ATI Physical Therapy, Inc. (NYSE:ATIP) Q4 2023 Earnings Call Transcript February 26, 2024
ATI Physical Therapy, Inc. beats earnings expectations. Reported EPS is $-2.15, expectations were $-3.17. ATI Physical Therapy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. And welcome to ATI Physical Therapy Fourth Quarter and Full-Year 2023 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. Please note 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.
Joanne Fong: Thank you, Mandeep. Good afternoon, everyone. Thank you for joining us today. Before we begin, we’d like to remind you that certain statements made during this call will be forward-looking statements that are subject to various risks and uncertainties and reflect our current expectations based on 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 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 will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance. Details on the relationships 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 ATI’s website and filed with the SEC. And with that, I’d like to turn the call over to Sharon.
Sharon Vitti: Thank you, Joanne. Welcome, everyone. In addition to Chris and Joe, we have the rest of our ELT on the call. We have Eimile Tansey, our Chief People Officer; Scott Gregerson, our Chief Growth Officer; Gus Oakes, our Chief Information Officer; and Eric Kantz, our Chief Legal Officer. As you may know, earlier today, we reported our fourth quarter and full year 2023 results. 2023 was a reset year, and I’m very proud of our achievements. ATI staff exhibited strong teamwork across our national single brand platform to bring our purpose to life in our local communities, expanding access to care and helping people live their healthiest life. Our team implemented deliberate strategies to deliver meaningful quarter-over-quarter growth allowing us to exceed our revenue targets and our 2023 guidance.
2023 was a year when we implemented many winning strategies, including strengthening the ATI culture, growing the provider base, elevating talent and creating development opportunities for our employees, expanding access for patients, advancing clinic operations, enhancing the patient experience, all resulting in improved financial and key KPI performance. I’m going to double down on a few areas that were highlights of 2023, starting with the demand for ATI services. It was exceptionally strong in 2023, and we saw an all-time high in ATI’s history of referrals per day, and referrals continue to be robust in 2024. In 2023, the rate per visit increased by $3.30 over the previous year. And so as we look at this, there are two contributing factors.
One, payer rate increases coupled with operational improvements in our revenue cycle management. The HR and OPS teams work together to allow us to see 390,000 more patient visits in 2023 compared to 2022. The labor market continues to remain tight and in 2023, Emily Tanzi, our Chief People Officer led her HR teams to successfully grow the number of clinical FTEs year over year, and significantly reduce turnover to a more normalized level, creating stability in our clinics. Chris Cox, our COO led the teams focus on reducing administrative burdens and improving processes in the clinic allowing our providers to see more visits per day per clinical FTE in 2023, achieving a historic high watermark. On our clinic footprint, we opened 13 de novo clinics and closed or divested 40 clinics for performance reasons.
2024 will be a year of investing in our current fleet with necessary upgrades, expansion and consolidations, coupled with opening a limited number of new clinics. Now our long-term goal is to grow the footprint while continuously monitoring local markets and clinic performance. Overall, we are focused on capitalizing on the momentum achieved in 2023 with people in operations to continue growing ATI’s capacity in 2024. Our people are what set us apart from our competitors. Through all the changes in the market and within the company in the past few years, our team’s commitment to our care excellence has grown. Hearing from our patients is a critical part of feedback. In 2023, we refined our patient survey processes during the year to gain additional insights in our patient experiences.
We anticipate sharing this new improved customer satisfaction KPI later this year in 2024. Our clinical quality remains exceptional. As previously reported in 2023 ATI achieved an exceptional rating in patient quality from the center for Medicare and Medicaid Services, MIPS program for the fourth consecutive year, basically every year since the program’s inception for physical therapy providers. In 2024, ATI will again receive a bonus payment to help offset the CMS fee schedule cuts in 2024. Another area of excellence is the launch earlier this month of the Institute for Musculoskeletal Advancement. The purpose of the institute is to advance scientific research and to enhance the quality of musculoskeletal clinical care. The Institute for Musculoskeletal Advancement will create new opportunities for our colleagues to get involved with teaching, research and influencing policy, as a top priority in 2024.
