Q2 2021 ATI Physical Therapy Inc Earnings Call
From there.
[music].
Okay.
Good morning, My name is Shirley and I will be your conference operator today.
At this time I'd like to welcome everyone to ATI physical therapies second quarter 2021 earnings conference call and webcast.
All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question actually get down to it.
On the interest of time, we ask that you kindly limit yourselves to 1 question.
And 1 follow up.
On the call today easily <unk> Chief Executive Officer.
Joseph Jordan, Chief Financial Officer, Harry Walsh, Chief operating Officer in July on fall.
Senior Vice President Treasurer, and head of Investor Relations.
Like NAV.
Turning to call over to MS. Huang to read a forward looking safe Harbor statement.
Thank you range and good morning, everyone. We appreciate you joining us for today's call before we begin we'd like to remind you that certain statements made during this call will be forward looking statements as defined by the private Securities Litigation Reform Act.
Forward looking statements are subject.
Various risks uncertainties and reflect our current expectation based on our beliefs assumptions and information currently available to us.
Although we believe these expectations are reasonable undertake no obligation to update them on.
Dennis required by law.
For some of the factors that could cause actual results to differ materially from these forward looking statements can be found.
And the risk factors section of the Companys resale registration statement on form S..1 filed on slide 19, 2021, and then there too and.
And other subsequent filings that are or will be filed with the securities and Exchange Commission.
Additional information will also be set forth from ATI physical therapy quarterly.
Subjects on form 10-Q for the period ended June 32021, which is expected to be filed in early August.
In addition, please note that we will be discussing certain non-GAAP financial measures. The company believes are important in evaluating performance.
Details on a relationship between these non-GAAP measures the most comparable GAAP measures.
Port and reconciliation of historical non-GAAP financial measures can be found in the press release as posted on ATI website and filed with SEC.
And with that I'd like to turn the call over to Levine.
Thank you Joanne and good morning, everyone I would like to welcome and thank you all for joining us on today's.
<unk> call.
We have a lot to cover so I'd like to get right into the key points that you'll hear from us today.
First we are a leader in the large and growing physical therapy space and we are positioned to benefit from long term tailwind such as the aging population and shift to outpatient care.
Second.
Earnings we are seeing growing demand for ACI as services and that demand is getting stronger as the country emerges from the pandemic.
Third in the second quarter, we experienced unexpectedly high levels of attrition among our therapist, which has continued into the third quarter.
We'll unpack the drivers of this.
<unk>, which we believe are at least in part rooted in the decisions that we made during the course of the pandemic.
We have identified the steps we need to take to address this attrition and we'll detail aggressive actions, we have underway to restore our staffing levels.
Fourth the labor supply and demand.
Thats a trim balance that emerged in the second quarter has impeded our ability to meet the demand that we have while increasing our expectations for labor cost as a result, we are updating our forecast for the balance of the year.
Finally, we remain confident in the underlying fundamentals driving our business. The teams that we have in place.
And our ability to leverage our strong position in the market to drive growth and value over time.
<unk> that we will detail today do not change the strength of our brand the drivers of our growth strategy that we have in place to capitalize on the significant market opportunity ahead.
With that overview, let's get.
The details of the quarter.
Our results in the second quarter reflects the continued strong fundamentals supporting increased support demand for our services.
Our visit volumes were 85% of pre COVID-19 levels across our entire portfolio of clinic and visits per day were up 10, 5%.
And so the compare to the first quarter of 2021 and more than 70% compared to the year ago period.
Similar to the first quarter of 2021 volumes were in excess of 100% of pre COVID-19 levels in certain geographies in the south and followed by the northeast while the west and the Midwest continued to show.
The improvement.
While the demand trends remained strong overall unfavorable payer mix shifts driven by the faster rebound in lower reimbursing versus higher reimbursement payer classes, such as workers' compensation and auto personal injury resulted in a lower reimbursement rate for the quarter.
So stay in addition, the acceleration of attrition in the second quarter has impeded our ability to meet that demand.
To understand the drivers of this attrition it's important to provide some broader context.
