Q3 2022 ATI Physical Therapy Inc Earnings Call
And thank you for 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 are 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 these forward looking statements can be found in the risk factors section in the company's filings with the Securities and Exchange Commission.
In addition, please note that the company is discussing certain non-GAAP financial measures that we believe are important in evaluating performance.
Sales on a 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 as posted on <unk> website and filed with SEC.
And with that I'd like to turn the call over to Sharon.
Thank you Joanne.
Welcome everyone to our third quarter earnings call.
I'm joined today by <unk> <unk>, our Chief people Officer Ray Wall, Our Chief operating Officer, and Joe Jordan, Our Chief Financial Officer.
So since our last call I continue to learn about the API business in the physical therapy ecosystem and a far more definitive views on what the business needs.
I've enjoyed meeting with many of our therapists patients and stakeholders across the country and we will begin by sharing some observations.
Next I'll provide highlights of Q3 results with a focus on our most impactful operational levers the three piece of our practice.
<unk> provider base and provider productivity.
These are critical drivers to achieving our near term growth targets.
Emily will discuss the labor environment and key activities around our provider base rate will walk through operational performance during the quarter and Joe will take us through a detailed review of financial results.
Finally, I will wrap up with closing remarks before we open the call up to Q&A.
To start out.
Want to thank hei's talented and dedicated team of clinicians and leaders that emotionally invest and are passionate about enriching the lives of patients and communities. They serve.
Over the last few months I've.
I've had the pleasure of visiting clinics in hosting in person town hall meetings across the footprint altogether, I, probably met and spoken with close to 1000 team members.
And my reaction to what we offer we made strong and proud.
The passion of the team and the commitment to helping patients get back to their lives is consistent and visible.
I observed firsthand the dedication of our teams to help patients on their health care journey and ensure that everyone feels like a member of our Hei family.
From our patients new hires established colleagues and corporate teams.
When I asked them.
Why they love Hei.
Its the people.
Hei was built on a solid foundation in the company is poised for success with the work ahead.
While demand for physical therapy remains strong the health care provider labor market and economic environment continue to present challenges.
We are eager to demonstrate to our investors board and employees, our ability to define and execute and deliver on the rate actions for both short and long term success.
Regarding our first operational P pipeline.
Sustained demand for physical therapy care reiterate the value of this offering and in the third quarter. The pipeline for ATI services continues to be strong.
Referral grew referrals grew quarter over quarter and are just shy of pre COVID-19 levels.
Our business development team is focused on local relationship building alongside our clinicians with targeted referral sources and employer customers.
The second piece provider base the headwinds, we discussed previously with recruitment and hiring persisted through the third quarter.
Despite the tough labor market, our hei employee attrition rate, excluding our clinician contractors has improved since the beginning of this year and is currently in the mid 20.
Moreover, in the third quarter, the clinical FTA FTE count remains stable.
The labor challenges affecting ATI and the broader PC market will take some time to dissipate.
In the meantime, we are not standing still and are making investments and executing on tactics, both short and long term to accelerate the way we grow our provider teams.
One of my first priorities in this regard was to fill the chief people officer role.
I'm delighted to introduce Emily <unk> on this call. She joined this GPO just over two months ago.
<unk> has a strong and seasoned leader with more than 20 years experience in human resources and operations in health care and provider organizations.
Emily will share some perspective shortly on the labor market and discuss new approaches in talent acquisition and people development to advance the business.
We're delighted to have her.
For the third piece provider productivity, our teams across our national footprint saw an average of $8 seven visits per day per clinical FTE in the third quarter and $8 eight visits per day per clinical FTE and the year to date period.
And when we break it down we rank our clinic based on productivity in Q3, the providers in the top 80% of our clinic saw an average of $9 five bpd preclinical ft compared to the bottom 20% of our clinics that are at a six five.
C P J.
So the top 80% of clinics are doing well seem patients in achieving or exceeding our productivity target targets were.
We believe there is room for incremental improvement in both groups and Ray will discuss our roadmap later in the call.
We completed the first pass and reviewing our clinic footprint and observed a similar clustering related to financial and operational performance.
