ATI Physical Therapy, Inc.

Good morning. My name is Ling, and I will be your conference operator today. At this time, I'd like to welcome everyone to ADI Physical Therapies Second Quarter 2021 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, ask the county. In the interest of time, we ask that you kindly limit yourselves to one question and one follow-up. On the call today is Labib Diab, Chief Executive Officer, Joseph Jordan, Chief Financial Officer, Ray Wong, Chief Operating Officer, and Joanne Fong, Senior Vice President, Treasurer, and Head of Investor Relations. I'd like now to turn the call over to Ms. Wong to read the forward-looking safe harbor statement.

Thank you, Rain, 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 ban. These forward-looking statements are subject to various risk 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 take no obligation to update them other than as required by law. Descriptions of some of the factors that could cause actual results that differ materially from these forward-looking statements can be found in the risk factors section of the company's resale registration statement on Form S-1, filed on July 9th, 2021, and any amendments thereto, 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's quarterly report on Form 10-Q for the period ended June 30th, 2021, which is expected to be filed in early August. In addition, please note that we will be discussing certain non-GAAP financial measures that the company believes are important in evaluating performance. Details on the relationship between these non-GAAP measures, the most comparable GAAP measures, and reconciliation of historical non-GAAP financial measures can be found in the press release that's posted on the API's website and filed with the SEC. And with that, I'd like to turn the call over to Labib.

Thank you, Joanne, and good morning, everyone. I'd like to welcome and thank you all for joining us on today's earnings 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 tailwinds such as the aging population and shift to outpatient care. Second, we are seeing growing demand for ATI 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 therapists, which has continued into the third quarter. will unpack the drivers of this attrition, 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 will detail aggressive actions we have underway to restore our staffing levels. Fourth, the labor supply and demand imbalance that emerged in the second quarter has impeded our ability to meet the demand that we have while increasing our expectations for labor costs. 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. The headwinds that we will detail today do not change the strength of our brand, the drivers of our growth, or strategy that we have in place to capitalize on the significant market opportunity ahead. With that overview, let's get into the details of the quarter. Our results in the second quarter reflect the continued strong fundamentals supporting increased support demand for our services. Our visit volumes were 85% of pre-COVID levels across our entire portfolio of clinics, and visits per day were up 10.5% compared 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 levels in certain geographies in the south and followed by the northeast, while the west and the midwest continued to show steady improvements. While the demand trends remain 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. 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 the infrastructure we built to attract, develop, and retain leaders in 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 and support for our clinicians. As we have already detailed today, demand for our services has steadily increased throughout 21 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 will continue to be aggressive in accelerating hiring to meet demand. In fact, we have been successfully hiring at or near all-time higher rates throughout the year, including in the second quarter. In addition, we have had a leadership change in our human capital organization, and I will oversee the function directly while we conduct a comprehensive search for a new leader. We remain laser-focused 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 opportunities, culture and working environment, and competitive compensations. To win talent in 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 platforms. Despite our success in hiring, the higher than expected attrition will take time to overcome as we work to restore headcount to plan 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 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 PT industry, including the aging population in the U.S., and an increasing shift away from inpatient rehab hospitals to the lower-cost outpatient setting. Physical therapy is an efficient treatment modality for many musculoskeletal issues that can reduce costs and improve outcomes. With our commitment to collecting and utilizing outcomes data in the treatment of patients across all our clinics and in 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 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 ATIP. Following the business combination, we have a strong balance sheet and liquidity position as we continue to invest in our business. In the second quarter of 2021, we continued to execute on our growth plans and opening new clinics. Specifically, ATI opened 10 new clinics during the second quarter and increased our local density in several existing markets, including in Georgia, Massachusetts, and Texas. We remain committed to executing on our three-prong 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've built. I'm excited about where we're going together and confident that the plans that we have in 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.