Throughout our history, we have been focused on being the employer of choice for physical therapy clinicians and we are proud of.
Structure rebuilt to attract develop and retain leaders and physical therapy.
Historically, our fantastic culture extensive support structure and strong development programs has resulted in very high retention with industry, leading low turnover.
During the height of the COVID-19 pandemic.
In response to the unprecedented decline in visits and revenue we made a number of difficult decisions to align our business with the demand.
This included staffing and compensation adjustments as well as reduced benefits on support for our clinicians.
As we have already detailed today demand for our services has steadily increased.
Throughout 'twenty, 1 as the country has emerged from the pandemic.
We saw pockets of attrition in certain markets and took steps to address the causes of that attrition.
At the same time, the broader labor market dynamic intensified the battle of talent.
Ultimately the confluence of these events resulted in the accelerated attrition.
That we experienced in the second quarter.
The good news is that we have already taken actions and well underway in addressing the root of the issue.
We made several changes to our clinic operations to provide even more support for our therapists in the field to maximize time available to treat patients.
And we are taking additional steps to retain our talented staff across our platform, including adjustments to compensation and benefits and several other actions.
We also launched several new hiring campaigns in select markets and we will continue to be aggressive and accelerating hiring to meet demand and.
In fact, we have been successfully hiring.
During at or near all time higher rates throughout the year, including in the second quarter.
In addition, we have had a leadership change on our human capital organization and I will oversee the function directly while we conduct a comprehensive search for a new leader.
We remain laser.
Our focus on hiring the right talent for our clinics and being the clear employer of choice for the physical therapy profession in terms of career development opportunity culture, and working environment and competitive compensation.
2 and talent and the current labor market, we anticipate some wage inflation in the second half of 2021.
And in 2022, combined with an incremental increase in labor costs from the additional support staff that will put pressure on our profit margins until we can scale once again and fully leverage our corporate platform.
Despite our success in hiring the higher than expected attrition will take time to overcome.
To come as we work to restore head count to planned levels in line with the increased demand as a result, we have lowered our 2021 revenue and adjusted EBITDA forecast for the year.
While we are moving aggressively to address this challenge we remain confident in the underlying fundamentals driving our business and our ability.
Ability to drive growth and value over time.
As a leading provider of outpatient physical therapy with nearly 900 locations across 24 states, we are well positioned to capitalize on the positive trends driving growth in the PC industry, including the aging population in the U S and an increasing shift.
<unk> away from inpatient rehab hospital to the lower cost outpatient setting.
Physical therapy, as an efficient treatment modality for many muscular skeletal issues that can reduce cost and improve outcomes.
With our commitment to collecting and utilizing outcomes data in the treatment of patients across all of our clinics.
And then sharing this data with payers to demonstrate therapeutic effectiveness and cost efficiency. We believe we are uniquely positioned to continue to expand our platform drive growth and deliver value for our patients and our shareholders.
On June 16, 2021, we took another important step.
Step in executing our strategy by completing our merger with fortress value acquisition Corp, 2 and began trading on the New York stock exchange under the stock ticker symbol ATI peak.
Following the business combination, we have a strong balance sheet and liquidity position as we continue to invest on our business.
Yeah.
In the second quarter of 2021, we continued to execute on our growth plans and opening new clinics specifically.
<unk> opened 10, new clinics during the second quarter and increased our local density in several existing markets, including in Georgia, Massachusetts.
<unk> in Texas.
We remain committed to executing on our 3 pronged growth strategy to optimize same clinic growth invest in de novo clinics and expand through accretive M&A within our highly fragmented industry.
I am proud of the caliber of our team and the great platform that we built.
I'm excited about where we're going together and confident that the plans that we had on place today will put ATI in the best position to reach our full potential.
With that I'd like to turn the call over to Joe to review, our second quarter 2021 financial results and provide more detail regarding our revised forecast.
For 2021.
And thanks to everyone for joining the call today.
As <unk> said I will review, our second quarter financial performance and then provide details regarding our revised 2021 forecast.
For Q2 of 2021 net patient revenue was $146.7 million compared to 95.
