ATI Physical Therapy - Q2 2024

Executive Summary

• Strong quarter: Net revenue grew 9.2% YoY to $188.1M with Adjusted EBITDA up 77.5% YoY to $16.6M (8.8% margin), driven by higher visits and a 3.4% increase in rate per visit; net loss improved to $(2.6)M.
• Demand and execution: VPD rose 6.4% YoY to 24,921 and VPD per clinic increased to 28.4; rate per visit was $108.32, benefiting from payer rate wins, RCM improvements, and mix.
• Guidance: Q3 2024 guidance calls for $180–$190M revenue and $9–$14M Adjusted EBITDA (~6% margin at midpoint), implying continued YoY growth despite labor and reimbursement headwinds.
• Stock reaction catalysts: Improving margin trajectory and delivery within prior Q2 guidance (Q2 guide was $185–$195M revenue and $15–$20M Adj. EBITDA) vs persistent liquidity/going-concern and reimbursement risks highlighted in filings.

What Went Well and What Went Wrong

• What Went Well

  • Volume and capacity: “Over 1,500 more patient visits each day compared to the same period last year,” reflecting robust demand and higher clinician headcount (+4% YoY) and productivity.
  • Pricing and collections: Rate per visit rose to $108.32 (+3.4% YoY) on improved payer rates, RCM enhancements, and mix; provision for doubtful accounts stayed low at 1.4% of PT revenue.
  • Profitability: Adjusted EBITDA increased to $16.6M (8.8% margin) vs $9.3M (5.4%) a year ago; operating income was $6.6M vs a loss in Q2’23. Management earned an “exceptional” MIPS rating for a 5th year, supporting reimbursement offsets.

• What Went Wrong

  • Labor cost pressure: PT salaries per visit rose 2.6% YoY to $56.22 due to wage inflation; rent/clinic supplies/contract labor and other increased 5.4% YoY to $53.2M, with per-clinic costs up 10%.
  • Liquidity/going-concern risk: Filings continue to warn that liquidity raises substantial doubt about the company’s ability to continue as a going concern, alongside covenant and indebtedness risks.
  • Reimbursement overhang: Medicare (and some commercial) rate dynamics and PTA reimbursement at 85% remain headwinds; management is watching CMS proposals and payer adoption closely.

Transcript

Operator (participant)

Good afternoon and welcome to ATI Physical Therapy's second quarter 2024 earnings conference call and webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions, and if you would like to ask a question at that time, please press star one on your telephone keypad. Please note that this event is being recorded. On the call today is Sharon Vitti, Chief Executive Officer, Joseph Jordan, Chief Financial Officer, Chris Cox, Chief Operating Officer, and Joanne Fong, Senior Vice President, Treasurer and Head of Investor Relations. I will now turn the call over to Ms. Fong. Please go ahead.

Joanne Fong (Senior VP, Treasurer, and Head of Investor Relations)

Thank you, Sarah. Good afternoon, everyone, and thank you for joining us today. Before we begin, we'd like to inform you that certain statements made during this call are forward-looking statements subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from the forward-looking statements can be found under the risk factor section in the company's filings with the Securities and Exchange Commission. In addition, please note that the company will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance.

Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the earnings press release that's posted on ATI's website and filed at SEC. With that, I turn the call over to Sharon.

Sharon Vitti (CEO)

Thank you, Joanne.

Welcome, everyone. As mentioned, we have our Chris Cox and Joe Jordan and myself will be speaking throughout the call, and then we also have our other ELT members on the call for the Q&A session. Earlier today, we reported our second quarter 2024 results. Our teams continue to advance our national practice, driven by our shared purpose of making every life an active life. Our providers and support staff embody outstanding teamwork across our platform to ensure that our patients receive high-quality care. Earlier today, we also provided Q3 2024 financial guidance. On this call, we'll discuss our expectations for future performance and our efforts to finish 2024 strong. So let's jump in. Referrals per day increased by more than 9% year-over-year. Demand for ATI care was one of the levers that fueled our growth in Q2 2024.

We saw over 1,500 more patient visits each day compared to the prior year. So clearly, our strategies are working. The focus of the year continues to be execution and expanding access to physical therapy, including in underserved areas. In the second quarter, our teams continued to increase the rate per visit year-over-year by taking action in the following areas: sharing ATI patient outcomes and quality indicators with payers, improving front-end operations and revenue cycle management to efficiently collect payment for our services, and our continued efforts to grow our workers' comp offerings by strengthening our relationships. There are a lot of macro-level headwinds that we're experiencing, but despite the ongoing imbalance in the physical therapy labor market, we successfully grew our ATI clinician headcount by more than 4% year-over-year.

