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Below is a research note from our Healthcare Team of Tom Tobin, William McMahon, and Justin Venneri. |
ATI Physical Therapy (ATIP) posted surprisingly poor results. We're still running all our data and will follow up with a separate summary of the MicroQuads and usual Monday updates. One bad print doesn't stop the process.
KEY CALL OUT
When we interviewed ATIP on July 7th we asked about labor trends, a topic we had been hearing about from other operators across the industry. We anticipated both the potential impact to margins and the risk to revenue if ATIP didn’t chase therapist wages. What we heard from them sounded like a real but manageable risk, not something that could derail the outlook to such a degree. ATIP is likely to trade in a range of $3.00 to $5.00 assuming 6-10X EV/EBITDA, but given the labor pressures ease 2H21, we think ~2X EV/Sales becomes a better metric and can support $7.00-$8.00.
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]?
Labeed Diab (ATIP CEO) – 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.
- 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.
Guidance Update
- Revenue $640M-$670M vs prior guidance $731M and FactSet $706.2M [5 est, $684.0-730.5M]
- Adjusted EBITDA $60M-$70M vs prior guidance $119M and FactSet $103.3M [5 est, $89.0-118.8M]
- The revised expectations reflect the impact of the following developments which are partially offset by continued strong demand for ATI's services:
- The acceleration of attrition in Q2 and continuing into Q3 caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians. ATI has taken swift actions to offset those changes, but the company expects the impact of attrition in the second and Q3s will impact overall profitability for the year.
- Labor market dynamics that increased competition for the available physical therapy providers in the workforce, creating wage inflation and elevated employee attrition at ATI, negatively affecting our ability to capitalize on continued customer demand.
- Decrease in rate per visit primarily driven by continuing less favorable payor and state mix when compared to pre-pandemic profile, with general shift from workers compensation and auto personal injury to commercial and government, and further impacted by mix-shift out of higher reimbursement states.