$5 million in the second quarter of the prior year or an increase of 54, 4%.
The second quarter of 2020 was the lowest point during the pandemic and social activity has steadily improved and COVID-19 restrictions have eased, albeit with local variations in the pace of recovery.
Breaking down our revenue change further.
Further PT visits per day increased 76% with Q2.2021 visit volume ranging between approximately 75% and 105% of pre COVID-19 levels across our 5 geographies.
PT rates decreased 9.5% in Q2.2021 as compared.
<unk> Q2.2020.
As <unk> referenced this is primarily due to unfavorable payer mix shift driven by a faster rebound in lower reimbursing versus higher reimbursing payer classes, such as workers' compensation and auto and personal injury.
We believe the lower volumes from high reimbursing workers' comp and auto and personal injury.
<unk> treatments are partially driven by the fact that many regions of the country.
Including those where we have many locations continue to emerge from the pandemic and residents are slowly returning to their routines.
Our PT rate was further impacted by a mix shift out of higher reimbursing state.
As always we are closely monitoring pockets.
It's a increased competition.
Particularly in higher reimbursing states and taking action to ensure that we continue to maintain and grow our share in those markets by floating staff amongst clinics and extending hours, while ensuring that our staff has the proper support as we work to deliver on the ATI brand and meet customers where.
And when they choose.
Other revenue was $17.4 million compared to $12.8 million in the second quarter of 2020.
36, 1% increase.
Clinic operating costs were $128.6 million in the second quarter of 2021 as compared to $96.6 million.
<unk> on quarter, the prior year or an increase of 33, 1% primarily due to the growth in clinic personnel to serve the strong demand for physical therapy at ATI as we navigate the returning visits since the low point during the pandemic.
Salaries and related costs as a percentage of revenue decreased 75 basis points to $49.
In the 2nd% from 51% due to higher labor productivity.
Rent and other costs as a percentage of revenue decreased 905 basis points to 26, 9% from 35, 9% primarily due to the fixed nature of rent.
On the higher leverage achieved from higher revenue.
Provision for doubtful accounts.
3% of revenue decreased 147 basis points to 2.2% from 3.7% as a result of favorable cash collections during the second quarter.
Clinic operating income was $35.5 million in the second quarter of 2021 compared to $11.1 million in the second quarter of 2020 with clinic operating margin increase.
<unk> on day 21, 6% in Q2 from 10, 3% in Q2 of the prior year or 11, 3 percentage points higher due to higher revenue, which resulted in higher leverage of fixed costs.
Corporate SG&A was $26.4 million in the second quarter of 2021 compared to $24.
$8 million in Q2 of 2024, an increase of 6.5%, primarily due to transaction costs and higher share based compensation expense in 2021, resulting from the transaction.
Operating income was $9.1 million in the second quarter of 2021 compared to a loss of $313.7 million in the prior year.
Operating margin was 5.5% in Q2 of 2021 compared to negative margin of 12, 7% in Q2, the prior year due to the aforementioned causes.
Net loss before taxes was $5.5 million in the second quarter of 2021 compared to net income before taxes of $8.2 million in the second quarter.
2020.
Net loss tax margin was 3.4% in Q2 of the current year compared to net income before taxes margin of 7.8% in Q2 of the prior year. The decrease was primarily due to the cares Act grant income of $44.3 million recognized in Q2 of.
The prior year.
Additionally, there were several non operating items in Q2 of 2021 relates to the business combination with fortress that largely offset which includes several mark to market liabilities that we will continue to see for the foreseeable future.
Adjusted EBITDA was $24 million in the second quarter of 2021.
Compared to $45.5 million in the second quarter of 2020 Q.
Q2 of 2020 as noted also includes cares Act grant revenue of $44.3 million.
Adjustments to adjusted EBITDA were $1.2 million in the second quarter compared to $7.1 million in the second quarter of the prior year net.
Notably lower business.
And our reorganization expenses incurred were partially offset by higher transaction costs and share based comp compensation expense in Q2 of 2021 win.
When compared to Q2 of 2020.
And as mentioned there were a few offsetting non operating items in Q2 of 2021 related to the business combination with fortress.