See the top 80% of our clinics meeting or exceeding performance targets, while 20% are under performing.
We are currently pursuing different approaches to optimize half of the underperforming clinics, including consolidation closure and divestiture.
We will also continue to closely monitor the remaining lagging clinics.
In addition in addition to boosting financial returns Rethinking select clinic locations will strengthen operations and facilitate redeployment of displaced providers clinics with more demand.
Now historically hei Hei has increased the number of clinics every quarter since the companys inception in 1996.
While we plan to continue opening de novo's in attractive geographies and markets. We're taking a hard look at the existing fleet and we will exercise discipline in pruning underperforming locations looking.
Looking ahead in 2023, we may have a decline in the total number of clinics year over year as we prioritize same clinic growth overextending clinics.
We continue to gain insight into the past for near and long term earnings and cash potential of this business.
In the third quarter, we have identified and developed work plans on a portfolio of initiatives with the deliberate aim to strengthen our financial position, including execution of several quick sprint efficiency and improvement projects in 2022.
Priority areas for review organizational change <unk> process transformation includes streamlining the corporate SG&A function.
Redesigning, our referral and patient intake structures and leveraging technology to improve revenue cycle performance. We are moving with speed and are focused on being prudent with our spend and conserving cash.
I am pleased with the focus the intensity and the progress that our teams have made.
Finally, we need to celebrate our exceptional rating under the Medicare Merit based incentive payment system, otherwise known as Mips, and our outstanding NPS and Google Star rating customer satisfaction scores.
Both are testaments to our purpose driven culture.
As I said before Hei ATI has solid has a solid foundation and talented team of leaders.
I am confident we will continue to make progress toward our goals.
With that I will turn the call over to Emily for a discussion of talent acquisition and people development.
Thanks Sharon.
I'd like to provide perspective on the current labor market and discuss some of our activities aimed at our provider base.
Through the pandemic the overall health care industry has seen the number of providers decline.
This is also true in the outpatient physical therapy sector. The American physical therapy Association recently issued a benchmark survey showing most PT practices reported hiring challenges and significant vacancy rate.
With this backdrop I am focused on developing programs that will further advance ATI as an outstanding place for providers to start build and accelerate their careers.
In the short time I've been here at ATI I've had the distinct pleasure of joining several listening tours and getting on the road out to clinics to personally connect with the frontline and understand our care delivery model.
It's been great to meet with providers and hear their questions concerns and goals.
Being a large national operator has certain advantages that allows us to offer unique talent programs for providers to gain a wide range of medical experiences and stay in the ATI family.
One new program Im really excited about is called explore ATI.
This program is geared towards our providers, who are mobile and want to accelerate their learning.
Explore ATI is an opportunity to spend one year at a clinic and then rotate each year to a different clinic, while the person remains in the program.
Participants can travel and live and potentially any of the 25 states, where we currently operate while gaining experience treating different patient populations.
And all of this while building relationships and tenure with the company.
In the clinic clinician is interest in the business side of physical therapy. We have the pathways program that is an opportunity for career progression through managing the clinic, a district and even a region.
In the third quarter, we also began refining our hiring tactics.
We are testing and iterating with various forms of digital outreach, including social media Geo framing and programmatic media to better engage passive candidates with on point messaging.
The aim is to garner more than our fair share of candidates in this competitive environment as we look to grow.
Okay.
The key performance metrics on tracking at the macro level, our clinician turnover and clinician hiring rate with a business goal to grow and balance the provider base in line with referrals at the local market level.
My focus areas, our workforce development performance management and team member engagement.
ATI has an amazing culture and I am excited to do my part to locate attract acquire engage and develop the next generation of skilled therapist for future leaders.
Now I'd like to turn the call over to Ray for a discussion of clinic operations.
Great. Thanks, so much.
I'd like to provide a review of operational performance and discuss some of our activities in the field during the third quarter.
So very forgiving, though since we just finished national physical therapy physical therapy month in October .
Quick moment to say thanks to appreciate all of our Pts Ptas along with our clinical support staff for what they are doing day in and day out that impact we're having on our patients lives.
