ATI Physical Therapy Inc (ATIP) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to ATI Physical Therapy's Third Quarter 2022 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. (Operator Instructions) Please note, this event is being recorded. On the call today is Sharon Vitti, Chief Executive Officer; Eimile Tansey, Chief People Officer; Ray Wahl, Chief Operating Officer; Joseph Jordan, Chief Financial Officer; and Joanne Fong, Senior Vice President, Treasurer and Head of Investor Relations. I would now like to turn the call over to Ms. Fong to read the safe harbor and forward-looking statements.

Thank you, Abby. Good afternoon, everyone, and thank you for joining us for today's call. Before we begin, we would 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 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. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in our earnings press release as posted on ATI's 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 Eimile Tansey, our Chief People Officer; Ray Wahl, our Chief Operating Officer; and Joe Jordan, our Chief Financial Officer.

So, since our last call, I continue to learn about the ATI business and the physical therapy ecosystem and have for more definitive views on what the business needs. I've enjoyed meeting with many of our therapists, patients, and stakeholders across the country and will begin by sharing some observations. Next, I'll provide highlights of Q3 results with a focus on our most impactful operational letters, the 3 Ps of our practice; pipeline, provider base and provider productivity. These are critical drivers to achieving our near-term growth targets. Eimile will discuss the labor environment and key activities around our provider base. Ray 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, I want to thank ATI's talented and dedicated team of clinicians and leaders that emotionally invest and are passionate about enriching the lives of the patients and communities they serve. Over the last few months, I've had the pleasure of visiting clinics and hosting in-person town hall meetings across the footprint. Altogether, I've probably met and spoken with close to 1,000 team members and my reaction to what we offer remain strong and proud. The passion of the teams and the commitment to helping patients get back to their lives is consistent and visible. I observe firsthand the dedication of our teams to help patients on their health care journey and ensure that everyone feels like a member of our ATI family. From our patients, new hires, established colleagues, and corporate teams, when I ask them why they love ATI, it's the people.

ATI was built on a solid foundation and 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, execute, and deliver on the right actions for both short- and long-term success. Regarding our first operational key, pipeline, sustained demand for physical therapy care reiterates the value of this offering and in the third quarter, the pipeline for ATI services continues to be strong. Referrals grew quarter-over-quarter and are just shy of pre-COVID levels. Our business development team is focused on local relationship building alongside our clinicians with targeted referral sources and employer customers.

The second key, provider base, the headwinds we discussed previously with recruitment and hiring persisted through the third quarter. Despite the tough labor market, our ATI employee attrition rate, excluding our clinician contractors, has improved since the beginning of this year and is currently in the mid-20s. Moreover, in the third quarter, the clinical FTE count remains stable. The labor challenges affecting ATI and the broader PT 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 Eimile Tansey on this call. She joined as CPO just over 2 months ago. Eimile is a strong and seasoned leader with more than 20 years' experience in human resources and operations in health care and provider organizations. Eimile will share some perspective shortly on the labor market and discuss new approaches and talent acquisition and people development to advance the business. We are delighted to have her.

For the third P, provider productivity, our teams across our national footprint saw an average of 8.7 visits per day per clinical FTE in the third quarter, and 8.8 visits per day per clinical FTE in the year-to-date period. Now when we break this down, we rank our clinics based on productivity in Q3. The providers in the top 80% of our clinics saw on average of 9.5 DPD per clinical FTE compared to the bottom 20% of our clinics that are at a 6.5 DPD. So, the top 80% of clinics are doing well, seeing patients in achieving or exceeding our productivity targets. We believe there is room free for mental improvement in both groups, and Ray will discuss our road map later in the call.

We completed the first pass in reviewing our clinic footprint and observed a similar clustering related to financial and operational performance. We see the top 80% of our clinics meeting or exceeding performance targets while 20% are underperforming. 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 lag in clinics. In addition to boosting financial returns, rethinking select clinical locations will strengthen operations and facilitate redeployment of displaced providers to clinics with more demand.

Now historically, ATI has increased the number of clinics every quarter since the company's inception in 1996. While we plan to continue opening de novo in attractive geographies and markets, we are taking a hard look at the existing fleet and will exercise discipline in pruning underperforming locations. Looking ahead, in 2023, we may have a decline in the total number of clinics year-over-year as we prioritize same clinic growth over expanding clinics. We continue to gain insight into the path 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 a deliberate aim to strengthen our financial position, including execution of several quick sprint efficiency and improvement projects in 2022. The priority areas will review organizational change and/or 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'm 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 in Google star rating customer satisfaction scores, both are testaments to our purpose-driven culture. As I said before, ATI 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 Eimile 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 rates. 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 has 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 I'm 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 1 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 in 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. If a clinician is interested 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. The key performance metrics on tracking at the macro level are clinician turnover and clinician hiring rates with the business goal to grow and balance the provider base in line with referrals at the local market level. My focus areas are workforce development, performance management, and team member engagement. ATI has an amazing culture, and I'm excited to do my part to locate, attract, acquire, engage, and develop the next generation of skilled therapists for future leaders. Now I'd like to turn the call over to Ray for a discussion of clinic operations.