<unk> adjusted EBITDA margin was 14, 6% in the second quarter compared to 42, 2% in Q2 of the prior year, which includes the cares Act grant revenue.
We ended the second quarter with cash on hand of $90.6 million in available Undrawn revolver of $68.8 million net of letters of credit, resulting in total liquidity.
<unk> of $159.4 million.
As of June 30.
Gross debt was $559.1 million, while net debt was $468.6 million.
With the latest 12 months adjusted EBIT of $112.6 million the growth and net debt leverage right.
Liquidity or 5% and 4.2 times respectively.
Days sales outstanding or DSO improved to just over 48 days from 53 at the end of 2020, as our revenue and related <unk> mix has shifted towards commercial and governmental payers.
Now turning to our revised forecast for the year.
<unk> revenue is expected to be in the range of $4.640 million.
$670 million.
And adjusted EBIT to be in the range of $60 million to $70 million.
Lowering from $731 million and $119 million respectively.
Let me provide a bit more color on the components of the revision at the.
The adjusted EBITDA level.
Roughly 2 thirds of the change is driven by staffing dynamics that will be detailed earlier, including both lower than expected therapist head count in the second quarter, which is expected to continue in the third quarter.
And elevated cost per therapist.
We expect our hiring levels to continue at a high rate into the third quarter.
While the actions we've taken and are taking to combat attrition are expected to yield tangible results.
The net effect is that we are estimating that our therapist therapists staffing levels at the end of 2021 will be roughly where we previously expected them to be during the third quarter of 2020.
This means that our ability to meet the ongoing demand.
And for service will continue to grow in the third and fourth quarter as we exit the year.
In addition to taking into account staffing levels at our existing locations. Our 2021 forecast is impacted by the fact that we expect to reduce the number of new clinic openings from 90% to in between 55 and 65 largely driven.
By the tightness in the labor market.
The remaining 1 third of the downward revision in our forecast as a function of lower revenue rate tied to both payer and state mix shifts.
As the country continues to emerge from the pandemic, we expect our revenue rate will trend slightly higher from the first half of 2021 to reflect continued return of.
Reimbursement sources. However, we also anticipate the higher rates generated by an improvement in our payer mix will largely be offset by continued state mix challenges driven by outpaced growth in lower pain state.
And continued diversification of our national footprint in the second half of the year.
As a result, we.
Higher to flat aggregate rate per visit in the second half of 2021.
As we wrap up 2021, we will have more to say about our outlook for 2022.
I'd now like to turn the call back over to lobbied for closing remarks.
Thanks, Joe and before we open it up to Q&A I'd like to thank our nationwide team.
The hard work dedication and sacrifice of our clinicians and corporate staff have worked tirelessly to navigate through the pandemic and the stand the company up as a publicly traded entity.
And assure you that the entire management team at ATI is laser focused on retaining and supporting our teams in the field on.
I'm extremely proud.
For there everyone has pulled together and continues to do so to deliver on the HCI brand and promise to provide exceptional patient centered care and deliver industry, leading outcomes with that let's open it up for Q&A.
Thank you.
At this time I would like to remind everyone in order to cash.
On how extreme please press Star then the number line on your telephone keypad.
As previously mentioned, we ask Mitch to try and limit yourselves to 1 question and 1 follow up sales.
Adjusted for a moment to compile the Q&A roster.
Your first question.
Cash to quite on travel Ralph Jacoby from Keybanc Your line.
Sure.
Thanks, I was hoping you can give a little bit more detail on the magnitude of the attrition.
What percentage of <unk>.
Positions you need to retail on our absolute numbers and then.
Is it just <unk> or.
Or ppas as well.
Hey, Ralph it's low beta thanks for the question. So I just want to reiterate that our.
Our ability to hire and set an all time high so in Q2 and it's continuing into Q3, we are hiring physical therapist.
At an all time high.
To answer your question on the attrition.
It is predominantly focused on our physical therapist, and we saw that really come into fruition in Q2.
As we discussed on our prepared remarks, I mean, there were lots of puts and takes.
