growth plans. We've been very busy working on those plans with a really great group of development opportunities, which we look forward to getting over the finish line between now and year-end. We also don't have control over the macro environment when it comes to inflation or availability of workers. To that end, in the second quarter, we began to feel the impact of some of those forces with rising labor and ancillary costs.
We continue to make adjustments where and when possible with respect to dialing in our costs to the extent that we don't negatively impact the volume or hinder our ability to grow into the future. We continue to work on rate-based negotiations with payers and have invested more resources in that effort. In that area, we're getting some wins as well. We are working to accelerate those with these additional resources.
We have similar investments in the work comp area, along with new tools which we believe will help us in both PT and injury prevention recruiting, as well as in development of new opportunities in the form of beneficial relationships for the injury prevention group, along with helping to identify acquisition targets, is proving to be great asset, and we're very excited about what we can drive with these new tools we've invested in. Looking back over the quarter, let's talk a little bit, let's start with volume. Volume in the spring was solid. A little later in the quarter, we began to feel the normal seasonal ebb and flow that was decidedly missing in 2021. Concurrent with that, I think we allowed ourselves a little leeway with respect to recruiting new staff, given the really tight labor market.
We saw our costs tick up a bit in the quarter as a result. Also related, I think folks, you know, our team, not only our team, but our patients, everybody's been cooped up these past two years. If you've flown recently, next flight, which probably paid double what you paid a year ago, airlines are full to the brim. People are taking vacations that they've forestalled these past couple of years. My family, we're gonna take our first vacation, a real vacation in the past couple of years since COVID started. That impacts our staff coverage as well as referrals and visits because doctors and their staff are taking time as well. Good news is that school is starting back soon, at least here in Texas. Football will be cranking up across the country with two-day sessions.
I'm hopeful that we'll see some boosts from that as we make our way through the remainder of the year. Finally, we are working hard to get our costs very finely tuned, considering the environment we're in at the moment. We have an important project which will take a little time to complete, but ultimately will help to streamline our intake and front desk operations, which we believe will help some of the cost in that part of our PT business as we continue to move forward. That concludes my prepared remarks. Carey, if you would please go ahead and walk us through the financials in more detail.
Will do. Thank you, Chris. Excuse me. Good morning, everyone. All things considered, our team produced a really good result for the second quarter, with operating results per share of $0.90, which, as Chris noted, was the second-highest quarterly amount in our company's history. Our reported adjusted EBITDA was $21.3 million for the second quarter, which was only down slightly from the $24 million in the second quarter of 2021, which was the second quarter high for the company. Like all companies, we're dealing with the increasing impact of macro environment factors, namely rising inflationary cost pressures and rapidly increasing interest rates in the U.S.
Those factors are expected to continue to impact us through the remainder of this year, but volumes remain strong by historic standards, and our team is focused as always on finding ways to become even more efficient so we can produce the best possible results for all of our stakeholders. Our physical therapy patient volumes per day per clinic were 29.5 in the first quarter, which was an increase from 27.9 in the seasonally low first quarter and slightly less than the company-high 30.0 in the second quarter of 2021. By month, our average visits per clinic per day for all clinics were 30.0 in April, 29.7 in May, and 28.9 in June, reflecting our historical pattern entering into the summer months.
We don't have final numbers for July yet, but based on trend data, we expect July volume to be similar to June. Our net rate for our physical therapy operations was $103.18 in the second quarter, which compares to the $104.46 we reported in the second quarter of 2021. That rate is up slightly from $103 in the first quarter of this year. The decrease in rate versus last year is due to the Medicare rate changes that went into effect in January of this year and the 1% sequestration impact that went into effect April 1. The remaining 1% sequestration impact became effective July 1.
