Acadia Healthcare Company Inc (ACHC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pioneer Behavioral Health earnings conference call. My name is Bill and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Brett Moss, from Hayden Communications. Please proceed, sir.

Thank you. Good afternoon and thank you for joining us today for the PHC fiscal 2004 fourth quarter earnings conference call. Earnings were released this morning and if anyone needs a copy of the release, please feel free to contact my office at 843-272-4653 or by e-mail to jennifer@haydenir.com.

One other announcement before we start. If you'd like information about Pioneer Behavioral Health presenting at the Equities Conference on September 15th at 8:30 in New York City, please feel free to also e-mail jennifer@haydenir.com for that information.

Our call today will be hosted by Bruce Shear, president and chief executive officer. Following management discussion there will be a formal Q&A session open to those participants on the call. There will also be a playback available until September 9th. To listen to the playback, dial the number 888-286-8010 if calling within the U.S., and dial 617-801-6888 if calling internationally. The pass code for the replay is 69998429.

Before we get started, I'm going to review the Safe Harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties. Words such as expects, intends, believes, plans, anticipates, approximately, and likely also identify forward-looking statements. All forward-looking statements are based on current facts and analysis.

Actual results may differ materially from those currently anticipated due to a number of factors, including, but not limited to, history of operating losses, anticipated future losses, competition, future capital needs, the need for market acceptance, dependence upon third parties, disruption of vital infrastructure, disruption of services, and due to natural disaster. All forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995.

Additional information -- factors that maybe affect -- may affect businesses and financial result of PIHC can be found in the filings of the Company with the Securities and Exchange Commission.

Bruce, congratulations on your fourth consecutive quarter of profitability and the record profits for the fourth quarter. At this time I'd like to turn the call over to you to provide details surrounding the quarter and the fiscal year.

Bruce, go ahead.

Brett, thank you. And thank you all for joining us this afternoon. Good afternoon. Thank you again.

After a challenging year filled with exciting acquisitions and the settlement of a legal matter, we completed the fiscal year with a strong quarter, reporting record quarterly profitability and revenue growth, which exceeded our expectations. On last quarter's call we indicated we are now positioned for improved growth and ongoing profitability. We demonstrated this with the record profits in the fourth quarter. I'm increasingly optimistic at our prospects moving forward. The acquisition of Pivotal was completed and integrated and that division has contributed to our strong results, exceeding our estimates. Going forward, we see this division and our expansion in Michigan as key components of our future growth and ongoing profitability.

We are rapidly approaching the anticipated first stage of our expansion at the Detroit Medical Center. As I'm sure you can imagine, every construction project takes a little bit longer. We're awaiting the final licenses and a few construction items, but the project is now complete, the construction is done, and we are anticipating opening sometime around September the 15th with the eventual target -- that'll be our first 30 beds with the eventual target of 114 acute and long-term psychiatric beds. This operation presents a unique and compelling opportunity for us, one which should contribute significantly and substantially to our growth and our profitability going forward.

As we discussed during the third quarter, we resolved the medical malpractice claim, which had been filed by a former patient against the Company's subsidiary and a former clinician. As a reminder, this situation occurred prior to the Company's acquisition of the subsidiary in 1996. The legal costs and settlement expenses from this matter impacted our full-year results. The settlement and legal expense was in excess of $1,000,000 and we are still trying to collect a portion of this amount from other parties and I believe we may be successful. However, strong performance across all three operating segments helped us to overcome this one-time expense.

We completed the acquisition of Pivotal on May 3rd and, as we noted in the prior call, we have already reorganized our entire research function under the Pivotal name and under the proven leadership of Dr. Louis Kirby (ph) and Michael Colombo. In just two months of operation since the acquisition, we recorded more than $700,000 in revenue from Pivotal, contributing to overall growth of more than 32% for our research division. Based on Pivotal's excellent management team, outstanding relationships with the -- most of the largest pharmaceutical companies, and a solid base of more than 80 clinical studies currently underway, we are optimistic we can match or exceed this growth rate next year. Our goal is to become a known national provider in the pharmaceutical research industry, particularly for research involving central nervous system pharmaceutical studies and we are well on our way to meeting this goal.