We have a lot of phone in October celebrating the profession and each other's complements accomplishments and it was great to see.
As Sharon mentioned demand for physical therapy continues to be strong with hei referrals continuing to increase quarter over quarter, our business development team alongside our clinical directors for doing a great job in getting out to the communities they serve and building meaningful relationships with the medical community.
As Emily and her team work to grow the ATI provider base and the clinics, we are continuing to be focused on optimizing patient intake and scheduling coordinating handoffs advancing accountability and on Onboarding new team members to the ATR way.
From the work done during this past year I feel good we have improved the amount of support in the clinics and our team is growing it can focus on providing excellent care to our patients.
In the third quarter, our provider team averaged eight seven visits per day.
This was lower than the second quarter. This pattern is consistent with seasonal trends considering summer PTO. As previously discussed we are in the process of assessing our national footprint in clinics or the local market level.
As Sharon mentioned earlier when looking at individual clinics during the third quarter in 2022.
80% of our clinics are the nine five visits per day or greater.
This is encouraging as it shows when providers referrals and support staff for at the right levels. The team has been able to execute the playbook and this results in excellent patient experiences and high functioning clinic operations.
As we progressed in assessing our real estate footprint, there will be opportunities to consolidate locations with the dual benefit of adding much needed providers to these busy locations and offering a vibrant work environment, which is all which is what we're all striving for.
Each of our clinics is unique with their own local market considerations. So balancing the right level of staff and productivity expectations is always a work in progress.
With the work we're doing to ensure the foundation is in place and with many of our providers already achieving productivity targets I feel we are positioned for further growth not only in these clinics, but across the entire platform.
Okay.
Q3 has shown our ability to exceed performance expectations and many clinics.
I think our northwest region is a great example of a market where referral supported on solid we've made some leadership changes are having a real impact.
Staffing is starting to take hold and we're seeing high patient volumes and great clinical outcomes because of it we look forward to replicating these types of results as we move forward.
So I just want to say I'm really proud of the entire ACI team. This group continues to work hard every single day towards our overarching mission that is helping patients reach their full potential.
I am excited as we finished the year and I look forward to delivering on our commitments to our investors and our stakeholders as well.
That said I would like to turn the call over to Joe for a financial review. Thank you Rick and thanks to everyone for joining the call today.
I'll jump right into the third quarter 2022 financial results.
Net operating revenue in the third quarter was $156 $8 million down 1% from $159 million in Q3 of the prior year.
Net patient revenue was $142 3 million, which was essentially flat with the prior year.
Other revenue was $14 5 million decreasing 16% year over year, primarily due to the sale of our home Health service line in the fourth quarter of 2021.
Okay.
Visits per day per clinic during the quarter were $23 two sequentially decreasing one visit from $24 two in the second quarter with quarter over quarter decrease following normal seasonality trends.
Visits per day per clinic increased <unk>, 1% from $23 one in the third quarter of 2021, as we increase the number of clinicians year over year to see more patients.
A REIT per visit was $103 46.
Essentially flat from the second quarter of 2022 and.
And decreasing 2% year over year from $105 56 in the third quarter of the prior year.
The year over year decrease was primarily due to lower Medicare rates on account of the 2022, Medicare physician fee schedule changes and sequestration as well as unfavorable mix shift in both payers and states.
Salaries and related costs in the third quarter of 2022 were $93 million, a 4% increase year over year from $86 8 million in the third quarter of the prior year due to more clinical FTE and wage inflation.
PT salaries and related cost per visit during the quarter were $56 20.
A 5% increase quarter over quarter compared to $53 64 in the second quarter, driven by lower labor productivity and continuing wage inflation.
Comparing year over year, we saw a similar 5% increase from $53 70 in the third quarter of the prior year, primarily due to wage inflation and added clinic support.
Rent clinic supplies contract labor and other in the third quarter of 2022 was $51 4 million, a 12% increase year over year from $45 8 million in Q3 of the prior year due to more clinics and greater use of contract labor.