We're proud of achieving Great Place to Work designation in May 2024 and recognize that change in culture takes time and vigilance. We're committed to the strategies that bolster retention and recruitment efforts, recognizing the pivotal role our clinicians play in ATI's continued growth and success. We're also proud of our clinician turnover rate for the second quarter at 21%, which is consistent with the market. With strong demand and a more stabilized workforce, we continue to build upon learnings and refine our operations. Our clinics continue to be busier year-over-year, with visits per day per clinic growing approximately three visits over Q2 of last year. We still have some clinics with excess capacity, and we will work to add providers, increase access for patients, and leverage our real estate and fixed costs.

In the quarter, we made progress to refine our clinic footprint and align with our patient and community needs, including closing two clinics and divesting four clinics. Chris will provide a detailed discussion around our operational performance and activities shortly. As you can see, the robust demand for ATI services, combined with our business achievements, is obvious in our financials, with revenue and Adjusted EBITDA for the quarter showing strong year-over-year growth. We're committed to executing on our strategies and sustaining revenue and earnings performance in the upcoming quarters. Later in the call, Joe will provide a comprehensive overview of the Q2 financial results and discuss guidance for Q3 2024. I'm proud of the outstanding people we have at ATI and have tremendous gratitude for their dedication to enhancing the lives of our patients and their families. They clearly are the foundation of all of our achievements at ATI.

I'm privileged to lead a fantastic care delivery organization that is leading and having a positive impact in the musculoskeletal ecosystem. With that, I will turn the call over to Chris to discuss operations.

Chris Cox (COO)

Thank you, Sharon, and good to talk to you all again. During the quarter, our operations teams continued to advance, refining processes, and enhancing the patient experience, inspired by our team's dedication to our purpose of making every life an active life and excited about the ongoing advancements in our operating environment. In Q2, we continued to achieve year-over-year top-line growth, driven by progress in several important areas. This success is a result of the efforts of both our clinical providers across our businesses and the multiple support teams whose collaborative efforts drove this growth. In the second quarter, clinician headcount grew more than 4% year-over-year, evidence that we are doing the right things for our providers and our patients, enabling us to achieve our purpose on an even larger scale.

As Sharon mentioned, we capitalized on strong patient demand and saw over 1,500 additional visits each day compared to last year, with visits per day per clinic increasing by 2.7 visits. Additionally, our providers saw 0.1 more visits per clinical FTE per day compared to Q2 of last year. The success in expanding patient access to high-quality physical therapy remains the cornerstone of our achievements. In the last call, I shared that Q1 marked the first full quarter of implementing our new centralized patient access management model across all of our clinics. In Q2, we saw continued improvements in our capture rate of partner provider referrals. As we gain more experience with this model, we will discover new ways to optimize and better meet demand. And in fact, we have several process enhancements that we'll be launching for this team in the second half of the year.

We remain focused on being an exceptional partner provider, creating a world-class patient onboarding experience, and reducing the administrative burden on our clinicians. In the quarter, our revenue rate per visit was $108.32, increasing 3.4% year-over-year. Continuing improvements in our revenue cycle management function were key contributors to this higher rate. As I've emphasized before, we are committed to leveraging technology and automation to advance this area, increasing clean claim submissions on the front end and collections on the back end, all at a lower cost. This dynamic work continues to evolve, and we believe there is ample room for further advancement as we strive for best-in-class performance in our RCM function. In closing, I want to express my pride in our performance so far this year. I extend my heartfelt thanks to all our teams for their unwavering commitment and excellence.

Their efforts empower ATI to make a positive impact on the lives of our patients and communities. Each time I'm in clinics visiting with our clinicians, our patients stop me to tell me what a tremendous impact they've had on their lives. As always, I'm excited about the opportunities that lie ahead and look forward to sharing more updates in our later calls this year. Now, I'd like to turn the call over to Joe to provide a discussion of financial results.

Joe Jordan (CFO)

Thank you, Chris. And thanks, everyone, for joining the call today. As Chris mentioned, I'll talk about our second quarter financial results. I'll also discuss third quarter guidance in further detail. Starting out with financial results, our net revenue in the second quarter was $188 million, which is a 9.2% increase over the prior year's revenue balance of $172 million. Breaking that down a little further, net patient revenue was $173 million, and that's a 10.1% increase year-over-year, while other revenue was $15 million, which is essentially flat. As Chris mentioned, our visits per day during the quarter per clinic increased by 2.7, up to 28.4 versus 25.7 in the second quarter of the prior year, and it really reflects our continued efforts to improve clinic capacity utilization.