In 2023, the operations team completed numerous process improvements and technology implementations. Chris will provide a detailed discussion of those operational initiatives and performance later during the call. I do want to call out two areas. The operations team drove increased clinic utilization every quarter-over-quarter during the year. And in the fourth quarter drove the highest visits per clinic since the start of COVID in 2022. Our clinicians were highly productive throughout 2023, spending more time treating patients than the prior year, with each clinical FTE in 2023 seeing a historically high visits per day of 9.4. The strong demand for ATI services combined with the progress we made in the business resulted in the company beating our 2023 revenue and adjusted EBITDA guidance.
Shortly, Joe will provide a detailed walk through of Q4 and full 2023 financial results and share Q1 2024 expectations. Worth noting is our continuous progress in 2023 to increase revenue every quarter from the prior sequential quarter with ATI’s Q4 2023 revenue back to levels when the pandemic started in 2020. In 2024, we’ve kicked off the year implementing numerous strategies to extend the progress we made in 2023. It goes without saying we have incredible teams at ATI that are making a difference in the lives of our patients and communities every day. I have tremendous gratitude for our talented teams, dedicated clinicians and leaders who emotionally invest and are passionate about enriching the lives of our colleagues, patients and communities.
Big congratulations to the entire ATI team for showing everyone the real ATI. With that, I will turn the call over to Chris to discuss operations.
Chris Cox : All right. Thank you, Sharon. I’m proud to share an update on our transformation efforts from the fourth quarter and the full year of 2023 as well as the outstanding operational results that we achieved. In January, I was able to attend our national leadership event for the second time. We brought together every clinic director from across our national footprint along with our field and corporate leaders as well as Board members to focus on leadership development, as well as our 2024 critical path. This meeting sets the stage for our year ahead and affords us the opportunity to continue to develop the core competencies and skill sets that our clinicians need to enable continued operational and clinical progress. I’m inspired by our providers and their passion for achieving exceptional outcomes for our patients.
Our operational progress furthers our ability to deliver continued excellence in health outcomes. Now I want to thank the ATI colleagues who bring our purpose to life every day. In 2023, our field and clinic teams continued to deliver exceptional patient care, while our central operations teams diligently refined workflows and processes. Together, we remain focused on enhancing our capacity for care and on continuing to elevate the patient experience. As Sharon mentioned, our clinic teams again earned an exceptional rating by CMS MIPS for delivering quality patient care, and will be awarded a bonus from Medicare services rendered. The clinic teams also expanded patient access with each clinical FTE seeing an additional 0.6 visits each day in 2023 over 2022.
And in fact, we increased visits per day and visits per day per clinic every single quarter in 2023 over the prior quarter, as we made continued progress with our operations. At the beginning of 2023, I spoke about how we would leverage process innovation and enhancements in technology to reduce administrative burdens and support our four-wall performance. Fast forward to the end of the year, and we can see that we realized greater efficiencies and higher customer satisfaction with our centralized intake initiative and clinic process innovation efforts. In Q4, we completed the centralization of our intake, registration and scheduling functions, completing the rollout across all our clinics. This effort has removed over 3.8 million annual phone calls from our clinics and helped drive consistency in our referral management, safeguarding referrals from slipping through the cracks.
This effort, combined with enhancements to make our ATI EMR system even easier for our clinicians to use, in addition to other operational initiatives, enabled our providers to spend more time operating at the top of their license, focusing on patients and delivering high-quality evidence-based care. But it doesn’t stop there. Our initiatives to augment our clinical operations will continue in 2024. By further streamlining administrative processes in our clinics, we expect to unlock even greater value for our organization. We have ongoing efforts to reduce paperwork and digitize registration for new patients, which will save both clinicians and providers’ time and now that we have a single centralized intake model, we will begin experimenting with new patient engagement strategies to drive higher referral conversion and appointment attendance.
With reduced administrative burdens and a more predictable operating rhythm, we expect our clinics to continue to experience improved employee satisfaction with more time to focus on delivering exceptional care. Equally impactful, despite the ongoing imbalance in the physical therapy labor market, we successfully grew our clinical FTE base throughout 2023 and ended in Q4 at nearly 2,600 FTEs. We remain committed to prioritizing strategies that bolster both retention and recruitment efforts, recognizing the pivotal role our clinicians play in our continued growth and success. Clinician turnover ended the year in the fourth quarter at 21%, which is on par with our pre-COVID levels. Considering the challenging labor market we are in, this notable retention speaks volumes about the culture we are building to foster a community where providers are engaged to stay and grow.