PT rent and other costs per clinic during the quarter was 54000 sequentially, increasing 2% from 53000 in the second quarter and 9% year over year from 49000, driven by greater contract labor to us.
Provision for doubtful accounts during the second quarter was $2 8 million or 2% of net patient revenue, which is consistent with the third quarter of 2021 at 2% of net patient revenue or $3 5 million.
SG&A during the quarter was $25 3 million, an 18% decrease year over year from $30 8 million, primarily due to lower severance and transaction costs.
Noncash goodwill and intangible asset impairment charge in the third quarter 2022 was $106 7 million the.
The impairment was primarily due to an increase in market interest rates.
Operating loss in the third quarter was $119 7 million decreasing year over year from $516 9 million.
The third quarter of 2022 included an impairment charge of $106 7 million, while the third quarter 2021 included an impairment charge of $509 million.
When excluding these noncash impairment charges, the remaining $5 million increase in operating loss year over year was primarily due to lower revenue.
And the continuing tight labor market, which resulted in wage inflation and a greater use of contract labor as previously discussed in.
And these costs were partially offset by SG&A cost containment.
Notable below the line items during the quarter included a decrease in the fair value of certain warrants and contingent common share liabilities totaling $7 $7 million the mark to market to fair value was based on evaluation analysis as of September 32022.
Okay.
Interest expense during the quarter was $11 $8 million compared to $7 4 million in the third quarter. The prior year consistent with the reduced outstanding debt balance pursuant to the business combination in 2021, and then the subsequent refinancing of our debt earlier this year.
Income tax benefit for the quarter was $7 2 million compared to $35 3 million in the third quarter of 2021.
Net loss during the quarter was $116 7 million compared to $326 million in the third quarter of the prior year.
Adjusted EBIT during the quarter was a loss of <unk> 4 million or zero percent margin.
Decreasing year over year from $8 5 million or eight five or 5% margin.
Similar to the year over year change in operating loss.
The year over year decrease in adjusted EBITDA was primarily driven by lower revenue and the continuing impact from the tight labor market, partially offset by lower SG&A.
Cash flow year to date 2022 was essentially breakeven.
With 59 million used to fund operations.
22 million used in investing activities offset by 81 million provided by financing activities.
Cash used in operations included $12 million repaid in connection with the Medicare accelerated and advanced payment program on our map program under the cares Act.
All map funds have been repaid as of September 32022.
Yes.
During the third quarter cash used was $31 million.
Of that amount 26 million was used in operations, which included $2 million repaid in connection with map.
4 million was used in investing activities and 1 million was used in financing activities.
As of September 30 available liquidity was approximately $97 million, which was comprised of $49 million in cash and cash equivalents.
And $48 million and available revolver capacity.
While cash used in operating and investing activities in 2022 year to date was approximately $80 million.
We're focused on driving operational performance as Sharon talked about controlling costs and making investment decisions to improve cash flows over the next 12 months as compared to the last 12 months.
As we move forward as a company we will continue to closely monitor the business performance and our financial covenants under our credit agreement.
Finally.
When considering financial performance through September along with October results in early November trends, we're tracking to deliver against the low end of our full year 2022 guided ranges and those ranges are for revenue.
$635 to $655 million and adjusted EBITDA of $5 million to $15 million.
With that I'd like to turn the call back over to Sharon.
Thanks, Joe.
As you can see ATI has a strong commitment to Paul its stakeholders, we have a plan and are continuing to make progress on multiple fronts to ensure the company continues to improve operational and financial performance.
We are aggressively working to implement plan changes and I'm confident that our talented team will fulfill our mission to provide the highest quality of care to our patients.
While delivering on our financial targets.
Operator, let's open the call for Q&A. Please.
Okay.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Pause for just a moment to compile the question and answer roster.
Okay.
Your first question comes from the line of.
Larry Solow from CJS Securities. Your line is open.
Hi, This is stefanos crist, calling in for Larry Thanks for taking our questions.
Thanks, Doug.
I think you mentioned.
Lower clinics next year can you talk about that just in terms of additions and closures is that going to continue to add while closing or mostly closures.
