Acadia Healthcare Company Inc (ACHC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fiscal 2006 third quarter earnings conference call for Pioneer Behavioral Health. My name is Jean and I'll be your conference coordinator today.

[OPERATOR INSTRUCTIONS]

At this time, I'll turn the call over to your host, Mr. Matt Hayden of Hayden Communications. Sir, please proceed.

Thank you very much. Good afternoon and thank you everyone for joining us today for PHC Inc.'s fiscal 2006 third quarter earnings conference call. The 8-K for the quarter has been filed through Edgar and the earnings release should be crossing the wire at any moment. It seems they were a little backed up today with lots of releases crossing after four.

Our call today will be hosted by Bruce Shear, President and Chief Executive Officer, and Paula Wurts, the company's Chief Financial Officer. Following management's discussion, there will be a formal Q&A session open to those participants on the call. A replay of this call will also be available through May 22nd and can be accessed by dialing (888) 286-8010 for callers in the US and (617) 801-6888 for international callers. The pass code to access the replay is 32157214.

Before we get started, I want 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 expect, intends, believes, plans, anticipates, approximately and likely also identify forward-looking statements. All forward-looking statements are based [to] 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 needs for market acceptance, dependence upon third-party providers, disruption of vital infrastructure, disruption of services and anything due to natural disaster.

All forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. Additional information and factors that could affect the business and financial results of PHC can be found in their filings with the SEC.

Now at this time, I would like to turn the call over to Bruce Shear, who will provide a highlight for the third quarter and discuss the company's accomplishments and specifics on each operating division. He will then turn the call over to Paula who will provide a summary of the financials. And then follow-up with a summary and open the floor to questions.

Bruce, at this time the floor is yours.

Thank you, Matt, and again sorry for the delay on the press release. I know the Form 8-K has crossed the wire; we have a large group out here. We're very, very, very excited about our results. Good afternoon. It certainly is rewarding when things come together and thank you all for joining us.

During the quarter, we achieved several significant accomplishments, including record revenue and record profitability, positively impacting each of our operating divisions. These events will incrementally add to our revenue base and they provide management with increased confidence in our ability to deliver a record fiscal 2007.

In fact, we announced the largest contract in the history of Pivotal Research Centers, their first major Phase I Trial, which has the potential to contribute as much as $2 million in revenue by the end of this calendar year.

To put things in perspective, our entire Pharmaceutical division contributed $1.2 million in revenue for all of fiscal 2004, the year in which we acquired Pivotal. This single contract has the potential to contribute up to 50% of the total revenues booked during fiscal 2005 and is evidence that Pivotal was a solid acquisition for PHC.

Another key announcement and perhaps one of the most important in our company's history was the official groundbreaking of our Seven Hills Behavioral Institute in Henderson, Nevada. This project is the largest in our company's history and will expand our inpatient operations considerably.

This 60-bed acute care, psychiatric and chemical dependency hospital will increase our total number of beds to approximately 250 nationwide and is expected to contribute annualized revenue in excess of $9 million with similar profit margins to those in our--with similar or actually higher profit margins, to those in our Michigan operations at DMC.

WE have a target opening date of the third quarter of fiscal 2007 and we expect this to begin to materially contribute to our revenues before the end of the next fiscal year. We recently secured commitments from major referral sources in-and-around the Las Vegas metro area that will drive new patient additions after the facility opens, which should enable us to reach profitability at the fastest time possible.

This project follows on the success we've seen in Detroit as the DMC operation is now, and has been for awhile, solidly profitable, including the most recently opened 20-bed girls unit.

We will continue to leverage our core competencies to target regions where there is significant demand which are under-served by existing facilities, to maximize our return on investment.

Finally, our Harmony Division announced two more contracts in the Las Vegas area bringing the number of casino properties covered, to 21. With these new contracts Harmony will provide mental and behavioral health services to more than 400,000 people in Southern Nevada.

Effective April 1st, Harmony was selected as the EAP & behavioral health provider for several new marquis casino properties, collectively covering more than 6,500 total employees and more than 13,000 new covered lives. We expect this contract to generate more than $400,000 in revenue annually comprising both the EAP contract and the fee-for-service behavioral contract.

Second, Harmony was awarded a three-year, $300,000 annual contract for member assistance program and mental health services for the Teamsters Local 631, Security [Fund] affective June 1, 2006.

The Teamsters Local 631 Security Fund is a multi-employer [inaudible] trust that provides benefits to approximately 4,900 employee participants in Southern Nevada. Both of these contracts add $700,000 in incremental new business to Harmony's existing base. Harmony continues to grow and we're very, very excited about this and we have a number of other opportunities that we're working on.