Finally, our rate in 2023 was positively impacted by revenue cycle enhancements and ongoing negotiations with payers for reimbursement. And during the year, we also standardized our workers’ compensation offering to ensure that we are a provider of choice in that area. I previously talked about transforming our revenue cycle management functions to achieve best-in-class performance. In 2023, we made significant improvement in almost every KPI that measures revenue cycle efficiency, from denial rate to cost to collect the POS collection rate to net collection rate. With our decision to consolidate our relationships and work more closely with a preferred vendor partner to drive collection rates, we were able to reduce costs and employ more automation in our efforts.
We have also seen a reduction in bad debt expense throughout the year as reflected in the financials, driven by technology and process enhancements. To conclude, I want to emphasize that my priority remains driving innovative improvements to our processes to better support our teams and to stand out among the competition. We still have work to do, and I am energized by the progress we achieved in 2023. I look forward to providing updates as we continue to build on our momentum. I want to again express my heartfelt gratitude to our clinicians, field leaders, health services teams and central teams for their steadfast commitment and passion. It is through their collective efforts that we can make meaningful strides in improving the health and outcomes of our patients.
Their dedication is the cornerstone of our success, and I am deeply appreciative of their continued focus on driving positive change. As we move forward, I am excited by the abundant opportunities that lie ahead. Now, I’d like to turn the call over to Joe to provide an in-depth review of our financial results.
Joseph Jordan: Thank you, Chris, and thanks to everyone for joining the call today. I’ll talk about our fourth quarter and full year 2023 financial results and then later on, I’ll discuss, as Sharon mentioned, early trends for 2024 as well as our expectations for the first quarter. Starting out with Q4. Our net revenue in the fourth quarter, it was $182 million, which is a 12.7% increase year-over-year from $162 million in Q4 of the prior year. And as we go a layer deeper, net patient revenue was $166 million, which is a 13.6% increase year-over-year, while other revenue for the fourth quarter was $16 million, which is a 3.7% increase year-over-year, and it’s mostly due to higher revenue from our MSA clinics. Our visits per day per clinic, as Chris talked about a little bit earlier, was 27 for the quarter, which is a sequential increase of 1.1 visits from the third quarter, which sat at 25.9. And since we began the execution of our clinic optimization and our operational improvement plans last year, the result continues to be stronger, more vibrant clinics and improved unit economics.
And also, as Chris mentioned, we’ve seen a sequential increase every quarter in visits per day per clinic. The visits per day per clinic of 27 in the fourth quarter compares to 24.1 in the fourth quarter of the prior year. Rate per visit was $108.81 in the third quarter that’s a decrease of 1% from $109.90 in the third quarter, but an increase of 4.6% from $103.99 in the fourth quarter of the prior year. Looking over the sequential quarters, the slight decrease in rate was mostly due to a more significant discrete rate adjustments occurring in Q3 related to prior period favorable collection experience. And when we look year-over-year, the increase in rate is primarily driven by favorable rate realization due to operational enhancements and revenue cycle management and increased contracted rates, which Sharon and Chris both touched upon.
Salaries and related costs in the fourth quarter of 2023 were $99 million, and that’s a 9.5% increase year-over-year from $91 million in Q4 of the prior year. It’s primarily driven by more clinical staff supporting higher revenue and higher wage rates due to inflation. PT salaries and related costs per visit during the quarter were $56.56 hat decreased 1.6% from $57.47 in the third quarter of 2023 and it increased 3% year-over-year from $54.92 in the fourth quarter of the prior year. The quarter-over-quarter decrease in Q3 is primarily due to higher labor productivity, while the year-over-year increase was primarily due to higher compensation wage inflation, which was partially offset by higher labor productivity. Rent, clinic supplies, contract labor and other in the fourth quarter was $53 million, which is a 7% increase year-over-year from $49 million in Q4 of the prior year, is primarily due to increased spend on contract labor and outside services.
On a per clinic basis, those same costs were approximately $57,000, which is essentially flat from the third quarter and increasing 11% year-over-year from $51,000 for the same previously noted reasons, contractor spend and outside services. Our provision for doubtful accounts during the quarter was approximately $1 million, which is 0.9% of PT revenue, and that compares favorably to 2.1% of this year and 1.7% in Q4 of last year. And on a full year basis, the provision was 1.8% of PT revenue compared to 2.4% in the prior year. Now these improvements are the results of deliberate process improvements and collection efforts by our teams. Chris talked a lot about the rev cycle management improvements that have happened year-over-year. And those improvements and those processes remain ongoing as we move into 2024.