Great. Thanks, Eimile. I'd like to provide a review of operational performance and discuss some of our activities in the field during the third quarter. So, before I begin though, since we just finished at physical therapy month in October, I'd like to take a quick moment to say thanks and to appreciate all of our PTs and PTAs, along with our clinic support staff for what they're doing day in and day out and impact they're having on our patients' lives. We had a lot of fun in October, celebrating the profession and each other's accomplishments, and it was great to see.

As Sharon mentioned, demand for physical therapy continues to be strong with ATI referrals continuing to increase quarter-over-quarter. Our business development team alongside our clinical directors are doing a great job in getting out to the communities they serve and building meaningful relationships with the medical community. As Eimile and her team worked to grow the ATI provider base in the clinics, we are continuing to be focused on optimizing patient intake and scheduling, coordinating handoffs, advancing accountability, and onboarding new team members to the ATI 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 and can focus on providing excellent care to our patients.

In the third quarter, our provider team averaged 8.7 visits per day. While 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 and clinics at the local market level. As Sharon mentioned earlier, when looking at individual clinics during the third quarter in 2022, 80% of our clinics are at the 9.5 visits per day or greater. This is encouraging as it shows when providers, referrals, and support staff are at the right levels. The team is then able to execute the playbook and this results in excellent patient experiences and high-functioning clinic operations. As we progress in assessing the 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 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 are 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. Q3 has shown our ability to exceed performance expectations in many clinics. I think our Northwest region is a great example of a market where referral support has been solid. We've made some leadership changes that 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 ATI team. This group continues to work hard every single day towards our overarching mission and that's helping patients reach their full potential. I'm excited as we finish the year, and I look forward to delivering on our commitments to our investors and our stakeholders as well. With that said, I'd like to turn the call over to Joe for a financial review.

Thank you, Ray, 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 is 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. Visits per day per clinic during the quarter were 23.2% sequentially decreasing one visit from 24.2% in the second quarter with the quarter-over-quarter decrease following normal seasonality trends. Visits per day per clinic increased 0.1% from 23.1% in the third quarter of 2021 as we increase the number of clinicians year-over-year to see more patients. Our rate per visit was $103.46, essentially flat from the second quarter of 2022 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 and accounted 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 $90.3 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 costs 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 $54,000 sequentially increasing 2% from $53,000 in the second quarter and 9% year-over-year from $49,000 driven by greater contract labor use. 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 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 of 2022 was $106.7 million. The impairment was primarily due to 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 of 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 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 warrant and contingent common share liabilities totaling $7.7 million. The mark-to-market to fair value was based on a valuation analysis as of September 30, 2022. Interest expense during the quarter was $11.8 million compared to $7.4 million in the third quarter of 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 EBITDA during the quarter was a loss of $0.4 million or 0% margin, decreasing year-over-year from $8.5 million 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 or the MAP program under the CARES Act. All MAP funds have been repaid as of September 30, 2022. 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 in 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'll 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 and 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 million 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 follow 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.

At this time, I would like to remind everyone in order to ask a question (Operator Instructions) Your first question comes from the line of Larry Solow from CJS Securities.

This is Stefanos Crist calling in for Larry. 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 wall closing or mostly closures?

Right, Stefanos, thanks for the question. So, we will finish out the year with the de novos that we have on the docket. That's in the...

Roughly $35 million for the year, a couple that are opening in the fourth quarter.

And then we -- as you know, there's a long lead time to pulling together the de novo so we will continue with a lower rate of de novos in 2023, probably in the 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 a clinic level. We've looked at profitability, prospects, local operational synergies, et cetera. And so, we're focused on all of our clinics. The ones that we are taking action on are the 20% that are not -- don't have sufficient market demand or for one other -- one reason or another, they're 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 a watch list. Some of them are newer clinics. Some of them have seen growth, but not necessarily up to the levels that we need. So, we call that our watch list. And then the other half of that 20%, we've developed a plan for each of those clinics, and we will be taking actions starting now and over the next 3 to 5 years. Obviously, the lease terms are one of the factors that plays into the decision but we're moving on those that we can relative to a lease term or those that we have made a decision on closing or divesting...

