Acadia Healthcare Company Inc (ACHC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pioneer Behavioral Health Fiscal '06 Earnings Call. My name is Annie, and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Matt Hayden with Hayden Communications. Please proceed, sir.

Thank you. Good morning, and thank you very much for joining us today for the PHC Inc. fiscal 2006 fourth quarter and year-end earnings conference call. Earnings were released this morning, and if anyone needs a copy of the release feel free to contact Jennifer Heady at jennifer@haydenir.com, or via phone 843-272-4653. There were a few small corrections I want to draw your attention to, in the table on the first page of the press release, the increase in diluted EPS was actually 83.3%, not 383.3%, and on the table at the end of the release, basic and diluted EPS are $0.21 and $0.20 respectively.

Our call today will be hosted by Bruce Shear, President and Chief Executive Officer and Paula Wurts, the Company's Chief Financial Officer. As was mentioned, following management's discussion, there will be a formal Q&A session open to those participants on the call. Before we get started, I will 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 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, and need for market acceptance, dependence upon third parties, disruption of vital infrastructure, disruption of services, and anything due to natural disasters. All forward-looking statements are made pursuant to the SEC Reform Act of 1995. Additional information on factors that may affect the business and financial results of PHC can be found in all of its SEC filings.

At this time, I would like to turn the call over to Bruce, who will provide highlights of the fourth quarter and full-year period and discuss the Company's accomplishments and specifics on the key operating divisions. He will then turn the call over to Paula, who will provide a summary of the financials, and Bruce will conclude with an outlook before turning the call over to question and answers. Bruce, congratulations on a record quarter and revenues exceeding 10 million for the first time. The floor is yours.

Thanks, Matt. Good morning, and thank you all for joining us. As Matt mentioned, we enjoyed record revenue for the quarter and for the first time in our Company's history, we exceeded the $10 million quarterly revenue plateau. This contributed to record revenue for the year. As we discussed earlier in this fiscal year, we viewed fiscal 2006 as a period of planning and implementing the initiatives which will facilitate and support our long-term growth.

In fiscal year 2005, our inpatient care division grew in large part due to the expansion of the Detroit Medical Center. As we completed that expansion, we were just beginning the process of the next addition to our inpatient division, which now involves the construction of the Seven Hills Behavioral Institute near Las Vegas, Nevada.

During fiscal 2006, we completed the lengthy planning and permitting process, broke ground on the hospital and began to solidify relationships with referral sources. 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 of approximately $8.5 million with similar or higher profit margins to those in our Michigan operation. We have a target opening date of the third quarter of fiscal 2007, and expect this to begin materially contributing to our revenues before the end of the current fiscal year.

We have secured commitments from several referral sources in and around the Las Vegas metropolitan area that will drive new patient additions after the facility opens, which should enable us to reach profitability in the fastest time possible. We will continue to leverage our core competencies to target regions where there is significant demand which is underserved by existing facilities to maximize our return on investments.

This is the most substantial project in our company's history, placing us squarely as one of the very few mental health facilities in the fastest growing market in the country, a region with a compelling and expanding need. We are excited about what the future holds for our inpatient care segment, but we are also optimistic about our pharmaceutical research division. As many of you know, we acquired Pivotal Research in the second calendar quarter of 2005, and this acquisition has met our expectations.

During the third quarter of this year, Pivotal signed its first major Phase I trial, a $1 million plus trial with a major pharmaceutical client for a diabetes compound. This contract has the potential to contribute as much as $2 million in revenue by the end of this calendar year, which exceeds the 1.2 million in total revenue from our entire pharmaceutical research study division for our fiscal 2004. This single contract has the potential to contribute up to 50% of the total revenues book during fiscal 2005 and is evident that Pivotal was a solid acquisition for PHC.

Entering the Phase I arena was important to us as it opens the door for additional Phase I trials with this and other pharmaceutical customers, significantly expanding our market opportunities. We continue to report steady growth in this segment with a 28.6% growth in revenues from fiscal 2005 to fiscal 2006. This follows 262% from fiscal 2004 to fiscal 2005, as the impact of Pivotal's acquisition was seen in our results.