Our total visits increased 5.7% in the second quarter from 1,084,070 visits in the second quarter of 2021 to 1,145,554 visits in the second quarter of this year, with the addition of 41 clinics through both acquisitions and de novos, net of a few normal course sales and closures since the second quarter of last year. Our physical therapy revenues were $119.1 million in the second quarter, an increase of $5 million or 4.3% from the second quarter of last year. Our physical therapy operating costs were $92.9 million as compared to $82.9 million in the prior year.
Our physical therapy margin in the second quarter of 2022 was 22.0%, which is a healthy margin despite the increase in costs. New clinics added $7 million in revenue and $1.3 million in PT operating margin dollars. Revenue at our mature clinics declined $1.5 million year-over-year due to a lower net rate on similar volumes, while expenses increased $4 million or 5%. Our physical therapy salaries and related costs at our mature clinics increased 4.6% in the second quarter of 2022 compared to last year, and our contract services and rents were also higher at our mature clinics.
On a per visit basis, our total physical therapy costs were $81.09 in the second quarter of 2022, compared to $76.50 in the second quarter of 2021, which is an increase of 6%. Salaries and related costs were $58.29 in the second quarter of 2022, compared to $55.95 in the second quarter of last year, which is an increase of 4.2%. Our revenues for the industrial injury prevention business were at an all-time high $19.4 million in the second quarter of 2022, which is a $9.4 million or 93.7% increase over the second quarter of 2021.
Our expenses in industrial injury prevention increased $7.8 million, resulting in an IIP operating margin of $4.1 million, which is an increase of $1.6 million or 62.2% over the prior year. Excluding our IIP acquisition in November of 2021, our IIP revenues still increased 25.5% in the second quarter versus last year. Our gross profit was $30.8 million in the second quarter of 2022, which compares to $30.3 million in the second quarter of 2021, and our gross profit margin was 21.9%. Our corporate costs were $10.7 million in the second quarter of 2022 as compared to $12.1 million in the second quarter of 2021, with a decrease due primarily to lower estimated bonus expense this year.
As a percent of revenue, corporate costs were 7.6% of revenues in the second quarter of 2022, which is down from 9.5% in the second quarter of 2021. Our other income includes a loss of $617,000 related to revaluation of our put-right liability that's associated with the potential second purchase of the remaining portion of the IIP business that we acquired in November 2021. For the first six months of 2022, the loss is only $14,000.
Our interest expense increased from $237 thousand in the second quarter of last year to $987 thousand in the second quarter of 2022 due to an increase in our debt, primarily related to acquisitions that we've closed since the second quarter of last year and higher interest rates in the second quarter of this year than last year. Our net income attributable to non-controlling interest was $4.1 million in the second quarter of 2022, which is less than $5 million in the second quarter of the prior year. As a percent of profits, our non-controlling interests were 13% in the second quarter of 2022 as compared to 14.7% in the second quarter of 2021.
The reduction in the non-controlling interest percentage is due to the purchase that we've done of non-controlling interest from existing partners, which results in a greater percentage of our profits being retained by USPH. In 2021, we purchased $30.0 million of non-controlling interest from our existing partners, and we purchased another $8.6 million in the first six months of this year. Our balance sheet remains in an excellent position. We're very pleased to have successfully closed on a $325 million five-year credit facility in June, which gives us greater capacity for acquisitions and other investments. The facility includes a $150 million term loan and a $175 million revolver. We had nothing drawn on the revolver at June 30 and had cash on our balance sheet of $48.6 million.
Our low leverage, coupled with our expanded facility, provides us tremendous flexibility and sufficient capacity for the right growth opportunities as we identify them. In connection with the financing transaction, we also entered into a swap agreement in May to fix the rate associated with our $150 million term loan. The swap fixes the one-month term SOFR at 2.815% for five years. Our total rate includes an applicable margin based on our leverage ratio, which currently puts our total rate at 4.665%. The swap provides a certainty in the rising interest rate environment at a rate that we believe will be favorable over the five-year period.