SG&A during the quarter was approximately $26 million, which is a 4.2% decrease year-over-year from $28 million in Q4 of the prior year, is primarily driven by lower severance and lower non-ordinary legal costs, partially offset by higher outside services and contract labor. Non-cash goodwill intangible and other asset impairment charges in the fourth quarter were $6 million and is due to long-lived asset impairments related to primarily subleasing a portion of our corporate office space. Operating income, excluding impairment charges in the fourth quarter was $3 million, which increased from an operating loss of $8 million in the prior year, which reflects the higher revenue we earned in 2023 and the associated earnings that come along with that.
Notable below the line items during the quarter included income resulting from a decrease in the fair value of our second lien PIK notes, our contingent common shares and warrants, which totaled $16 million. Those are mark-to-market to fair value every quarter. So as of year-end, December 31, valuation analysis that resulted in $16 million. Our interest expense during the quarter was $15 million, which compares to $13 million in the fourth quarter of the prior year, and the increase is primarily due to lower interest rate hedge benefit. Income tax expense for the quarter was $2 million, which compares to a benefit of $5 million in the fourth quarter of the prior year, and our net loss during the quarter was $5 million compared to a net loss of $102 million in the fourth quarter of the prior year.
Looking at the full year, revenue for 2023 was $699 million that’s a 10% increase year-over-year from $636 million and outperformed revenue guidance of $680 million to $695 million. The primary drivers for an increase in visits per day, which increased 7.5% year-over-year, and rate per visit, which grew 3.2%. And on the adjusted EBITDA line, the full year was $36.2 million, which increased from $7 million in the prior year, also outperforming our adjusted EBITDA guidance range of $30 million to $36 million. Cash used during 2023 was approximately $46 million compared to cash generated in the prior year of $35 million. As we break that down further, operating cash use was $12 million in 2023 compared to $66 million in 2022, and the improvement reflects improved earnings in addition to the conclusion of CARES Act.
Investing cash use was $17 million compared to $28 million in 2022, with the decrease mostly due to fewer clinic openings. And financing cash use was $17 million compared to cash generated of $128 million in 2022, with the decrease driven primarily by the issuance of preferred stock that happened in 2022, as well as higher revolver repayments in 2023 as we had significant borrowings at the end of 2022 and then repaid some of it in ’23. As of December 31, 2023, our available liquidity was approximately $42 million, and that consisted of cash and cash equivalents of $37 million and then available revolver capacity of $5 million. And in addition to that availability, we had access to a $25 million delayed draw term loan, which was fully drawn in January of 2024.
Finally, as Sharon and Chris discussed, the people and the operational advances that we achieved in 2023 led to volume and led to capacity utilization increases throughout the year and we’re pleased with the progress that we made during 2023. And we’re excited to continue these advancements into 2024. Despite the severe weather in January that negatively impacted patient visits, we currently expect Q1 revenue to be between $175 million and $185 million and adjusted EBITDA to be between $5 million and $10 million, demonstrating growth over the prior year. Of course, this will depend upon continued success of our current initiatives and the risks outlined in our press release and other filings. Overall, we’re continuing to see plenty of demand for ATI services and Sharon talked about that early on.
In 2024, we’ll be working to see if we can achieve the full potential of the process improvements and the technology solutions that we implemented throughout last year. And with the changes made to date and others still in process, we plan to achieve productivity levels exceeding 2023, and we expect to provide full year guidance during our next earnings call in the spring. With that, I’ll turn the call back over to Sharon for closing remarks.
Sharon Vitti : Thank you, Joe. As I said before, 2023 was a reset year, and we succeeded in setting up ATI for continued growth. The successes accomplished during the year demonstrate that we have the right team in place, we are aggressively executing our operations improvements, while continuing to make notable strides toward our strategic vision. I am very confident in our people, strategies and ongoing initiatives, and that we will continue to advance our national practice, improve performance and lead in the muscoskeletal space. We will capitalize on the 2023 momentum and execute unknown growth levers to XL in 2024. I’ll now hand the call back to the operator to open up for questions-and-answers.
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