And attrition accelerated in the second quarter.
<unk>, we had some defined pockets, where there was dissatisfaction on.
On attrition and we took and have taken net necessary steps to address it we've hired nearly 300 clinicians in the first quarter and nearly 300 clinicians in the second quarter.
The increased demand Ralph and the labor market dynamics combined to accelerate attrition.
And beyond what we expected previously.
Okay, and I guess I'm still trying to understand do you think this is sort of an industry issue or do you think it's related to your model and some of the standardized clinical approach that you guys have talked about maybe taken away from some of the autonomy of your Pts or anything along those.
<unk> lines that maybe more specific to ATI.
AI than general industry, and then I guess the next question as well.
You've taken the de Novo guidance down from 90 to 60 at the midpoint, but I guess why continue to add in an environment of all these labor challenges as opposed to.
Kind of addressing the core facilities and putting all your focus now.
Thanks.
So I'll start and then Joe will chime in on the de Novo look I mean, I really don't like to get into anecdotal.
Data and information about what's happening in the industry I really want to keep the focus on what.
We are seeing here anecdotally, we're hearing that it's impacting others, yes, what we're seeing here is that we're able to hire at record hires here over the last several months Q2 and going into Q3. The attrition that was created is partly due to the decisions that we made during the pandemic that impacted compensation.
We have identified those issues and have absolutely gone and made the necessary adjustments. So we.
We feel confident in what we're doing and we feel good that we are reversing the trend to slow down the attrition, it's not be hiring in our ability to attract it's slowing down the attrition to ensure that we have the number of heads that we knew.
On to continue to meet the demand that is growing for ATI services across the country.
And then Ralph on part 2 on the de Novo's.
We've opened 20 de novo to date through Q2, so if youre using the midpoint of the range to your point. That's another 40 for the year, it's a significant scale back from where we originally.
Donnelley as a 90, new clinics some of those new clinics, where I say, we've opened 23 of them were <unk> 17 were de Novo summer Ackman, novo's, where they are coming with staff.
So staffing is not a problem and on the back half of the year that will continue to be part of the mix and the pullback on the remainder is the result of some of the staffing.
Need attrition that we've seen but we've been thoughtful on which de novo as it makes sense to open as we've laid out the rest of the year not every geography is the same and there are pockets, where staffing attrition is less of a challenge for us.
Yes.
Okay. Thank you.
Yeah.
Your next question comes from Steph Wissink from Jim.
Please your line is open.
Thank you. Good morning, everyone. We have 2 follow up questions as well just wanted to break down the wage inflation a bit. So if you could help us think through clinic margins as we've looked into the back half on maybe into fiscal 'twenty..2 I think you mentioned you.
Translation to affect the business into 'twenty, 2 as well.
And then just on a point of clarification, you said second half rate per visit flat is that flat sequentially to the first half are flat year over year to last year. Thank you.
Maybe maybe step the second 1 is a quick answers I'll tackle that first and then go back to the first question so from.
You expect rate perspective flat sequentially to the first half of the year.
And then as it relates to labor to your point to win talent in the current labor market, we do anticipate wage inflation in the second half of 2021 and into 2022 combined with not just wage inflation, but incremental.
From a recent labor cost from adding additional support staff into the clinics.
Those factors have been taken into account as part of the adjusted EBITDA forecast for 2021, and we will certainly put pressure on profit margins until we can scale once again and fully leverage our corporate support platform.
At this time the granularity that.
<unk> <unk> is that the revenue range level and adjusted EBITDA level. Obviously, you have revenue right. Because you asked the question on revenue rate as well. So I think from there while we havent commented directly on wage inflation because of the combination of labor costs rising debt additional support staff.
You can back into a number on that.
We've gone ahead, and so we should use that 2 thirds of the adjustment to EBITDA as largely being in the clinic.
It's Rob.
Rough rough guide, but it will get you in the ballpark.
Okay and then just a final follow up question is just related to your de Novo versus acting over just in response to Chris's earlier question.
Why not lean.