Now let's discuss the reported results for the quarter and the fiscal year. For the quarter we saw increased revenue in all three operating segments, leading to total revenues for the fourth quarter increasing 20% to $7.6 million from the 6.3 million reported in the fiscal fourth quarter 2003.

Net income from ongoing operations for the quarter increased 183% to $533,083 from $192,066 reported in the fourth quarter of last year. Net income applicable to common shareholders for the three months was $532,454, a fourth quarter record, or three cents per diluted share, up from $179,786, or one cent per diluted share, for the fourth quarter of fiscal 2003. This was the Company's 14th consecutive quarter of operating profitability.

For the fiscal year total revenues increased 12% to 26.6 million for the year ended June 30, 2004 from 23.8 million for the last fiscal year. This led to a net loss applicable to common shareholders of $257,000, which included many of the one-time expenses specifically related to legal fees in our settlement and our -- a number of other one-time costs, compared to a profit last year of $977,000. The Company reported a fully diluted loss for the year of two cents versus earnings per share of seven cents on fewer shares outstanding last year.

The number of diluted shares outstanding increased to $17,337,923 for the quarter ended June 30, 2004 from 14,774,000 reported for the quarter ended June 30, 2003. Total net patient care revenue from all facilities increased 5.5% to 22,000,000 for the year as compared to 21.2 million for the year ended June 30, 2003.

Net inpatient care revenue for inpatient psychiatric services increased 2.9% to 14.8 million for the year from 14.4 million for the fiscal year ending 2003. Net partial hospitalization and outpatient care revenue increased 11.2% to 7.6 million for the year from 6.8 million last year. This increase is the result of utilization of many of our step-down programs that insurance companies have chosen to use as an alternative to more expensive inpatient care.

As I previously mentioned, pharmaceutical studies revenue increased 32.4% to 1.2 million for the year from $940,000 last year due to the contributions from Pivotal and the inclusion of two months of revenue from this operation. The largest increase in revenues for the year was from our Wellplace division.

Wellplace revenues increased 80.9% to $3,000,000 for the year from 1.6 million last year. This increase in revenue is due to the inclusion of the Wayne County Call Center contract, which began in March of 2003, and the Kansas Smoking Cessation contract, which began in 2003.

Patient care expenses, excluding Pivotal, increased by approximately $510,000 due to the increase in patient days at our inpatient facilities. Inpatient days at our ongoing inpatient facilities increased 1,250 days, or 4% for the year compared to last year.

Direct patient care payroll and payroll related expenses increased 6.3% to 10.6 million for the year from 9.9 million last year. Other inpatient related expenses, including food and dietary expenses, hospital supplies, laundry expenses, and medical records expense, also increased due to the high number of patients in our inpatient facilities. This is a good thing. These expenses totaled $686,000, a 10.7% increase from $619,000 reported last year.

Other patient related expenses decreased 31.3% to $237,806 for the year ended June 30, 2004 from $345,907 for the year ended June 30, 2003. This decrease is primarily due to the decrease in patients participating in our pharmaceutical research studies through Pivotal in Michigan.

Laboratory fees decreased 17.8% to 151,000 for the year ended June 30 from 184,000 for the year ended June 30, 2003 due to a change in service provider and closer monitoring of tests ordered.

We continue to closely monitor the ordering of all hospital supplies, food, pharmaceutical supplies, but these expenses also relate directly to the number of patient days we treat in our hospital and we expect to see this increase to go up as patient census (ph) increases.

The Company's profitability from ongoing operations, without the impact of the litigation settlement costs of approximately $1,030,000, decreased for the fiscal year ended June 30, 2004.

General economic conditions and increases in some one-time operating expenses resulted in a decrease in income from operations, before the expenses of the litigation noted above, of 18.6% to $1,175,000 for the year.

Website expenses increased 35.2% to 293,000 for the year from $216,827 for the year. This is the result of increased depreciation expense based on revision of the estimated remaining useful life of our assets. Without this charge, website expenses would have remained stable.

Contract expenses related to Wellplace increased 79.2% to 2.4 million for the year from 1.4 million last year. This increase is due to the inclusion of the Wayne County Call Center contract, which began in March, and the Kansas Smoking Cessation contract, which also began in March. Expenses are expected to increase as new contracts are added. Total administrative expenses, excluding Pivotal and website expenses, increased 21.5% to 9.7 million for the year from 7.9 million last year.