We'll adjust the fair value of the swap each quarter through other comprehensive income, and at June 30, we had an unrealized loss of $400,000 net of tax in OCI. We issued new guidance in our earnings release today noting that we now expect our adjusted EBITDA for the full year to be in the range of $73.5 million-$75.4 million and for our operating results per share to be in the range of $2.65-$2.75. The EBITDA and operating results range has taken into consideration our outlook for costs in the second half of the year and the impact of inflation on our wages and other costs which elevated during the second quarter.
Our operating results range also takes into account the change in the interest rate environment in the U.S. since we provided our initial guidance for the year, specifically our fixed interest rate of 4.665% on our $150 million of debt from the term loan for the remainder of the year. The increase in interest expense is an impact of approximately $0.25 versus our previous guidance. Please note that our current guidance does not include the impact of any potential acquisitions we make between now and year-end, and as Chris noted, we intend to be active on that front. With that, I'll turn the call back to Chris.
Yeah. Thanks, Carey. Gretchen, let's go ahead and open it up for questions.
At this time, if you'd like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. We'll take our first question from Larry Solow from CJS Securities.
Hey, Larry.
Hey, good morning, Chris. Good morning, Carey. Thanks for taking the question. I guess the first question, just on the guidance, the outlook and, you know, also Q2 a little bit in terms of just the volume trends. I realize last year, like Q2 last year was maybe a perfect storm or just a, you know, an amazing quarter 'cause it was sort of real acceleration and re-ramping back up, you know, during COVID. What is, what are you sort of contemplating? It does seem like you're a little bit surprised and maybe it was that June month which I know came down, you know, I think more than normally in the seasonality. You know, a little surprising I guess from our end that volumes were down a little bit.
What I'm sort of, you know, your thoughts on that and again, what are you looking at in the back half of the year? You've mentioned mostly it's mostly inflationary pressures. But, what are you thinking about in terms of patient volumes in the back half of the year?
Yeah. Let's talk about volumes for the quarter, first of all. April came in solid. Right, you know-
Right.
We had a really good March, really good April. That was the last time, you know, when we released. You guys heard kind of where we were. Then typically, May follows April pretty closely. We pulled back 0.3 of a visit in May compared to April. Then once we got into June, we pulled back a little bit more, and I don't think it was more than a normal seasonal pattern. You know, if you remember last year, I think this is from memory, so
Mm-hmm.
Give me a little latitude. I think June-
Absolutely
...was our highest visit per clinic, month in the quarter in 2021, which has never happened in the 19 years that I've been here.
Okay.
Best I can tell you in combination, one, we still have a bunch of people in quarantine from this COVID variant that we're dealing with right now. The world doesn't wanna talk about COVID anymore, which is.
Yes. Yes. Absolutely.
As a healthcare company, you know, in a lot of places we're back in masks, and our patients have masks.
Right.
In some markets like Tennessee and other places, patients don't like that, and that, you know, impacts our volume a little bit.
Mm-hmm.
We've got people in quarantine. Larry, I think we're back into what I would call a more normal seasonal pattern, so a little slower in the summer. God knows people have pent-up vacation that they've put off for a while, and so people are taking, including our staff, which they need to. They've done an amazing job. A little bit longer time off, a little bit more time away for doctors as well. I hope once school picks up, vacation season's largely in rearview and football two-a-days start, you know.
Mm-hmm.
I hope things pick back up again. We've modeled the rest of the year kind of in the vein of where the quarter was, you know, with Carey, I don't know how you-
Yeah, with the pickup in the fall like we normally have, just normal seasonal patterns. You know, it's the summer pattern, then picking up usually in September and then October through December are really strong months. I'd say for the full year, when we look at the full year from a volume standpoint, it's probably gonna be similar to last year from a volume standpoint.
Right.
Which is sort of flattish. Does that, but you know, and you've grown volumes, you know, pre-COVID sort of 2%-3%, more than that. I think historically it's been like a 2%-3%, but you know, always targeted 2%-3%, and you've grown probably 3%-4%, right? Maybe even, you know, higher end of that, 4-ish% to, you know, 5 years into COVID. Does that. You know, do you. Looking out over the next 5 years, do you feel like, you know, it seems like there's room for volume growth, but you know, I'm just trying to, you know.