Our rate per visit during the quarter, as you heard, was $108.32, up from $104.74 in the second quarter of the prior year. The primary drivers of the higher rate were higher reimbursement rates with certain key payers, favorable rate adjustments driven by some of the operational improvements in RCM that Chris talked about, and favorable service mix changes. Salaries and related costs in the second quarter of 2024 were $103 million, which is a 7.6% increase year-over-year. It's primarily due to more clinical and support staff, as well as wage inflation. Looking at PT salaries and related costs per visit during the quarter, it was $56.22, which increased 2.6% year-over-year from $54.81.

That increase in cost per visit was primarily due to wage inflation, but it was partially offset by higher labor productivity of 9.6 in Q2 of 2024 compared to 9.5 in Q2 of the prior year. Rent, clinic supplies, contract labor, and other in the second quarter of 2024 was $53 million, which is a 5.4% increase from $50 million in Q2 of the prior year. That's primarily driven by higher spend on contract labor and outside services, partially offset by having less clinics compared to last year. On a per clinic basis, these same costs were $59,000, which is an increase of 10% year-over-year from $54,000 in Q2 of the prior year. Provision for doubtful accounts during the quarter was $2 million, which is 1.4% of PT revenue, which compares to 1.5% of PT revenue in Q2 of last year and reflects continued strong collections.

Moving down to SG&A, it was $23 million on the quarter, which is a 36.9% decrease year-over-year from $37 million. The prior year included one-time debt and capital transaction costs that didn't recur in 2024. In addition to that, Q2 of 2024 had lower corporate insurance costs and higher legal reimbursements. We recorded a non-cash long-lived asset impairment charge of $0.3 million during the quarter, which was due to impairment on certain leases. Our operating income was $7 million in Q2 of 2024, which increased year-over-year from a loss of $12 million in the prior year. It's really driven by higher earnings based on the higher visit volume, higher rate that Chris talked about earlier, and those earnings flowing through to the bottom line.

Notable below-the-line items during the quarter included income resulting from a decrease in fair value on our PIK notes, our contingent common shares, and our warrants totaling $6 million. Those instruments are marked to market each quarter at the end of the quarter through valuation analysis. Interest expense during the quarter was $15 million, which decreased 10.7% over the prior year. It's primarily due to lower outstanding principal balances when comparing to Q2 of last year, partially offset by lower interest rate hedge benefit. Income tax benefit for the quarter was zero compared to income tax expense of $0.1 million in the second quarter of 2023. Net loss during the quarter was $3 million compared to a net loss of $22 million in the second quarter of last year.

Adjusted EBITDA during Q2 was $17 million, which is an 8.8% margin, and that increased year-over-year from $9 million, which was a 5.4% margin. As mentioned, the year-over-year increase in adjusted EBITDA is also due to higher revenue and the associated earnings that come along with it. Our cash use year to date was approximately $4 million compared to $45 million last year. As I break that down further, within operating cash, we used $28 million compared to $5 million last year. The year-over-year increase was driven by higher accounts receivable on higher revenue, higher payout of incentives, and those two items are partially offset by a lower net loss. Cash use in investing activities was $5 million compared to $10 million last year. The decrease is primarily due to fewer clinic openings.

Then cash generated from financing activities was $29 million in 2024 compared to cash used of $30 million in the prior year. The increase in cash generated from financing activities was primarily due to two things: $25 million from the delayed draw term loan, which was fully drawn in January, and higher net revolver borrowings. As of June 30th, 2024, liquidity was approximately $33 million, which consisted of cash and cash equivalents, a portion of which resides in our joint venture cash accounts. Now I'd like to share Q3 guidance. We anticipate revenue in Q3 to be in the range of $180 million-$190 million. The midpoint of that range equates to about 4% growth over the prior year Q3. We expect Adjusted EBITDA to be in the range of $9 million-$14 million.

The midpoint there represents 22% growth over the prior year and an approximate 6% margin. Our guidance ultimately reflects the dynamics that we're seeing in the market and the strategies we're employing to navigate and grow clinic volume and advance clinic operations. I'll now turn the call back over to Sharon for closing remarks.