Thanks Stefanos. Thanks for the question. So we will finish out the year with.
With the de Novo <unk> that we have.
On the docket.
That's in.
Roughly 35% for that you are a couple that are opening in the fourth quarter and then we as you know.
As a long lead time to pulling together the de Novo. So we will continue with a lower rate of de novo's in 2023, probably in.
Mid mid teens.
So that's on the growth side and then in parallel as I mentioned, we have done a full review of our real estate and we've looked at it at the clinic level, we've looked at profitability.
Prospects local operational synergies et cetera, and so well.
We're focused on all of our clinics.
The ones that we are taking action on our the 20%.
That or not.
Have sufficient market demand or for one other one reason or another than not achieving our target unit economics.
And.
So with that.
There's obviously a lot of things that go into consideration here. So I'd say half of that 20% is on our watch list. Some of them are newer clinics some of them have seen growth, but not necessarily.
To the levels that we need so we call that our watch list and then the other half of that 20%.
We have about we have developed a plan for each of those clinics and we will be taking actions starting now and over the next three to five years. Obviously the lease terms are one of the one of the.
Factors that plays into the decision but.
Where we're moving on those that we can relative to a lease term are those that we have made a decision on.
Closing or divesting.
No that's great color. Thank you so much and just a follow up can you just give a little more color on.
PT availability.
That's improved over the last few months and maybe talk about turnover specifically at ATI.
Sure why don't I, let Emily jump in.
Yeah, absolutely I think that the.
Market has remained extremely competitive.
And we're working to.
A variety of different channels to make sure that we can continue to attract and retain.
Talent.
And we have experience.
Reduction in attrition as we've gone through.
Quarter over quarter year over year, So we're really encouraged by that.
So.
We think that through the programs that we put together, we continue to listen to our employees and we think that internal attrition and then mid Twenty's is pretty good. We think we can continue to drive it down several more points, but we probably think that.
The industry has changed since the pandemic not.
Not just with <unk>, but health care broadly. So we believe we can continue to maintain levels driving down a little bit more with our programs.
Focusing on our culture, which is fantastic and making sure that we're putting programs together with development development is a big focus of ours. So we feel pretty good about it but it takes time and we're actively trading mechanism for open and frequent communication with our providers.
And let me just go ahead.
Sorry.
To clarify that attrition rate is without our contractors, obviously, we know the contractors turn.
So where we're measuring it without our contractors in it to make an apples to apples comparison.
Got it thank you and thanks for taking my questions.
Sure.
Your next question comes from the line of Brian <unk> from Jefferies. Your line is open.
Hey, good afternoon guys.
I guess just to follow up on another question there.
Think about it.
Im talking about turnover, but as I think about lead generation for new hires and what does that look like right now in terms of new applicants coming in.
Okay.
<unk>.
Thanks for the question Thanks Brent.
Lead generation is obviously incredibly important to us and we really are looking at a lot of different ways that we can drive the <unk>.
Top of the funnel for recruiting and it really looks like it's really a multichannel strategy maximizing university channels integrating.
And focusing on a rotational programs for conversion.
Really activating those opportunities through the universities. We're also doing a lot of work with internal digital outreach.
Increasing our sourcing.
Capability and.
Focusing on our recruiter capability through additional digital channels. So we're looking at being able to pull in not just new grads, but with a heavy focus on outreach.
For passive candidates out in the market. So I think that all of these tactics are widening the top of our funnel and we're really focused on.
Converting all of those people to be ATI employees.
And I would just add so under Emily short tenure. She has brought on a new VP of talent acquisition to complement the existing team and to add a level of experience and quite honestly, a new way of thinking about our go to market tactics.
And I will say some of the activities that we put in place August or September we have seen an increase.
And the top of the funnel, obviously, we need to convert those but we've been pleased with some of the activities that have generated a higher number of candidates.
Quality candidates and those were good learnings to for the types of tactics that Emily referred to and then the last would be weak.
We've also increased our spend.
In the area.
To support those tactics.
Got it and then as I think about the clinic closures coming up I mean is there a <unk>.