Yeah.
I feel certain one quarter doesn't make a trend, and there are. It's still a difficult time with, you know, there's still, like you said, COVID maybe more, you know, fortunately in most cases a nuisance as opposed to, you know, not that it's not serious, but, you know, people are just. The things are not 100% efficient. Is that, you know. Do you still view yourself as a, you know, modest grower in volumes as we look out, you know, on an annual basis? I get this is still kind of a tough call the next couple quarters.
Yeah. Yeah, no, I definitely think. I mean, Larry, right now we're impacted in certain markets, important markets for us, just on the labor side, you know. We've done a good job. Our clinical turnover really hasn't changed, but it's just taken a little bit longer to fill those spots. In some of those markets we've got people that are tired, that have been working hard and that's impacting our volume some. I definitely think we're gonna continue to grow.
Mm-hmm.
I don't have a perfect crystal ball for five years and, you know, in this last two years we haven't had two quarters that look like the quarter, you know, that rubbed up against us. We're just making our way through, but we've got great capacity in our facilities. We've got, you know, a partner model that we, you know, we think is the way to go and strong partners and a strong team and so we just need to get through this bumpy patch.
Yeah, no, absolutely. What about on the, you know, and I know you've been sort of pounding the drum on the rates. You know, it certainly seems like you guys are, you know, it's an uphill battle for you when everything's going up and you should have pricing power, but it's tough. It does sound like you're, you know, you're trying to get, you know, you're making some leeway at least with some of the bigger payers, and hopefully the government will help you out too, but, you know, next year at some point. Any commentary there? Any additional commentary there?
No, we just made a reasonably good investment, big investment in terms of some additional horsepower on the rate negotiation side. That's been very recent. We finally got that done. We have had some wins here lately, as you might expect. I'm not gonna name names or tell you real changes, but you know, we're making progress and we expect to make a good deal more. I think a lot of that will be 2023 impacted rather than so much in 2022. It's important and we think that the value that not just we as a company provide, but physical therapy provides in general is extraordinary and we think it deserves higher rates, and we're gonna keep banging on that until we get that.
Has CMS given a? Don't they, doesn't the 2025 their next year's proposal usually come out in July? Maybe we're a little late this year. Did I miss it? Has there been anything mentioned for next year yet or no?
Yeah.
Proposals?
Yeah. It did, it came out a little bit late, but it did come out late in July. And it's slated for a 4.5% reduction for next year, which I can't hardly imagine. We're working on that as we have been.
Right.
Yeah, it's totally stupid. You know, I don't know how that's gonna land. We'll not know until December. We expect to do some, you know, significant work on that, between here and there.
What's the rationale behind it? Is it just some, you know, convoluted equation that gets to that? Or, you know, just from a high level, from a layman's perspective, how do they cut you 5% when they're giving 9% to CPI-U-based, you know, rate getters?
Yeah.
It's crazy.
We're out of that CPI-U bucket-
I know you are. Right.
Because of some adjustments that were made some years ago. We'll be back over, I think, in that bucket. I believe it's 2025. I think, you know, this is the original rate reduction was 9 and change, which we were able to mitigate. I think this is some residual from that, but we think and hope will work to mitigate it again.
Okay, great. I appreciate all the thoughts there. Thanks.
Yeah. Thank you.
Our next question comes from Stephanie Wissink from Jefferies.
Hey, Stephanie.
Hi. Good morning, everyone. I wanted to spend a little bit more time compartmentalizing the labor and wage rate pressure you're seeing, because it does sound like there's a mix of things occurring. One might be availability of labor and just the cost of that labor, especially on the front end. But you also talked about some PTO or away time that you're also noticing among your staff. Can you just help us think through what components of that mix are the most substantial burden on the revised guidance? And what do you expect to be more transitory and maybe related to summer vacations or holidays that you would see some of that labor availability come back into the fall?