Hopefully into Acme Novo debt balance sheet is there to support. It is is there any reason to think that a higher percentage of the 40 and the back half wouldn't be ackman now for acquiring with labor already in place.
Certainly this is will be so both de novo is an acronym <unk>.
<unk> are part of our strategy.
More we've closed as we mentioned on our Q1 release on on several <unk> and we continue to look at that as an important part of our growth strategy on our pipeline, but as jewelry I've mentioned and I'll reiterate de novo's are critically important and very accretive and we're being very methodical in terms of where we're the day numbers that are being.
So in terms of geography, where we have lower attrition and have the ability to hire and bring people on.
Again as a reminder, when we opened de Novo as we open them with team members.
Had experience within ATI and then the goal is to backfill those folks with external hires from the marketplace.
We opened the new grads.
Thank you.
Okay.
Your next question comes from Michael <unk> from Barrington Research. Your line is open.
Hi, I was wondering if you all could give.
A little more specifics around what you actually did.
Based on the.
Comp and benefits.
Thanks Heather.
Had a reaction amongst some of your peers can you specify what what actually was done there.
Yes. This is will be so the changes that we made during the COVID-19 pandemic related to compensation and benefits.
Good day.
Did have an impact on our team members I want to be very clear that we are absolutely identified those those comp and benefit related issues and have reversed.
Some of them, where we had to reduce.
Hours, we have to put people on furlough.
We took away benefits that we're realizing are very important to our people from our Wearables program to our continuing education programs. Those things have all been identified and have been reversed and that has been communicated to.
So the field.
On the confluence of the events that resulted in the accelerated attrition from what we.
We did cut.
Coupled with the increased demand for our services the labor market dynamic dynamics of increased competition for the available physical therapy provider in the workplace created the headwinds that we're that we're dealing with today, but also want to reiterate that we have identified those issues have reverse them and feel confident that were going.
Our attrition for the back half.
Hey, Scott.
Absolutely here that you guys have tried to act aggressively to reverse this.
How many how many.
Physical therapist that actually left the company in the first half of 'twenty 1.
So we have not gone out with turnover numbers.
On a lower and candidly theres not theres hardly any industry benchmarks in terms of what turnover. It looks for we know what great looks like for us and we know that in Q2.
We have unexpected.
Unexpected attrition and we know what we need to do to fix it and put those programs in place.
In all transparency, we have not.
Any turnover numbers and I want to reiterate there are no industry benchmarks for us too.
Compare ourselves to.
Okay can I ask 1 more 1 more question sure.
On the on the visit volumes. It seems like you guys had roughly 85% of pre COVID-19 some areas above 100, which.
100% pre COVID-19, which would indicate that maybe there are some areas that you may be sort of around 70 or thereabouts.
Covid visit volume.
Can you talk about what parts of the country, if it's regional or.
What's going on there because that really does seem to be on.
Which really do have clinics that are at 70% of volume.
That would seem to really be lagging the recovery.
Sure. So this is will be at again as I mentioned in my remarks.
We have <unk>.
So the country like the south southeast and.
On the northeast.
If you're catching up pretty close.
At pre Covid numbers and even higher.
We still have geographies like the west the Pacific Northwest and the Midwest that are recovering at steady rates, but not quite up to pre COVID-19 numbers. So we anticipate anticipate that visit volume will continually.
Steadily increased.
Manger of 2021, although there continues to be local variation with a supply and demand at PT services at the local level.
Okay.
Essentially saying that.
Yeah.
Christian in some of these places is more responsible for.
The lower volume.
<unk>.
Or is that not what youre, saying.
I think theres 2 things I think the country for us is recovering at different paces as we've discussed.
In the past and then coupled with the attrition that we.
We witnessed in saw in Q2 that is continuing.
<unk> Q3 are driving that with that I think it's important to understand that the demand is coming and referrals even in those geographies are outpacing our visits so.
So on attrition definitely is a contributor but the good news is as I've mentioned and I'll continue to mentioned we're addressing that.
Moving into the drivers of attrition and the even better news is that the referrals are there and the business is there for us to be here.
Okay, great. Thank you.
Thank you.
Sure.