Sharon Vitti (CEO)

Thank you, Joe. It's pretty clear you can see our Q2 results showed progress and that our strategies are coming to fruition. We're eager to ride the momentum and continue advancing the business to benefit our stakeholders. I remain confident in the people we have and the good work we're doing to stand out amongst the crowd and help people live healthier lives. That said, we have a lot to complete to realize our full potential, and I know we have what it takes to get there. I look forward to sharing our progress next quarter, and I'll hand it back to the operator to open the call for Q&A.

Operator (participant)

Thank you. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again. Please ensure you are not on mute when called upon. Your first question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut (Senior Equity Research Analyst)

Hey, good afternoon, guys. Congrats on the quarter. Maybe Sharon, as I think about rate growth, it looks pretty good, obviously. It sounds like you're getting some traction with payers here and service lines. Just curious, how much runway do you think there's left to drive rate growth, and what are the levers remaining for you to sustain this really good trajectory in rates?

Sharon Vitti (CEO)

Great question, Brian. Thank you for joining us. I think it's a tale of two cities. I think we continue to work with our payers. We have a good story. And certainly, some of the payers are responding favorably as they look at rates. I think the second piece is, while we've picked the low-hanging fruit as it relates to revenue cycle, there are continued—we have a path to looking at other advancements that will continue to refine our revenue cycle, our cost to collect, and our overall collection performance or decrease in bad debt. On the other side of it, I think we are all looking to see what happens with Medicare. We have a sense of next year, but it really is the future years when we get out of this sort of this five-year plan to rationalize primary care.

I think CMS sets the tone for many of the commercial payers. I think that's a very important piece. While the MIPS continues to be a positive for us to offset some of the Medicare cuts, I really think on the government side, Medicare will set the tone.

Brian Tanquilut (Senior Equity Research Analyst)

That makes sense. And then maybe just as I think about margins, right? Obviously, rate is a factor there, but you've done a good job as well with the G&A line here. I know that recruiting is still tight here and there. So just curious, how are you thinking about the remaining margin opportunity here? And maybe to narrow it down further too, just on the G&A line, I mean, that was a really good number for the quarter. How should we be thinking about G&A going forward?

Joe Jordan (CFO)

I think, Brian, it's Joe. I think if you were sticking on the G&A line, I think we would expect G&A to stay relatively flat. We have an infrastructure built up to run the business. If we make substantial changes to the business in the future, obviously, that could change. But I think for now, you'd expect it to be pretty consistent. And then on the maybe more holistic margin, if I go all the way up the P&L to clinic operations, we're still focused on making sure that we're trying to make the clinicians' lives as easy as possible when it relates to non-clinic care type activity, so administrative work, so that they could really focus their time on patients and getting patients better, which is what they do best and what they're trained to do.

But ultimately, if we do that right and make their lives easier, it could lead to better margins as well because they're able to see more patients and we're able to take some of the burden off of them that they shouldn't really be doing.

Sharon Vitti (CEO)

Yeah. And Brian, we continue to refine what we're doing on all levels. And so Chris, a big part of Chris's work, just operational excellence and how do we make sure we're leveraging our assets as best as possible, including our expense base. So I think there's more work to do there.

Brian Tanquilut (Senior Equity Research Analyst)

Got it. And then maybe one more question, if I may. Joe, as I think about the proposed rule, I know there's some language here on PT assistant. Anything we should know, or how are you interpreting some of the language that's embedded in the proposed rule?

Joe Jordan (CFO)

Well, we have on PTAs, we have right now reimbursement coming in at 85% of the PTs. Some of the commercial payers have adopted that as well. It's something that we've had to adopt our strategies to. PTAs are still an important part of our care model, and they will continue to be. But we obviously need to make some alterations as we move along.

Sharon Vitti (CEO)

Chris, do you want to add anything to that?

Chris Cox (COO)

No, I think Joe really hit the key high points. I mean, we're monitoring kind of the commercial payer environment to see if that is something that continues to be adopted. And then, as Joe said, we continue to believe in the PTA model and expect to continue to leverage PTAs as a big part of our team-based care. And we want to be smart about where we're deploying PTAs versus PTs versus our clinic directors and making sure that each patient has the right care for them in a way that also helps to optimize our business.

Sharon Vitti (CEO)

Yeah. I think we continue to get more sophisticated on how we schedule and how we utilize the team-based care.

Brian Tanquilut (Senior Equity Research Analyst)

All right. Got it. Thanks. And congrats again.

Sharon Vitti (CEO)

Thanks, Brian.

Operator (participant)

This concludes the question and answer session. I will turn the call to Sharon Vitti for closing remarks.

Sharon Vitti (CEO)

Thank you.