Yeah. Certainly, vacation's gonna be the transitory part. You know, I think for the most part, while there might be a little bit more cost related to that, I mean, it's banked, and people are using it. To the extent that we can find, you know, replacement or temp cost while somebody's on vacation, you know, that would bump our cost a little bit. Vacation's a normal thing. We just have people that are a little bit more pent up and carried over some vacation from prior periods. That's gonna normalize. You know, the other part, the higher labor, we see that particularly. We've seen that particularly at the front desk on the non-clinical side.
I mean, when you look at our mature facility rate changes, I think it was 4.2%, which you know given this environment, honestly, you know, I think it could have been a lot higher. Some of that will take a little time to come down. In talking with my brothers and sisters at our APTQI facilities, I think everybody's in the same boat. Everybody right now is taking a hard look at their costs. We've made some adjustments for our remainder of the year, very surgical, very precise adjustments matched very closely to volume, where we're able.
We have some projects going on right now that'll impact long-term, longer term, the efficiencies in the staffing and the labor load at our front desks. That's something that we're very focused on at the moment right now as well.
That actually leads to my second question, which is related to the projects. Can you share with us a little bit more about what you're doing, if you can, without it being competitive risk? And secondarily, if there's any sort of cost embedded in the back half P&L for the projects or if it's a CapEx related project? Just help us conceptualize what that might be. Thank you.
Yes. Thank you. The one project I referenced in my prepared comments, or the one resource, I think, I'll call it. I don't wanna name it because, man, it's an unbelievable resource for us. It's helping us on the recruiting side identify therapists and connect with those people. It's helping us on the injury prevention side, identifying, connecting with companies that are in our sweet spot on the injury prevention side of things. It's also helping us identify and connect with and time that connection with companies who may be interested on the development front for our acquisition pipeline, which right now is very solid. It's, you know, actually it isn't a big investment, but it's an important investment for us.
It's gonna bear fruit for, I think, for a good while. On the front desk project side, that's ongoing. Carey, I don't know if you wanna speak to that or Eric. I don't think that's a big monetary investment.
It's not.
That's really just people and time on our end working the way through it.
Yeah. That's more of a just a rollout integration and timing issue. Eric, you may. Do you wanna talk about it some?
Yeah. It is a timing issue. You know, obviously with all the different partnerships that we have out there, you know, these systems changes do take a little time. We're trying to figure out how to improve automation in that front desk operation so we can get by with less labor.
You know, creating patient portals that allow our patients to to schedule, you know, electronic insurance verifications that would reduce the amount of time front office people are spending now verifying insurance. We dabbled in patient kiosks. You've probably seen these in lots of different businesses now that it used to be people you talk to when you checked in, and now it's more the norm. We're looking for electronic kiosks that would allow us to get by with less front office labor, 'cause that's really where our biggest turnover is in the company. You know, our clinical turnover right now is really below industry average, and we've kinda toed the line. As we've talked about on calls before, our clinical turnover is three percentage points lower than it was pre-pandemic, so we're doing pretty good.
Having said that, you know, every time somebody does walk out the door, clinical or non-clinical, the new person walking in is more than likely gonna be making a little bit more money. You know? Our focus right now is the front office side that has the highest turnover percentages, and we believe focusing right now on our systems to get by with less labor really is the long-term way to go.
Very helpful.
Yes, sir.
Thank you so much.
Our next question comes from Michael Petusky from Barrington Research.
Hey, Mike. Mike?
Good morning, guys. In terms of sort of the double whammy of inflation and sort of going against you, reimbursement from at least the government side, going against you, I guess how do you think about M&A in terms of both, you know, how you wanna approach your balance sheet? Then also how do you think this impacts smaller PT companies? Because, gosh, you guys are getting squeezed, but you've got significant size and scale advantages over some of these smaller entities. I'm just curious if we're gonna see-
Sure
a consolidation just based on, sort of the macro. Thanks.