No, that's great color. 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 Eimile jump in?

Yes, 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've experienced reduction in attrition as we've gone through quarter-over-quarter, year-over-year. So, we're really encouraged by that. And so, we think that through the programs that we put together, we continue to listen to our employees. And we think that internal attrition in the mid-20s 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 just with PT, but health care broadly. So, we believe we can continue to maintain levels driving down a little bit more with our programs and 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 creating mechanism for open and frequent communication with our providers.

And let me just... Just to clarify, that attrition rate is without our contractors. Obviously, we know the contractors turn so we're measuring it without our contractors in to make an apples-to-apples comparison.

Your next question comes from the line of Brian Anklet from Jefferies.

I guess just to follow-up on some other questions there. As I think about -- and I know we've been 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?

Yes, absolutely. Thanks for the question. Thanks, Brian. Lead generation is obviously incredibly important to us. And we really are looking at a lot of different ways that we can drive the top of the funnel for recruiting. And it really looks like- it's really a multichannel strategy, maximizing university channels, integrating and focusing on our 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 those people to the ATI employees.

And I would just add, so under Eimile's short tenure, she has brought on a new VP of Talent acquisition to complement the existing team and to add a level of those 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 to September, we have seen an increase in 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 Eimile referred to and then the last would be we've also increased our spend in the area to support those tactics.

Got it. And then I guess as I think about the clinic closures coming up, I mean, is there a way to -- do you retain some of those clinicians and redeploy them? And how does that work? I'm just curious.

Yes. No, great question, Brian. Thank you. Absolutely, that is our goal. And when you look, I mean, 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 a way for us to move the staff and then also that makes it a more vibrant clinic setting when you have more than a single provider. So our intentions would be to maintain or to keep those staff. If there's a divestiture that we'll have to see how that plays out. That was a little bit harder.

Got it. Last question for me. Joe, as I think about free cash flow, as we think about clinic closures, 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 in the de novos?

Yes. Certainly can, Brian, drive improvement next year. To Sharon's point, 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's 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 there'll be -- there's some actions we're taking right now. There will be some action we'll be taking in '23. I would say the majority of the action is going to happen over the next 3 years. But again, it's all predicated on the -- both the action we want to take and then the lease.

Your next question comes from the line of Jason Cassorla from Citi.

Great. Just as we think about -- just thinking about mix, like payer mix as you staff up, you've talked about referrals. But maybe could you -- when do you think you'll 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 rind for next year, right, just given your new hires, the focuses of referral channels and the like, but also in context of the final Medicare rates that came out. So, anything just on one payer mix, if you think you can get back to pre-pandemic levels? And then two, how you're thinking about revenue kind of per visit next year and the puts and takes there?

Sure. Joe, do you want to take us through those 2?

Yes, Jason, it's Joe. So, I'll unpack that because you asked kind of a lot there. Maybe I'll start at the highest level on a rate. From a rate perspective, we're monitoring what could happened with Medicare pretty closely. They've come out and said 4.5% cut and in the past couple of years, the Medicare rate cut that's originally been "final" has not equaled where it landed at the end of the year. Congress has stepped in and often that's then come down. So, we're monitoring because there's a chance that, that happens again like, it has the last couple of years. If it stays as is, that 4.5% 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 our exceptional rating under the MIPS program, which would give us a bonus, which would help to offset the 4.5% 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 can have some wins elsewhere.

From a payer 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 is one where we built up our workers' comp and API historically, and it's 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 haven't seen the improvement, which, as a result, we're not prepared to make a prediction on where the mix is in 2023.

Yes, that was very helpful. And then just quickly as a follow-up, and you've talked about divestitures on this call. And apologies if I missed this. Are you thinking about it more broad-based? Is it regionally focused or concentrated? And then just thinking about, I think back a couple of years ago, you 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 and 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 revised baseline of clinics? I'm just trying to understand, as you right size the business, what -- where you could think growth could ultimately be achieved in the white space that's available to you on the go forward?

Great question. So, on the divestitures, from a divestiture perspective, I'd say the actions we're taking are across the footprint. But as it relates to the divestitures, it's definitely clusters of clinics and predominantly within a market. So, we'll -- a little bit of that is TBD. But I would say that we're being pretty selective on where that is, both from what makes sense to us and then what would make sense to a buyer. On the growth in the white space, we're slowing down our growth for the right reasons because we've gone through such a large gross rent, kind of pausing and taking a look at where we are, but absolutely see the white space and the opportunities going forward and anticipate getting back to that after we finish this 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 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, gives us great insight on to where we made a bet, and it came through and where we made it at 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 keep a seat at the table, but we will -- I think there's plenty of opportunity going forward.