These announcements bolster what was already a strong and record quarter for Pioneer. We reported 13.6% top line growth for the quarter and 11.3% growth for the first nine months of this fiscal year. Our net income was a record despite an increase in administrative expenses and several non-capitalized expenses. We built a strong base and have the building blocks in place which will drive strong growth during fiscal 2007 and beyond.

I would like to again note that we have been pursuing and the work that we've been spending on the growth strategies has still--we've still continued positive cash flow without affecting profitability while we continue to build our infrastructure in place.

At this time, I'm going to introduce Paula Wurts, our CFO, who will discuss the financial details, and then I'll comment further.

Thanks Bruce. Here are the specific financial metrics for the third quarter and the comparisons I note will be on a year-over-year basis for both the quarter and first nine months.

Total net revenue from operations increased 13.6% to $10 million for the quarter from $8.8 million for the three months ended March 31, 2005.

Net patient care revenue increased 8.3% to $7.3 million for the quarter due to a 14.5% increase in patient days which benefited from both a 4% increase in patient days at our substance abuse facilities for the quarter and the addition of the 20 new beds at our Detroit facility.

Revenue from pharmaceutical studies increased 38.1% to $1.5 million for the quarter due primarily to a large research contract signed and initiated during the quarter. As we cannot always predict when study starts or delays, we expect fluctuations in Pivotal revenues from quarter-to-quarter, but management attempts to keep an adequate backlog of studies and resources to create a stable revenue flow from research.

With that being said, we do expect a continued year-over-year improvements in this operating division. Contract support services revenue from Wellplace increased 22.9% to $1.1 million, due to the start-up to a smoking cessation contract at the end of the last calendar year.

Patient care expenses increased by 7.2% to $3.8 million for the quarter due to increased patient census. Expenses included items such as payroll, food, hospital supplies and lab fees. Last quarter we opened the second phase of the new inpatient program at Detroit Behavioral Institute which is part of the Detroit Medical Center, which resulted in an increase in patient care revenue and the associated increase in patient care and administrative expenses related to the start up of the new operations.

Patient care expenses related to our Pharmaceutical Research Division increased 24.1% to $522,477 due to the increased patient visits related to the active clinical trial project.

Contract support services expenses increased 37.1% to $713,438 for the quarter due to the addition and staffing of the new call center contract, to provide adequate support services for these new contracts.

Our provision for doubtful accounts increased 53.5% to $334, 248 for the quarter which is attributable to the previously disclosed software failure at [Harbor] Oaks and we do not believe it is indicative of any changes in our payer mix.

The software issue slowed both the billing and collection process and since the company maintains a policy to keep reserves based on the age of its receivables, these delays increased the amount and age of the company's receivables which in turn increased the formula reserves and provisions for doubtful accounts.

The system is now operating and we have made incremental progress in our collection activities and expect to see further progress in this quarter.

In addition we have experienced a positive trend in bad debt expense as a percentage of net patient care revenue. This number decreased from 9.8% for the quarter ended September 30, 2005 to 7.4% for the period ended December 31, 2005, to 4.6% for the current quarter ended March 31, 2006.

Administrative expenses increased 16.8% to $2.8 million for the quarter as a result of increased payroll and employee benefits to support the opening of the Detroit Behavioral Institute and preconstruction for the Las Vegas hospital. Administrative services for Pharmaceutical Services decreased slightly to $638,000.

The company's provisions for income taxes was $45,427 which is significantly below the Federal statutory rate of 34% primarily due to the availability of net operating loss carry forwards. This tax expense for the quarter represents State income taxes for certain subsidiaries with no available net operating loss carry forwards.

Net income for the quarter was $950,549 or $0.05 per fully diluted share based on 19.2 million shares compared to net income of $880,466 or $0.05 per fully diluted share based on 18.7 million for the third quarter of last year.

The net income for the third quarter of 2006 was in the increase of 174.1% sequentially compared to the $346,782 for the second quarter of 2006.

Turning to the nine-month results, total net revenue from operations increased 11.3% to $27.6 million for the nine months ended March 31, 2006 from the year ago period.

Net patient care revenue increased 8.3% to $20.5 million for the nine months, revenue from Pharmaceutical Studies increased 15.6% to $3.9 million and contract support services revenue from Wellplace increased 28.1% to $3.2 million.

Patient care expenses increased by 8.4% to $10.3 million for the first nine months of fiscal 2006, while patient care expenses related to Pharmaceutical Research increased 30.4% to $1.6 million and Contract Support Services expense increased 19% to $1.9 million, all compared to the year ago period.

Our provision for doubtful accounts increased 83.2% to $1.6 million for the nine months ended March 31, 2006, due to the software billing issue previously discussed.