Yeah. I don't think there's any doubt about that. It's gonna squeeze unequally. It's gonna squeeze larger providers as well, who are more highly levered than we are and who don't have the financial, you know, parameters that Carey just outlined, which are even though it's more expensive than we were a year ago, it's still very, very efficient. We're gonna use our balance sheet. You guys are gonna see that over the coming, you know, short term. We think that there will be even more opportunities as we go forward as this environment punishes people who, you know, are not in equal-sized boats, so to speak. And we think it'll be good long term for us. Yeah, it's challenging on several fronts, but it's not just challenging for us.
This profession, you know, is gonna continue to provide value to the healthcare system. There are a lot of drivers to the growth of physical therapy, and so we're gonna get through this, you know, through this bumpy period, and I think out the other side. There are definitely, as you point out, good catalysts that are gonna come out of that.
Just sort of a follow-up on the proposed rule for a reimbursement cut from CMS. I mean, do you think even at like this point, as you look at it, that there's more of an opportunity just given the givens and given what it could do for smaller providers, that there's a better chance of beating back most of this than maybe last year when you did have some success there too? I'm just it just feels like things have deteriorated in the last few months, and I'm just wondering if you think there's a recognition out there, if APTA thinks there is, that 4-point whatever it is, 4.5%.
Yeah
Decrease is ridiculous.
Yeah. Yeah, I do think it is ridiculous, and I think I hope we'll get a beat back. We got most of last year's beat back. I mean, this year, unfortunately, the impact, which isn't directed at PT, it's not directed at us, most of that impact was sequester impact. You know, that sequester relief going away, I think last year was 0.75% that we felt less than 1%. We got most of it out last year, and I'm hopeful that, you know, we can do the same or better this year. Time will tell. You know, obviously that's not a certainty.
Just last question, and I may have missed the nuance of this. It almost sounded, Chris, like you may have said that obviously the macro is impacting staffing to a great extent, but it almost sounded like you alluded to possibly late in the quarter, maybe you guys could have done better in terms of that piece of things, or did I pick up on something?
Yeah
that really wasn't there?
No, I think, you know. Look, I think our team's done an incredible job. We came out of Q1 expecting, you know, kind of low and go Q2 from a volume perspective. I don't know, the volume materialized quite the way that we expected. We also came out of Q1 with a real urgency around hiring and anticipating, you know, real strong volumes. I just think, having now a rearview look at it very closely. Yeah, I think we probably selectively onboarded, not a lot of full-time people, but we probably had our, you know, our part-time folks, we ended up carrying a little bit more cost than we could have otherwise. You know, we've made and we're making those adjustments to make sure that stays very closely dialed in.
We kinda have a handle, I think, a sense on volume here. I expect that dialing to be much tighter, you know, from here through the rest of the year.
Thanks. I know it's a tough day, but, thanks, for standing up and answering the questions. Appreciate it.
Oh, thanks, Michael Petusky.
Thank you.
Our next question comes from Mitra Ramgopal from Sidoti & Company.
Yes. Hi, good morning, and thank you for taking my questions.
Hey, Mitra.
Hi, just a couple for me. Just, Chris, on the M&A side, you sound pretty confident in terms of getting deals done, between now and year-end. Just wondering, what are any specific drivers there? Is this a question of valuations being a lot more attractive in this environment versus maybe a year ago? Is it a case also where maybe post-COVID, you're seeing one thing where in a number of years of healthcare, increasing retirement, et cetera, and so maybe that's also boosting your pipeline?
It's mixed. We've been busy all year. A few of these just, you know, the planes that I expect to get on the runway, they're just taking a little bit longer to land, or the timing's been a little bit different. It's, we're very active right now. I think this isn't related to people retiring. I think this is. You know, it's related to where people have been the last few years. The folks that we're attracting are really strong, highly capable people. We have very high expectations for all of these deals. They're not ready to retire, but they have been through, like we've all been through, you know, a rather unique period.