Way too.
Do you retain some of those clinicians and redeploy that money how does that work just curious yes, no great question, Brian . Thank you.
Absolutely that is our goal and when you look I mean, there's there's.
There's a bunch of different things that we see out there one relates to just dense markets that have a lot of duplication or a lot of capacity and so those are obvious.
Where we might be a consolidation there.
There are some other markets, where we have staffing challenges and so closing clinics and consolidating makes it it makes it.
A way for us to move the staff and then also that makes it a more vibrant.
<unk> when you have more than a single provider so our intentions would be to maintain or to keep those staff.
If theres a divestiture that we'll have to see how that plays out that was a little bit harder.
Last question for me, Joe as I think about free cash flow.
As we think about clinic closure I mean is that something that we should be thinking about as a potential contributor to driving improvement next year and kind of pulling back on the de Novo.
Yes, certainly can Brian drive improvement next year.
The <unk>.
<unk> pointed it depends on how.
The closure happens divestiture right, that's one way to get.
An improvement in free cash flow, but closing money, losing clinics is another way.
Plus there is the the resources that are allocated to those clinics to on top of it. So the other important thing for us to do as a business is make sure that as we close clinics, we're scaling our corporate cost structure appropriately with those clinics.
I think that.
There'll be some there is some action we're taking right now so there is some action will be taking in 2003 I would say the majority of the action is going to happen over the next three years, but again, it's it's all.
It's all predicated on.
The action, we're going to take and then the lease.
Awesome. Thank you guys.
Thanks, Brian .
Okay.
Your next question comes from the line.
Houston Coppola from Citi. Your line is open.
Hi, Jason.
Hey, great. Thanks, guys just as we think about just think about mix payer mix as you staff up you've talked about referrals, but maybe could you.
When do you think youll get back to sort of a pre pandemic level of payer mix.
And then just maybe broadly how you're thinking about the puts and takes on the revenue per clinic right for next year right. Just given your new hires the focus those referral channels and alike, but also in context of the final Medicare rates that came out so anything Josh on one payer mix.
If you can get back to pre pandemic levels and then two how youre thinking about revenue per visit next year and.
And the puts and takes there.
Sure Joe do you want us to want to take us through those Tim Hey, Jason its Joe.
So.
I'll unpack that because you asked kind of a lot there maybe I'll start at the highest level in our rate from a rate perspective, we're monitoring.
Happen with Medicare pretty closely they've come out and said four 5% cut and in the past couple of years, the Medicare rate cut.
Thats originally been quote unquote final.
Has not equaled where it landed at the end of the year Congress has stepped in and often that that's been coming down. So we're monitoring because theres a chance that that happens again like it has the last couple of years. If it stays as is at four 5% rate cut would impact roughly 20% of our volume.
Now we do have as Sharon mentioned when she was speaking during the scripted part of the call we do have.
Exceptional rating under the Mips program, which would give us.
A bonus which would help to offset the four 5% rate reduction so.
I think overall on our volume it will have some impact but it gets pretty diluted quickly I think we think about rate as being flat. If we could have some wins elsewhere from a payor mix perspective.
As it relates to getting workers comp and auto personal injury back to where it once was.
We are focused on driving mix.
And we're rolling out through States, Illinois, one, where we built up our workers' comp and API historically and it is not back to where it once was so we're trying to drive that business back. So far the mix has stayed pretty flat, we havent seen an improvement which.
As a result, we're not prepared to make a prediction on where the mix is in 2023.
Okay. Thank you.
Yeah, No. That's very helpful. Thank you and then just.
Quickly as a follow up on you talked about divestitures on this call and apologies if I missed this what are you.
Thinking about it more broad based is it regionally focused or concentrated and then just thinking about I think back.
Three years ago, we were talking about your growth in the areas of white space.
The way that you've seen kind of regional development play out do you still think a lot of that construct around white space growth opportunities still exist in this framework or do you think you have to be more choosy as you think about growth off of this kind of a revised baseline of climax I'm just trying understand as we rightsize the business, what where you could think of.
Growth to ultimately be achieved in the white space that's available to you on the Gulfport.