Administrative expenses increased 16.9% to $8.2 million, which emanated from the increase in administrative payroll, fees related to the [Jayco] accreditation at Harbor Oaks, Mihana [Ridge] and the Michigan quality assurance fee, option expenses related to director fees, accounting fees and rent. Administrative expenses related to the Research Division decreased 11.7% to $1.8 million.

Net income for the nine month period was $1.7 million or $0.9 per fully diluted share based on 19.2 million compared with net income of $2.1 million or $0.11 per fully diluted share based on 18.2 million shares for the same period last year.

I would like to take a few minutes to highlight a few of our key balance sheet metrics. We completed the period with a current ratio of 1.7-to-1 on March 31, 2006. Stockholder's equity increased 20.8% to $11 million on March 31, 2006 from $9.1 million on June 30, 2005. The company reported just under $1 million in cash as of March 31, 2006, up slightly from $917,000 on June 30, 2005.

Total net receivables from patient care for the third quarter of 2006 was $6.6 million, down from 6.3 -- up from $6.3 million reported as of June 30, 2005. Overall, days outstanding remain stable at 90 days for the nine months ended March 30, 2006 and the year ended June 30, 2005. Amounts for doubtful accounts was $3.1 million for the third quarter of 2006 compared to $3.2 million for the second quarter of 2006 and $2 million for the year ending June 30, 2005.

Bad debt expense was $334,000 for the third quarter, down 1.8% from $475,000 reported in the previous quarter. Days outstanding, allowance for doubtful accounts and bad debt expense all increased for the nine months ended March 31, 2006 due to software problems, which slowed the billing process and diverted staff attention from collections while we re-entered the receivables into the new software.

To reiterate, the system is now operating. Bad debt expense as a percent of net revenue has decreased. Day sales outstanding are stabilizing and we expect reserve requirements as a percent of accounts receivable to continue to decrease in future quarters as collection activity has become normalized.

With that out of the way, I'll now turn the floor back to Bruce. Bruce?

Thanks Paula. Again, if you read in between-- if you hear Paula's numbers, she's reporting that we had record revenue and record profitability and again, I apologize if you have not seen the release.

I want to take a minute to provide some insight into what management believes Pioneer will look like a year from now. We have made substantial progress in growing the company during the past two years, have positioned the company to leverage its assets and its core competencies for future success. At the end of March 2004, at the end of our third quarter of fiscal 2005 we had operating 121 beds nationwide for inpatient psychiatric and chemical dependency treatment. Our Pharmaceutical Research Division was on a revenue run rate of approximately $1.2 million annually and Wellplace was trying to capitalize on smoking cessation opportunities from the tobacco settlements.

As a consolidated organization we were marginally profitable, but profitable, reporting with approximately $0.01 per share in earnings per quarter. Today, we have approximately 180 beds nationwide, up 48.8% from two years ago. We have acquired and integrated Pivotal into our operations which has delivered solid year-over-year growth, which is now running at more than $5 million in annualized revenue, or more than four times that of core Pharmaceutical Services businesses, two years ago.

In addition, having signed its first major Phase I clinical trial, Pivotal is both expanding it's market share while addressing a significantly larger overall market opportunity.

Harmony and Wellplace are both expanding their operations, particularly for Harmony in Las Vegas where it provides EAP and related services for 21 different properties and over 400,000 citizens, while Wellplace is engaged in a large contract with a major Federal Government contractor to provide smoking cessation programs.

A year from now we will have more than 250 beds including contributions from the new Seven [Hills] Hospital. This facility will not only significantly grow our inpatient revenues as the DMC did last year, but will serve as a central hub for our overall operations in the Las Vegas region. Supporting the outpatient services provided by Harmony and strengthening the reputation, and brand of the overall organization, in this rapidly growing region.

I hope you sense the enthusiasm the entire management team has for the future of PHC. We have taken the steps to capitalize on a solid, industry reputation. Leveraging our core competencies and facilities to build a foundation capable of delivering future growth and increased profitability. We've done this while maintaining our current profitability and continuing to generate positive cash flow.

In addition to our organic growth strategies we continue to benefit from macro-drivers in our industry. The Mental Health Parity Act is still being actively discussed in Congress and has gained significant White House support. While this has been a long, long-time coming we are more optimistic than ever about the chances of this becoming a reality.

This Federal legislation would require insurance companies to treat mental-health related claims in the same way they treat other medical claims, which would only validate mental health issues as a real factor in overall health and thus increase the consumer's access to much needed mental health services like those we provide.

We are well positioned to expand both our inpatient and Internet-based services, if this Bill is signed. We are certainly not basing our business strategy on this piece of legislation, but it's worth noting that the entire industry, including PHC would benefit significantly from this becoming a reality. And we're very hopeful and hope this will happen very soon.

