Overview
On July 7, 2021, we hosted ATIP CEO Labeed Diab (LD) & CFO Joe Jordan (JJ) for a fireside chat format Q&A about the business post-de-SPAC and opportunities that lie ahead. We came away from the discussion thinking, "OK, the total addressable market (TAM) is larger than we thought for a couple of key reasons" and ATIP likely has the infrastructure, data, capital/balance sheet capacity (at sub-3x leverage), and runway to execute and grow. We're sticking with ATIP as a Best Idea on the Long side because our estimates may prove to be conservative as de novos open, more direct-contracting opportunities open up and are won, and activities that lead to PT (surgeries, sports, etc.) continue to "reopen" all across the US.
Highlights
- Despite redemptions, ATIP was able to delever its balance sheet to sub-3x (from over $1B of debt to $560MM-$570MM), which provides room for growth via M&A activity
- ATIP's investments in its infrastructure and EMR provide the company with an advantage because it has and can leverage data on 2.5MM+ encounters for treatment plans and new business development opportunities (e.g., with employers and retail), respectively
- As ATIP grows and executes its de novo strategy, density will increase in core markets making the offering more attractive; the company has already announced 6 ATI First wins this year, and management sounded optimistic that there's more to come (including progress with payers)
- Risks include reimbursement pressure, potentially offset by value-based contracts, and labor costs, which ATIP may be able to navigate due to its corporate model
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Management Interview | ATIP | July 7 | Business Combination Complete, What's Next? Subscribers: CLICK HERE for the event replay (includes video, dial-in, and materials link) |
CALL NOTES (lightly edited for length and clarity)
Background: Combined, Labeed and Joe have spent decades with public companies. Both joined ATIP knowing it would become public, and the team assembled is impressive (Labeed w/ experience running Health & Wellness at WMT, a $25B business, and Humana Rx Solutions). ATIP is ~20 years old and has nearly 900 locations, one name, one brand, in 24 states. Joe spent his first couple of years w/ the company focused on infrastructure and the back office, setting tools and processes in place that would support growth (i.e., allow management to execute on levers around de novo clinics, M&A, etc.).
We got a lot of questions about the de-SPAC from clients. Is there anything about the experience you're going through, anything idiosyncratic or special about what have seen in the share price recently?
LD – For us, it was an easy decision [to go with Fortress] – there was a robust selection process for a SPAC partner, and Fortress had been a partner for over 10 years. , invested for a long time, predating the Advent acquisition. They were engaged, we knew the management team, it was an easy process… SPACs, knowing come public, impacted by COVID-19, as started to climb out, quick, share forecast, talk about strategy, how correlates to revenue and EBITDA – top and bottom-line growth + FCF – it was easy decision to go down SPAC route w/ Fortress.
JJ – The SPAC process got crazy at times but we feel it was the right choice. There were some redemptions (as noted in the press, in the 20%s), but we got a fair amount of capital and leverage is down significantly, which allows us to execute on growth plans. We feel very good about the outcome.
Is there anything about incremental lockups, were redemptions high, any incremental liquidity needs (secondaries)? How's the cap structure now vs. where you want it to be?
JJ - We took debt from over $1 billion to $560 - $570 million, which puts us at sub-3x leverage. We wanted to be sub-4x and have flexibility for M&A, de novos, etc. Advent is still a majority owner, Fortress has a big share, and I think both want the stock to perform well. There's no timetable on it - both have confidence in the company. Advent rolled all the investment and is sticking with it.
Having aligned interests is always helpful and a confidence booster – what can you tell us about the recovery and what happened at the end of 2020 and in 1Q21 with incremental volume/visits?
LD - At the peak of COVID-19, we were down 60% (April 2020). We kept clinics open, implemented robust CDC guidelines to keep patients and team members safe. The recovery was been slow and methodical, consistent through the end of 2020. Since the start of the year, we noted 500-600 bps of improvement – with that, it's important to understand geographical differences. The South and Southeast recovered faster while the Pacific NW, the original hotspot for COVID-19 in the US, and Northeast had not recovered as quickly. You can see it in and out of health care – I spend a lot of time in Nashville and Chicago, there are big differences with restaurants, schools, etc. We continue to see a recovery and incremental growth.
Have you seen any impact from the Delta variant hotspots in core areas?
LD - We haven’t. 1Q21 growth was 600 bps, and April was up again on top of 1Q. We haven’t seen Delta hit as the country continues to recover, but it’s very uneven.
In terms of how competitors recovered (or didn't), you've got some expectations built into the forecast about how many units can be opened and years of growth into the white space. How has COVID impacted the competitive landscape and plans now vs. pre-COVID?