Yes. And maybe, Jason, this is Joe. Just to add to Sharon's point, she mentioned earlier that de novos next year is probably somewhere in the mid-teens. The white space, certainly, to Sharon's point, still exists -- but the 2 challenges that we have, which causes us to pause and slow down, one is labor, labor availability. And where we are adding de novos, -- 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 novos, you're stressing a talent acquisition team that already has a requirement to add. So, we certainly recognize that. And the second is the CapEx need. There's an investment to open these de novo -- even though they pay back pretty quickly, we do see the cash burn of the business, and we need to, to Sharon's point, get the underlying fleet running how we want it to run, be 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 cash burn, but it's another reason why it makes sense to slow down.

Your next question comes from the line of Mike Petusky from Barrington.

So, I want 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're communicating? I guess if that's what you're communicating? Why was it pulled out of the release?

Mike, I mean, we didn't pull it out of the -- so yes, your understanding 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. I'd say, in practice, we've seen companies do both. If you'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're 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 million to $15 million adjusted EBITDA range the low end of that range assumes that our clinical FTE stayed pretty flat. Our headcount stayed pretty flat. And we tracked that way in the third quarter. The rest of the operating KPIs followed seasonal trends based on what we've seen 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 because Q4 was your worst quarter last year for adjusted EBITDA and typically, it's 1 of the 2 weaker quarters from those PT companies. 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. Yes, not to unpack Q4 of last year. But last year in Q4, you may recall, 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. So then, I guess, Sharon, going back to this idea of optimizing the bottom 20%. And it sounds I was -- I think I heard you say that a lot of this will be accomplished over 3 years. I mean is it likely on some of the divestitures that will see that action more at the front end of the 3 years in order to give you guys a little extra liquidity, et cetera?

So yes, Mike, we -- a lot of this we were able to stay process and be work 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 divestiture work is actively in progress. So, I would say those -- who knows, right? But I think we have a few different clusters that we -- I'd say half of the clusters, we already have real meaningful activity, the other half. We're not sure, but all of them are out. They're all of them are out and being actively pursued at this point, which has been very recent in the last few days.

Yes. Can I just ask and maybe I missed this earlier, when you're talking about the bottom 20%, you're talking about closure consolidation divestiture, I mean, is it roughly 1/3, 1/3, 1/3 when you think about that? Or are there more facilities to hopefully divest? Or can you give some sense of that?

Well, first of all, the bottom 20%, we're acting on 10%. The other 10% I capacitized is underperforming, but on a watch list because there's still -- we look at holistically at the clinic. We look at every -- the demand, the competitors, the staffing levels, et cetera. So, 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. I'd say, yes. I'd say it's about 1/3, 1/3 1/3 off the top of my head. In regards to closures in regards to some other activity like maybe a closure with a sublease depending on the lease terms, and then on the divestiture.

And 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 lease lives remaining on these clinics. They are open. They are seeing volume for the most part. There's a handful of dark clinics. They're just -- they're underperforming. So, over some period of time, they will be closed, most likely. Certainly, some of them can turn around, but that's kind of how to think about it.

So -- and Mike, I'd say the thing is we're actively -- we know the list, and we're actively working with all of them to take an 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 3 years based on the action we're taking and based on the timing, right? We're not going to close the clinic that has a longer lease, it wouldn't make sense. So, we've done a full analysis and have the standard of clinical level and then it gets we'll see. We'll see how our actions; how fruitful we are with our actions. I think we're being 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 taking these 10% off the grid is really important because we spend a lot of time on this 10%, and they obviously weighed down the performance of the other 80%.

Right. So, of the 10% above that bottom 10% that are sort of as a watch list. Are those situations where finding an extra therapist or a therapist assistant could make a difference? Or are those mostly staffed appropriately, they're just underperformers?

No. I think there's definitely -- could be a de novo where we just haven't been able to get it fully ramped from a staffing perspective. We could have -- we could have had a lot of certain geographies, but really just hit with a higher amount of attrition and so rebuilding that staff. They're typically offer markets that have less available staff. I'd say some of them they're 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 -- so now we know what that list is. Our TA group is hyper-focused on trying to recover from a staffing perspective on these. They could be referral starved areas. Our business development group is working hard to see if we can accelerate the referrals. So, it's typically one of those 3 levers, right? The staffing, the referrals or it just hasn't been long enough to kind of write this one off.

There are no further questions at this time. Ms. Sharon Vitti, I turn the call back over to you.

Okay. I thank everyone for their participation in the call today. I thank my team for joining me and helping share where we are. And we look forward to seeing everyone in Q4. Thank you.

This concludes today's conference call. You may now disconnect.