Yeah.
Great question, so on the divestitures.
<unk>.
You know from a divestiture perspective, I would say the actions, we're taking are across that footprint, but as it relates to the divestitures, it's definitely clusters of clinics.
And predominantly with within our market.
So little bit of that is TBD.
But I would say, where we're being pretty selective on where that is both from what makes sense to us and then what would make sense to us to a buyer.
On the growth in the white space.
We're slowing down our growth for the right reasons, because it's gone through such a large gross spread kind of pausing and taking a look at where we are but.
Absolutely.
The white space and the opportunities going forward and anticipate getting back to that.
After we finish this.
<unk> internal.
Sort of review and I would say, obviously, how we look at things now may be different than we looked at them before because things are pretty different post COVID-19 and the whole landscape has changed and I would say we're also smarter we have a lot of experience. The review of our fleet tells us It gives us great insight on to where we made a bet and it came.
Through and where we made a bet and maybe it wasn't what we thought it would be so I think we're positioned nicely.
We haven't shut that off we're still active in that area, but because you need to you need to keep a seat at the table, but we will I think theres plenty of opportunity going forward and maybe Jason. This is Joe just to add to Sharon's point. She mentioned earlier that de Novo. If next year is probably somewhere in the mid teens at the white space certainly.
To Sharon's point still exists.
The two challenges that we have which causes us to pause and slow down one is labor labor availability and where we are adding de novo those are areas, where we generally believe we can add labor but.
We want to add people across our platform and if you do a lot of de Novo as you're stressing our talent acquisition team that already has a requirement to add so we certainly recognize that and the second is the capex need there is investment to open these nols, even though they payback pretty quickly and we do see the cash burn.
The business and we need to to Sharon's point get the the.
Buying fleet running how we want it to run.
B pretty diligent with the capital spend that we have in 2023.
Obviously, we have plans in place to drive the business forward and make improvements to our to our cash burn.
It's another reason why it makes sense to slow down.
Yes.
Got it okay. Thank you for all the color.
Thanks, Jason.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Next question comes from the line of Mike Pitofsky from Barrington. Your line is open.
Hi, Mike.
Hi.
I wanted to I guess I want to understand the commentary around the guidance. It looks to me like the guidance was pulled out of the release itself versus Q2, unless I missed it somehow.
And then it sounded like Joe maybe said well.
The guidance that we gave previously were sort of reaffirming but maybe at the lower end I mean is that essentially what you are communicating it I guess, if that's what you're communicating what was pulled out of the release. Thanks.
Hey, Mike.
I mean, we didn't pull it out of the so yes, you understand is correct that we are reaffirming the guidance maybe I'll just state that we do think that we're going to be at the low end of the guidance I guess, we just didn't put it back in the release to say that we're reaffirming the guidance, let's say in practice, we've seen companies do both.
We're still in line with guidance then sometimes there's just no need to update because it's assumed unless you go out and say something different so but you are correct. You heard me right on the call and we're tracking towards the low end of guidance.
You might recall that when we talked about that 5% to $15 million adjusted EBITDA range. The low end of that range assume that our clinical FTE stayed pretty flat or head count stayed pretty flat and we tracked that way in the third quarter. The rest of the operating Kpis following seasonal trends based on what we see.
Scene here in October with an uptick.
Early trends in November .
It gives us some comfort that we're moving towards the low end of the range within the low end of the range.
Okay.
Q4 was the worst quarter last year for adjusted EBITDA and typically it's one of the two.
Weaker quarter somewhat PT company, so you're saying what you're seeing in October and early November gives you confidence that this is going to come in as your second best quarter for EBITDA or maybe even close to your best quarter.
Correct correct.
Yes.
Unpack Q4 of last year, but.
Last year in Q4, you may recall we.
We had a couple of things going on we had some relatively significant severance we revamped our sales team brought in a consultant to help us do that which was some spend and omicron picked up pretty heavily in December .
And then into January .
Okay. Okay.
So then.
I guess, Sean going back to this idea of optimizing the bottom 20%.
And it sounds like.