Legal expense increased approximately 1.1 million which accounts for more than a 62% increase. We know where that came from. This is a result of the litigation and the settlement that I previously discussed and it's behind us. Administrative salaries increased 6.8% to 2.5 million for the year from 2.3 million last year.

Insurance expenses increased 59% to 452,000 from 284,000 due to general increases in the property and liability insurance. We're beginning to see a softening in that marketplace and we're anticipating that the premiums will stabilize and possibly go down as the years go forward.

Interest expense decreased 2% to 531,000 for the year from 542,000 last year due to the decrease in the prime rate which dictates the interest rate on the majority of the Company's long term debt, as well as a decrease in our outstanding debt.

The Company took an ongoing expense of $114,500 of costs related to the Company's initial efforts to finance the Pivotal acquisition through debt (ph). As you know, we went with an equity financing. This amount would have been amortized over the term of the loan had the loan been consummated. It was determined that equity financing would be in the best interests of the Company and its shareholders when more favorable terms could not be secured. Without this one-time interest expense for the year, interest expense would have actually been reduced by 23.1%.

The Company's income taxes of 11,294 and 54,234 for the years ended June 30, 2004 and June 30, 2003 respectively are significantly below the federal statutory rate of 34%, primarily due to the availability of net operating loss carry-forwards. Total income tax expense for fiscal 2004 and 2003 represents state income taxes for certain subsidiaries (ph) with no available operating loss carry-forwards. The Company (inaudible) provided a significant valuation allowance against this deferred tax asset due to the uncertainty of its full recoverability given the Company's history and potential changes in the IRS rules.

Provisions for doubtful accounts increased to 1.4 million from 1.1 million. This increase is a result of an increase in the age of some of our receivables, as well as an increase in our revenue base. The environment the Company operates into today makes collection of receivables particularly challenging. But consistently we are head and heels above the industry norm in terms of what our bad debt percentages are.

We've increased stats, standardized some procedures for collecting receivables, and instituted a very aggressive collection policy which has resulted in overall decreases in our aging, although we continue to reserve for bad debts based on potential denials and past difficulty in collection.

Looking forward. As I said, great quarter, great start to the turnaround. This quarter demonstrated a significant acceleration of our growth and our operating leverage as we saw improved performance across all operating segments. Increased attention on behavioral health from both presidential candidates continues to drive attention to our operation. We believe this growth can be maintained at or above 20%.

More importantly, we are positioned for ongoing profitability as we continue to grow. The growth in our pharmaceutical research division and the outstanding ongoing growth from Wellplace give us confidence for our anticipated fiscal 2005 continuing improved performance.

We're also excited about the potential of our acute care bed expansions at the Detroit Medical Center. By the end of this quarter, the first 30 long-term beds will be open. We hope to expand this to 114 beds, expanding our operations at that location. The annual revenue potential for these new beds is over $14,000,000. We continue to believe this opportunity provides our next significant growth opportunity without a significant capital investment. Our investment in this location to date is less than $250,000.

As I've said during the call and as you can tell by the enthusiasm in my voice, we are performing as promised with a full plate to ensure constant revenue and profit growth in the near term. Again, we're very excited about the results of this quarter.

We have a very large attendance group on the call today and it'd be my pleasure to field some questions.

Bill, why don't you give us the first one and explain the process?

Thank you very much, sir.

(OPERATOR INSTRUCTIONS)

And your first question, gentlemen, comes from Jim Kennedy (ph) of Marathon Capital Management. Please proceed.

Hi, Bruce.

Jim, how are you today?

Good. Congratulations on a good year. Best wishes for another great one.

Listen, two questions. Number one, on the Detroit center build out, you're going to go from approximately 30 to 114 beds. Could you give us an approximate -- and I know construction is never in the bag, so to speak -- but can you give us an approximate timeframe for when you anticipate the 114 being in place?

And then secondly, could you talk a little bit about some of the larger, maybe global drivers affecting the drug testing business and why that going forward should result in some nice revenues and profits?

OK. Well, first of all, we're training staff now for the first 30 beds so that project is underway and we're hoping to admit patients sometime the week of September 15th. The next 30-bed unit construction should take 30 to 45 days. I'm hopeful we'll have those beds online by the end of Q2.