LD – PT is a very fragmented industry – outpatient PT is a ~$22 billion industry. There are ~38k clinics in the US, and the top ten players, including us, USPH, Select (not a pure-play), and middle-market collectively have ~12% share. ATIP is up to almost 900 clinics, and or growth has been 50% by M&A, 50% by de novo. We acquired 55 organizations from 2010 - 2016, and when Advent bought the company, M&A activity slowed in favor of back-office/infrastructure enhancements that created a stable environment, especially for M&A (big and small).
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What has covid done? From a de novo perspective, we don’t really compete w/ others like USPH that does a lot of tuck-ins (mom-and-pops) and lets them operate under their own brand. ATIP’s de novo program, adding over 900 over 10 years in current geographies. Real estate opportunities are more prevalent – look at who competing with – QSRs and SBUX, want to be in prime locations, convenience
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From an M&A perspective – what COVID has done, and CMS reimbursement changes – reimbursement, more opportunity especially among smaller players, cuts impact smaller players and costs around COVID. Opportunity to look at new opportunities.
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We are very, very disciplined about how we're going to grow – de novos are very accretive to P&L, and M&A must be accretive and people we're bringing into the mix must be aligned with or values and differentiated outcomes - our NPS of 80 is something we're very proud of.
JJ - Our de novo process – we leverage proprietary tools focused on the best site selection, which leads to these being very accretive to the platform. To identify the best white space: data on where the competition sits, population and demographic trends, payer rates, RE properties, traffic patterns on roads, etc. gets us to the best spot to get the best density and avoid cannibalization.
As a result of COVID, has any capacity been shuttered out there? Has the competitive landscape thinned?
LD - During COVID, we saw regional and independents close, some abruptly. We've seen some reopen. There’s a significant opportunity for acqui-novos because of the impact the pandemic had on smaller mom-and-pops. There hasn't been a straight capacity reduction - the demand, pent-up demand, is starting to come back as the country reopens and the vaccines take hold. We're seeing surgeries coming back, sports are coming back, weekend warriors are getting injured, and all that's creating demand that we’re seeing.
On the labor side, the story of wage inflation nationally is a big deal, and for health care, it's the nasty variety. Could relationships in the practices be disrupted if people come in "off-scale" and can you touch on whether ATIP has an advantage [in hiring]?
LD – The labor market is really interesting right now. COVID-19 has had an impact in and out of health care. We have PTs and non-PTs (ancillary roles = technicians, PT assistants, and we added an operational support specialist or OSS (an hourly role)), so we're competing with everyone and with unemployment benefits. Some of that is coming to an end, but there's a risk that they extend from Sept -> December. States are fighting that, but if you annualize some of the benefits, Washington, for example, you can make over $70k on unemployment ($56k - $57k in Illinois). For PT hiring, we've always talked about differentiators and our ability to attract and retain PTs. Our EMR is custom-built for PT (7-8 years of data, >2.5MM unique cases), which is really important when we bring on a physical therapist.
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We keep PTs away from billing and other risks and allow them to practice at the top of the license. There's no guessing about treatment plans/protocols and we have superior outcomes – back, shoulder, knee, etc., we outperform the competition when it comes to function and mobility. That said, we are seeing some erratic behavior – some regional and mid-size players are trying to poach therapists at 30%+ above normal pay, and we're dealing w/ those issues on a 1x1 basis – it's a very unique time.
How do the extended unemployment benefits and people just not being at work have an impact on volume overall?
JJ - We have seen demand up, but we saw the overall rate down a bit (in 1Q21) because workers comp is a piece of it that was down, and as workers come back, that'll be up a bit.
Can you touch on the mix of the business? Workers comp, surgical recovery vs. weekend warriors - the sources of the volume that you see? Where should we be listening for beats or marginal weakness?
JJ - The way we think about is by payer class, not really surgical vs. non. About 50% of the business is commercial payers – general employees. Then 25% government (Medicare, Medicaid), and 25% is "other," which includes workers' comp (high teens %). Surgical happens within any of the buckets.
On the de novos, you show the cohorts with nice smooth increases over time – revenue builds per site, EBITDA builds – and they track similarly and end up in the same place. 2016 stands out, is there anything unique about that vintage?
JJ - All the cohorts track the same sort of steady ramp – there will be variation year to year, the geography of new de novos matters (different payer, rent, and labor rates drive variation). They are pretty tight bands. If you look at them in terms of multiples, we're paying 1.7x - 2.5x EBITDA. At either end, they are attractive, and as we move forward, we'll stay within those bands.
Path to $200MM EBITDA, there's a labor and productivity component, can you help us understand that?
LD – One thing is productivity. We set robust and consistent expectations about the number of patients per day, week, etc. that we expect our clinics to see. Then, there's the labor model – staff w/ PTs, PT assistants, and the OSS - it's a team-based approach and research shows that you get differentiated outcomes using a team. This allows the PTs/senior team to manage the most complex cases, and the younger/newer team members help with the easier/less complex. We started that work in 2019, took 2020 to implement it across the organization, and that really helps with productivity and cost control.