Your next question comes from Larry Solow from.
Securities Your line is open.
Great. Good morning, guys and thanks for taking the questions just.
Maybe 1 sort of justice.
Follow up sort of a global question.
You mentioned obviously.
Second speed bump here occur on your projected.
Projected growth just trying to.
Can you give a rough from a from a high level without getting into real timing, but you discussed potential.
From a charge and whatnot and obviously a bunch of these.
Triggers.
Seem to be temporary but I'm just trying to figure out as you look out long term.
Do you view these potential higher wages.
And then the ability to maybe hire as many people as you'd like.
That's something that could potentially slow the longer term growth trajectory as we look out over the next say 3 to 5 years.
Hey, Larry It's Joe I can start on that I'm sure on the beta will chime in here, but maybe.
And we already know we're confident in the underlying fundamentals driving our business and it will be marked the referral growth as strong. So that's that solid as it relates to the goodwill impairment charge itself.
Just maybe a little bit of background there the goodwill that was established in our business is legacy goodwill posted.
It was established back in 2000.
Maybe just from an accounting perspective.
Not to get into the weeds here, but ultimately anytime there is a lowering of forecast that typically constitutes a triggering event and requires us to test goodwill for impairment as well as our intangible trade name. So we're currently assessing whether there is an impairment that exist.
And if there is it's a Q3 event when we finalized the forecast in.
And we will update the market on net impairment charge. If there is 1 right again the analysis is still underway and as a reminder, that is a noncash accounting charge.
Larry will be just to reiterate.
We absolutely have comps.
Confidence in our our year's out.
I want to reiterate a few things number 1 the demand for ATI services is extremely strong and increasing.
Number 2 is we've identified the steps that we need to take to address this attrition, okay and it's important for me to continue to reiterate that because we have great plans in place and.
We're seeing them take hold.
<unk> aggressive actions are all underway to support our people and restore the staffing levels from adjustments to compensation to the benefits of the additional support the hiring campaigns that I alluded to.
Number 4 as we have been successfully hiring at an all time high throughout the year. So I am I am confident in our ability to hire.
Higher number 5 is the attrition will take time to overcome but we absolutely have the right plans in place and then lastly, as Joe mentioned and I'll reiterate we are extremely confident in the underlying fundamentals that are driving our business and our ability to deliver growth and value overtime and then Larry maybe 1 more thing just to specifically address your question on margins.
And margins in the out year.
This in the prepared remarks, but important to reiterate.
As we wrap up 2021, which is our primary focus right now we'll have more to say as it relates to 2022 and beyond.
Okay fair enough.
A couple of follow ups on the attrition itself. It seems like it's certainly.
Certainly you guys or the the pace Cook.
And everybody on <unk>.
There.
Are these employees it sounds like they're being poached from from other physic.
Physical therapist.
Clinics or whatnot are these.
I'd assume higher wages or maybe sign on bonuses.
And what are some of these things sort of even can you characterize it was unsustainable and irrational type things or is something that can continue.
Zone.
Does that question make sense, yes, Larry it's Levine, so look I really don't want to talk about what the dynamics are for those.
That are offering jobs I really want to stay focused on what we're doing at ATI physical therapy, we have historically been known as the employer of choice. Our people love working for any type of physical therapy. We've talked about are our EMR, that's been collecting data for years and years and years. It keeps our clinicians on 1 building in compliance risk we've talked.
About our ability to attract and retain a talked about being.
Certified as a great places to work so I want to focus on the headwinds that created the attrition for our company and get those off the table because again, we have been and will continue to be the employer of choice and then this is a short.
Short term speed bump, but I'm confident that we're going to get through.
Fair enough how about just on the revenue just a question on the revenue.
<unk> revenue.
Obviously.
Got a couple of drivers there.
Would you would you rank the inability to meet the demand is the highest 1 more is it.
More of that mix issue or perhaps slower than expected recovery from COVID-19 and some of these regions I imagine to mix of all 3 but any way to sort of bucket those and order Hey, Larry Yes, I think as <unk>.
Eric derived in.
In our prepared remarks, the largest factor certainly is the.