The last 54 beds, we reached a major hurdle where they were all approved by the State, which is very, very critical, evidencing (ph) the need, and I think we're looking at Q4 for that. Again, this fiscal year we should see 6,000,000 plus in new revenue from that plus the $4,000,000 in revenue from Pivotal moving forward.

In terms of the future on the pharmaceutical side, the -- sort of the reorganization is going well. Pivotal is tracked for the two months of operation ahead of our projections. CNS drugs, or psychiatric drugs are the number one drug in the pipeline through the FDA, so I think that really tells us that for the many years to come there's going to be a very long stream of psychiatric drugs which means that there'll be a need by the major pharmaceutical companies for companies such as Pivotal.

OK. On the -- coming back to the first question, on the 54 beds in Q4 -- at this point, are you going to leave it that you hope to have them open by the end of Q4 and then if you can beat that, great, but is that a good target?

Yes, I think - you know we missed the first opening, as you know, and we've had that conversation. And you know there's so many different factors when you're doing a construction project in downtown Detroit. I think after completing the first phase of it we have a better handle in terms of the contractors and the licensing process, so I think phase two and phase three will probably go a lot faster.

OK. And then what gives you the confidence at this point -- I know your first 30 beds are booked, you've got -- anticipating 30 more coming on the end of this calendar year and then, of course, 54 more and it sounds like they're all pretty well booked, if you can look that far in advance. What gives you the confidence that, indeed, they will be booked or are booked that far in advance? Are there some signs out there or some contract signed?

Yes, these patients are currently residing in other facilities, either State facilities or outside of their geographical catchment (ph) area, so -- and most of them are residents of Wayne County so bringing them back to Wayne County is something that the State and the families wants to do. We actually know the number of patients that are in the queue and where they are, so that's how we can project, much more accurately than we do on the acute side, the demand.

Great. OK, thanks.

All right.

Thank you very much, sir. And our next question comes from Loren Bend (ph) of Oppenheimer Company. Please proceed.

Hi, Bruce. How are you? Congratulations.

Thanks, Loren.

Bruce, could you talk a little bit more about the smoking cessation program? Do you only have the one contract currently or are there other ones that I've missed along the way?

No, we just have the one contract in Kansas. The Nebraska contract was not refunded so it expired. And I believe that the smoking cessation business is, I think ultimately, maybe a few years down the road will be a strong business, but I think there's going to be a delay in the potential of signing new contracts. So it's not the number one revenue grower that we saw, at least on our plate right now.

I assume that it costs you a lot of money to keep it up for only one contract.

Well, actually not. It's part of our call center that provides all of the Wellplace services, so we control the number of staff based on the number of calls. So, in fact, the Kansas program was just extended. So it's -- there's incremental revenue for us and it's not a bad thing.

OK. And can you talk a little bit -- in the financial notes I saw that you're -- you've got some mortgage debt coming due, I guess?

Right. Yes, the reason why our long-term debt was shortened was because the one portion of our debt, a term loan on a facility, is coming due in November. We have a commitment from a bank already with a commitment from an equity player, so we will either be, without getting into -- this will be placed either with our current facility or a new bank within the next 30 days. It's just a matter of pricing right now.

What kind of rate is that currently at? You've had that debt outstanding for a while, haven't you?

It's prime plus three.

And the new rate, will that be the same terms essentially, or maybe a little bit better?

Yes, it will be similar terms.

OK. Thank you.

All right. Thanks, Loren.

Thank you very much, sir. And at this time we have no further questions.

OK. Well, thank you all for joining us. I'm looking at the VueQ (ph) and we have quite an audience out here. As I said, we're ecstatic to really show you what we've been saying that we can do. This quarter is just a taste of the future. We had nice top line revenue growth, great bottom line growth and that's with only two months of Pivotal and without our new bed project in Michigan. So we have a high level of optimism going forward and we appreciate you joining us. We appreciate you being a shareholder in our company and supporting us. As always, I'm available to talk with anyone. Feel free to contact me directly in the office. Feel free to take a look at any information on our Web site.

Thank you all and have a wonderful day.

Thank you very much, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a good day.