We expect to report top line revenue growth for the fourth quarter in excess of 15% while reporting sequential earnings growth. At this juncture we would like to provide an outlook for fiscal 2007 which will see revenue growth accelerating beyond the current level. Supported by organic growth for recently announced contracts and the opening of our new facility in Las Vegas. Our company is growing and profitable in all areas. We are more optimistic than ever. I would like to thank you all for joining the call today. As you can tell by my enthusiasm it is very exciting to see the progress we're making and more exciting to see the progress we will continue to make moving forward.

I hope I have clearly explained the opportunities for the future and our stair-step growth strategy. At this point we can open it up to some questions for the Group. Thank you all for joining us.

[OPERATOR INSTRUCTIONS]

And we'll take our first question from David Lavigne of Edgewater Research Partners. Please proceed.

Hello Bruce. Great quarter.

Thank you, Dave. Thanks for joining us.

I was wondering if you could just--I'm just trying to go back and firm up my model a little bit. Do you have in front of you the information on the breakdown of the 108 beds? Can you tell me where each, just the breakdown of each facility in respect to those 108 beds--180, I'm sorry.

Well currently we operate 25 beds in Virginia, 41 beds in Utah, and in Michigan we have 64 beds in one hospital and 50 beds at the other facility.

So, 25, 41, 64 and 50. Great, thank you.

Okay, thanks.

And we'll take our next question from Shane Kim of Camden Partners. Please proceed.

Hello Bruce. Great quarter. As it relates to the Pharmaceutical study that you just started, how long is that study--how long is the length of that study?

We're expecting--Shane, thanks for joining us too. We're expecting the revenue to probably roll through the September quarter and depending on where they go from there it could even roll through the December quarter.

Now is the fact that you signed something in the insulin market, does that signal anything to us as investors that this business could expand beyond just the psychiatric drugs that are on the market place?

Well, that business always had 20 to 25% non-CNS related studies. So what--our business development is always looking for studies. The good thing is that we have a good patient throughput and a very strong database, so if there is a study that isn't directly CNS-related, that we feel we can meet or exceed the enrolment goals based on our patient population, we'll take it.

Okay. And how much, to this point, how much--can you quantify the reopening expenses related to the Nevada facility?

Well, we discussed that a little bit before and, we have opening expenses related to Las Vegas and we had some sort of preprofit expenses related to the second phase of our DMC project. They're not insignificant, but I wouldn't guess that they're more than six figures for the last quarter. And--but they're non-capitalized expenses and they are built into our P&L.

Okay, well your margins look pretty good. But as you go out to the fourth quarter do you expect the expenses, the total expenses related to bringing on revenue growth, do you expect that to increase quarter-by-quarter going up to the launch of the beginning of 2007?

Well, not too much in the [Concord] the DMC project is built out, we have no planned beds for the rest of this fiscal year, so we're already there in that regard. We do have some marketing expenses in Las Vegas, but I don't think they're going to increase until we probably get closer to the opening. So maybe that's a Q2 next fiscal year, expense item. But should not be significant in this current quarter and probably not in Q1 of '07.

Okay, congratulations.

Thanks much, Shane.

[OPERATOR INSTRUCTIONS]

We'll take a question from Mr. John [Lemack] of Standard Capital Management. Sir, you may proceed.

Bruce, seems like you guys have got this thing turned around and going forward, so I think that's wonderful. When do you think the Federal regulation with regards to mental health claims becoming maybe equivalent to just regular health claims will occur and what does it actually mean to your business if that happens?

You know, on balance we thought it would have happened by now. There is still active discussions, Bush has set a priority to have it passed during his administration. But I think we're already seeing a lot of the benefits from this because there is more discussions about it, there is more recognition about the behavioral health issues in America.

Some insurance companies have already taken the lead and improved their insurance coverage. So I think sort of as an industry we're beginning to see some of the positive impact. When it passes there will be some more, again, it's hard--my crystal ball is very, very cloudy on this especially when it involves the government. And so I wouldn't anticipate anything in the next quarter or two. But again, the more discussions the better it is for our industry.

Okay, thanks very much.

Are there any other questions out there, Operator?

I'm showing no questions at this time. I'll turn the call back over to the presenters for closing remarks.

Great. Well, we had a very large audience today. The largest ever. Again, we reported record revenue, record profitability. Made great progress on the bad debt expense and brought it down back to more of a neutralized basis, I don't believe we're done yet and our goal is to continue to improve that. Cash flow has been great the balance sheet continues to improve.

We have more opportunities on the horizon than we've ever had as a company, so, we're pretty excited here and our management team is onboard and motivated, incentivized. And we're looking forward to continuing to make this progress and moving forward to a great 2007 and beyond. So thank you all for joining us.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect your phone lines.