I think I heard you say that a lot of this will be accomplished over three years.
Likely.
On some of the divestitures that we'll see that action.
And of the three years.
Im wondering if you guys have a little extra liquidity et cetera.
So yes, Mike we.
A lot of this we were able to.
Data processing day.
<unk> worked with our board on the plans we had our board meeting last week, So I would say.
We are actively taking.
Pursuing the activities that we've laid out per clinic, and I would say that this divestment divestiture workers.
Actively in progress.
So I would say I would say those who knows right, but I think we have a few different clusters that we I would say half of the clusters, we already have.
Real meaningful activity and the other half.
We're not sure.
But all of them are out there all of them are out and being actively pursued it at this point.
It's just been very recent in the last in the last few days.
Yes.
Can I can I, just asking me again, maybe I missed this earlier when you were talking about the bottom, 20% im talking about closure or consolidation divestiture. I mean is it is it roughly a third a third a third when you think about that.
More.
More facilities to hopefully the math.
Okay can you give some sense of that.
Well first of all the 20% the bottom 20%, we're acting on 10%.
10% high capacity <unk> underperforming, but on a watch list because theres still we look we look at Holistically at the clinic, we'll look at everything.
The demand the competitors the staffing levels.
Et cetera.
On the 10% that we have that are not on the watch list that we've identified we're going to take an action on.
<unk>.
I'd say, yes, I'd say, it's about a third a third a third off the top of my head in regards to closures then.
In regards to some other activity like maybe a closure of the sublease depending on the lease terms.
And then.
On the divestiture.
Mike maybe just the one thing that I'd add on to that is you shouldn't walk away thinking that 10% of our clinics are going to be closed in 2022, because there's there's lease lives remaining on these clinics are open there. They are seeing volume for the most part there is a handful of dark clinics.
Theyre just theyre underperforming so over over some period of time they will be closed.
Most likely certainly some of them can turnaround, but that's that's kind of how to how to think about it so and Mike I would say the thing is we're actively we're actively we nonetheless and we are actively working with all of them too.
Get it taken action and if that action doesn't pan out we may look at a different action, so and I think I don't know maybe what do we think about 80% of the actions will happen in the next three years based on the action, we're taking and based on the timing right.
<unk> closed the clinic that has.
On a longer lease right when it makes sense.
So we've done a <unk> analysis and have the standard of clinic level, and then I guess, we'll see we'll see how how our actions.
Where we are with our actions I think were paying pretty.
Not trying to be coy here more we have a plan and we have a commitment to take an action and we're going to see how the market responds and then we may modify the action, but that taking these 10% off the grid is really important because we spend a lot of time on this 10% and they obviously way down.
Performance of the other 80%.
Alright.
The 10% above that bottom, 10% better sort of on that Scott.
Correct.
Watch watch list.
Those from those situations where.
Finding an extra therapists or therapists system could make a difference or are those.
Mostly staffed appropriately the underperformers.
I think theres definitely.
It could be a de novo, where we just haven't been able to get it fully ramped from a staffing perspective, we could have.
Just had a lot of fun.
Certain geographies, we're really just hit with a higher.
Amount of attrition until rebuilding that staff, they're typically also markets that have less less available staff.
I would say some of them.
Theyre, just not ramping as quickly as we thought and so they're questionable whether they will get there or not.
So they're not there's not enough here to say Oh these need to go on the close list.
But we are watching it so now we know what that list is.
Our Ta group is hyper focused on trying to trying to recover from a staffing perspective on these are it could be referral starved areas are our business development group is working hard to see if we can accelerate that referrals. So it's typically one of those three levers are.
The the staffing the.
Referrals or its just hasnt been long enough to kind of right. This one off.
Okay fair enough. Thank you so much I appreciate it sure.
There are no further questions at this time.
I'm, Debbie I'll turn the call back over to you.
Okay.
Thank everyone for their participation in the call today. Thank my team for joining me and helping.
Sure, where we are and we look forward to seeing everyone Q4.
Thank you.
This concludes today's conference call you may now disconnect.
Okay.
Oh.