In my 37 years as a therapist, you know, these last few have been kinda crazy, and yet we've done real well, and these companies have done well. Most of them, you know, see the opportunity to get some support that we provide, some really strong support, so they can continue to grow. 'Cause in their market, they're maybe the big provider, and they see a lot of opportunities, you know, among and across smaller providers to tuck those in or to move market share, and they want a partner to help do that. I think that's what's gonna continue to drive our opportunity more than anything. That and the fact that when our partners come, they pretty much stay forever. You know, we've been a really good home. We don't take that for granted. We work hard at it.
You know, we're gonna have the opportunity to surround ourself with even more good people as we go forward.
Okay. No, that's great. Then, tied in also on the M&A side, who knows how it plays out, but there's obviously talk of recession or obviously a, you know, a weaker, environment heading into next year. Does that factor into your, how aggressive you wanna be on the M&A side? Maybe you can remind us, you know, how the company has fared in periods of economic downturns or recession.
Everything factors, Mitra. You know, the interest rate environment factors. That impacts the multiples that we and others I think are gonna be able and willing to pay. Multiples are at, you know, kind of for me a career high. They have been and I expect that to pull back. It has to do with the rising interest rate environment. Returns aren't as great. That is without, you know, taking into consideration the macro environment where there's some challenges as well. Those things certainly influence. There was another part of that that I was gonna speak to, and I just lost my-
The recession helped.
Yes.
Oh, on the recession.
Right.
Yeah, back in. If we look at 2008, 2009, and 2010, we grew through those years, and we did some things differently. You know, when there was a you know a massive kind of labor glut back then when companies were laying people off, we created at the front end of this a commission-only sales force, and we doubled our sales force in that period of time, and it helped us grow right through that recession. We continued to get deals done, you know, at good multiples back then. It hit our same store a little bit certainly. You know, when there's high unemployment, I don't know that I believe.
I don't believe that we'll get to a high unemployment situation, like we did back in 2000, you know, 8 and front half probably of 2009. I think we're too employment stretched right now for that to happen. I think we're still well positioned as we have been. We have a good balance sheet. We're making some adjustments, and I forgot to mention this too, just. It's not huge, but it's gonna give us an impact I think in next year as we're changing who we buy things from and we're moving you know, our resources or will be to get some efficiencies there and we have to. There's some embedded cost savings in terms of what we have planned there as well.
We'll see. I think we're well positioned to deal with what comes at this point. Like we have had to do this quarter, we're gonna have to make some adjustments depending on what changes.
Okay. Just finally on, obviously you always try to run a very lean and efficient company. I know on the G&A side, it's probably the lowest I've seen it in some time in terms of percentage of revenue, so obviously trying to limit your costs in this environment. Just curious if you have more room there or is that something we should expect to start ticking back up?
Well, this quarter we made, you know, and I wish we wouldn't have had to do it but because it affects each of us directly here on the exec team, but we made some bonus accrual adjustments in this quarter. We'll have some lower bonus accrual just as a result of the reality of our guidance for this year. I think that's the biggest driver. We're already lean, Mitra, here. The folks are working hard. That is something I hope that as we go forward outside of this year, you know, I would expect, you know, more normal accrual pattern to happen, you know, with more normal predictable growth and as we go forward.
Yeah. Mitra, you know, that's typically been in the 9-9.5% range of revenue. I think for the second half of this year, it's probably gonna be closer to an 8.5-9% range as a percent of revenue, and then probably back to more normal patterns in 2023.
Yeah.
Okay, that's great. Thanks again for taking the questions.
Yeah. Thank you.
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Okay. Listen, thanks everyone for your time and your questions this morning. Carey and I are available if you have any follow-up, and I hope you have a good day. Thank you.
Thank you.
Bye now.
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