The inability to meet demand and that basically falls directly on revenue, we talked about that being roughly 2 thirds of our overall change in our adjusted EBITDA forecast with Brian on revenue rate in the other approximately 1 third and again thats driven by the.
The slower return on the high reimbursement payer classes, which.
Our typically workers' comp and auto personal injury for us versus the right reimbursement and payer classes, which is driving our overall blended rate down.
Alright.
So could you just remind us of any debt maturities or debt covenants with obviously your net.
That.
It's going to be it looks like you're about 6 times levered based on the midpoint or a little bit above 6.
So based on the midpoint of.
This year's guidance so so our.
We have first lien debt that expires in there.
Due in May of 2023 on what was the.
The second part of the question you were asking just in terms of are there any covenants.
That we should be concerned with it.
Not that you should be concerned with we have.
The leverage ratio covenant, but there is some add backs. So it's not the typical adjusted EBIT that you would see.
When youre, just doing kind of a straight GAAP calculation and we're not near those covenants or expected income those covenants.
Okay fair enough great I appreciate it thank you.
And again, if you would like to ask a question fresh start and a number of line on your California Keybanc.
Your next question comes from day on Saturday from the Benchmark Company. Your line is open.
Thank you good morning.
Really you've covered most of it.
On the call.
On the.
I am puzzling over still is the change.
Change in the rate picture the mix on me and whether that was.
Was there an assumption made at that flow.
On the right mix is as volumes recovered or has there been directionally at least that's been an issue.
Coming out of Covid.
Hey, Bill it's Joe.
Expectations was that that mix would shift and recover or do you think about workers comp and auto personal injury and the nature of those claims in.
And the dynamics of Covid.
As <unk>.
<unk> rolled up.
And I'm kind of taking you back in time to when the when the original plan is built on 3 plus 90 forecasts were belt as vaccinations rolled out expectation was people out on the road driving more people are back at work more injuries occur for both of those to payer classes in our mix, which shifts back.
What we saw on the second quarter is that the mixed.
Stayed relatively consistent slightly worse than the first quarter rate stayed pretty consistent overall and because of that continuation we've updated our expectations now for the second half of the year to assume that.
That mix improved only slightly and there is an offset as we continue to diversify states.
From a state mix.
Perspective, leaving our rate overall about flat on the year.
So the state.
On the state, you're moving into or having a slight.
I think the sector.
Okay.
The payer mix is the primary driver.
It's interesting if you think of a theory for why it has not come.
Coming back with more on.
Activity anyway.
The other question I had for you guys is just maybe an update on the M&A pipeline. Thanks.
Hey, Bill its Levine.
As we chatted and we continue to talk about our strategy.
It's 3 pronged I'll reiterate it's focusing on.
On our same store clinic growth or de Novo's slash equity levels and then the M&A.
We continue to look at.
M&A both at the small and then at the large the small Joe talked about the <unk>. We've closed several of those deals in Q1, we have several on the pipeline.
But we will be talking about.
And continue to see those as accretive and then we're also continuing to have conversations with the middle market PE backed players I want to be very clear that we are extremely disciplined about the M&A that we will look at it is not about just doing M&A now that we'd be levered and have the ability to do so.
Ensuring that it is M&A that is accretive.
Puts us on geographies, where we want to be those good cultural fits there's good labor dynamics.
And.
And that would be accretive to ATI physical therapy. So to answer. Your question. We continue to look we continue to do our due diligence, but were being very very methodical and very disciplined.
And about what we bring to the table.
Okay. Thanks, guys.
There is known for Great question at this time, Mr. <unk> I'll turn the call over to Pete.
Great.
Well. Thank you guys for joining us this morning.
As I stated at the onset we remain confident in the underlying fundamentals driving our business and the team that we have in place and our ability to leverage our strong position in the market to drive growth and value over time.
We are taking the necessary steps to address the headwinds that we face and we are committed to continuing to execute our strategy to capitalize on.
On the significant market opportunity ahead.
Have a great day, and we'll talk to you soon.
This concludes today's conference call you may now disconnect.
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Alright.
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