There's not a great, definitive study on PT, but you have the data. How does the conversation go with payers or employers?
LD – PT is on the right side of healthcare. What we are doing with PT at ATI in particular. Much lower cost alternative/modality than MRI, scan, opioids, surgery + a long hospital stay. Almost 30 years in health care, prior to PT, kids with sports – go-to was the ER. The reality is, PTs can diagnose 75% of all MSK-related injuries. There's an educational opportunity - going to PT first makes sense and provides immediate access, PTs can help with the diagnosis, coordinate a prescription with the doctor, and handle billing. It can help reduce costs and impact the ecosystem in a positive way.
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Our proprietary EMR has been collecting data for over 6 years, 2.5MM unique cases. The treatment protocols are consistent in any clinic in the US for any patient - age, weight, height, on whatever body part. We have very robust outcomes data tied to function and mobility. Typically, patients have below 50% function and mobility when thy come in, and when they leave, it's above 80%.
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We hold ourselves accountable with report cards for clinicians by body part. We submitted our data to CMS in 2019 and again in 2020 - a lot of the competition doesn't have the infrastructure that we invested in. That leads to the ability to have conversations with commercial and government payers – i.e., why ATI should be reimbursed differently (PT has been a FFS thing – see patient, bill, etc.). We have a robust payer team taking this data and having conversations about our capabilities (case study, slide 14 in the deck). We received an exceptional rating, the highest rating for outcomes through CMS.
How long do you think it’ll be before you capture some of that value (the 30% savings) or we see it in differentiated pricing over time because you've separated yourselves from the competition?
LD - There was a 30% increase in rate on above-average volume in the employer case study. There is an opportunity to go to payers and say, "Pay us a regular rate, we'll take risk and share in savings…"
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We see self-insured employers and payers as having an appetite for this - a capitation play. We have lots of conviction around it. We have a couple of people here leading it with lots of experience. It's early stages, and the financial forecasts do not include any of it, and I think what we’re doing is industry-leading. We're helping evolve the thinking of payers and employers, super excited/ convicted.
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Look at the investment that Advent made – mid-late 2016 – we slowed down M&A after 55 acquisitions and started investing in systems, back office, rev cycle, etc. All the things allowing ATIP to have a conversation about value-based arrangements. Took years - 4-5 years - to say we have the systems, data, and differentiated outcomes. We can go more than double the clinics and not flinch, and we're seeing PE-backed owners start to transact because they didn’t make the investments (costly, will take time).
JJ – It's not just systems infrastructure. It's density too. Employers need to know people are covered, so having that density is an advantage, and you can’t build that overnight – you have to either buy or do de novos to achieve density.
So, that's the trade here, for the population with some MSK injury, the sum total of costs reduced by $X amount that's well in excess of extra PT payments...
LD - Yes, the employer in our case study shared the data and through ATI First, you can see the savings they were able to garner: $1MM reduction in MRI, etc. The challenge is having access to the data and being able to show it. This is a case study, not a pilot, and we talked about the incremental contracts under this banner in our 1Q21 release. In these types of contracts, employers choose to waive copays. We're not waiting, we actively marketing/pushing on all fronts, with payers too (commercial and government – robust value-based care discussions).
Can you talk about how/why value-based care feels different this time – has the mood changed? Is it just that the data is available?
LD - Your point is spot-on. I think "value-based" care is an overused term. Primary care has done a nice job w/ it, and Humana has figured that out. From a PT perspective, most are not capable of taking risk – nobody is structured like ATIP with a national structure – we're going to do 900+ de novos in existing markets, which will add density. We can launch programs like this; there's no question about how to implement them. One brand helps and is critically important for value-based care and how 3Ps, etc. will reimburse you.
How deep do you think this goes right now?
LD - This is the first few innings of the game. It's not about knocking on doors and having people invite you in – when you have data and facts, you get meetings and undivided attention from payers and self-insured employers. All systems are set to pay FFS, to pivot requires investment and will take time. We will see payers and others launch programs later this year.
How will growth change it? Expansion?
LD - It's methodical expansion – de novos will add to this. The goal is not to be in every state, but there are some regions with the right mix of density and payer structure (we're in MA, DE, and PA, but not in NY, NJ, CT). Also, telehealth – ATI Connect launched within 4 weeks of COVID hitting and we've seen >50k visits. You can’t replace hands-on to get differentiated outcomes, but the opportunity to reach the consumer in other geographies, diagnose, and be helpful is great. We have clinics in Dallas, San Antonio, and Austin, but not in Houston, and we see patients in Houston through ATI Connect.
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Also, partnerships with other retailers. I came from retail – see what Walmart, Walgreens, etc. are doing and there's an opportunity for PT to be embedded in there. We're having those discussions.
Please send any questions or feedback to .
Thomas Tobin
Managing Director
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