Finally, our Harmony operations announced two additional 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 healthcare services to well over 300,000 individuals in the southern Nevada region. These two most important initiatives, the Seven Hills Behavioral Hospital and the Phase I expansion of our pharmaceutical research business coupled with the ongoing growth from our Harmony division set the stage for a stronger revenue growth for the next two years, providing us with the increased optimism over the future.

However, we are now without a few challenges during fiscal '06. For example, as one would expect, we have experienced a few delays in the opening of our Seven Hills Behavioral Institute, but remain close to our initial stated schedule and our optimism in this opportunity has even grown further because of the number of inquires we received from our referral base. We also experienced a software problem during the first fiscal quarter of this last year, which caused an increase in our accounts receivable and our bad debt reserve. This has impacted our overall profitability for the last fiscal year.

The issue was operationally put behind us by the end of the second quarter, and we are back on track with our billing system and collecting against the accounts receivable. However, due to our practice of accruing a reserve for bad debt, based on the age of our receivables, this reserve has remained high. Although collection of the older accounts is more difficult, we continue to collect on these accounts and expect to provision for doubtful expense and required reserves to decline in future quarters.

At this time, I am going to introduce Paula Wurts, our CFO, to discuss financial details. Thank you, Paul.

Thanks, Bruce. Here are the specific financial metrics for the fourth quarter and the comparison by note will be on a year-over-year basis for both the quarter and full fiscal year period. Total net revenues from operations increased 12.3% to a record 10.4 million, compared to 9.3 million for the fourth quarter last year. The components of our revenue include net patient care revenue increased 2.8% to 7.4 million, from 7.2 million in the same period last year, due to the addition of the 20 new beds at the Detroit Behavioral Institute, which contributed to a 16.2% increase in patient days for the year.

Revenue from pharmaceutical studies increased 67.6% to 1.9 million for the fourth quarter, compared to 1.1 million for the fourth quarter last year. Contract support services revenue provided by Wellplace, increased 18.6% to 1.1 million for this quarter compared to 957,000 for the same quarter last year. The growth was primarily due to the October 2005 commencement of the smoking cessation contract with a major government contractor.

Total operating expenses for the quarter increased 15.3% to 9.4 million from 8.2 million during the fourth quarter of last year. Included in this increase were expenses related to the ramping up of new programs and services, associated with contracts signed during the previous two quarters. Notable increases included a 43.5% increase in patient care expense in the company's pharmaceutical business, due to the increased patient stipend for the study participation and increased professional fees.

A 29.2% increase in cost of contract support services, due to the new services provided under the previously announced contracts. And a 13.5% increase in administrative expenses, as compared to the year ago period, related to personnel for the opening of the additional beds at Detroit Behavioral Institute and non-capital expenses for the Las Vegas hospital. Our provision for doubtful accounts [increased] to 446,000 from 472,000 in the year ago period.

The percentage of bad debt expense to net patient care revenues decreased to 6% for the quarter ended June 30, 2006, from 6.6% for the quarter ended June 30, 2005, indicating some stabilization after the software problems previously mentioned. Income from operations for the quarter was $920,982, down 11.4% from $1,039,810 reported for the same period last year. Net income for the three months was $2,150,497 or $0.11 per fully diluted share based on 19.1 million fully diluted shares, compared to net income of $1 million or $0.06 per fully diluted share, based on 18.4 million shares for the fourth quarter last year.

The company's income tax benefit was $1,302,311 for the quarter, versus $171,892 in the fourth quarter of last year due to the recognition of the company's net operating loss carry-forward. Based on the company's recent and projected profitability, the company recognized 100% of this income tax benefit from operating loss carry-forwards.

Total net receivables from patient care for the fourth quarter of 2006 were $7 million, compared to 6.3 million reported at June 30, 2005. Overall days sales outstanding were 91 days for the year ended June 30, 2006, and 89 days for the year ended June 30, 2005. Allowance for doubtful accounts remained relatively stable at $3.1 million as of June 30, 2006 and March 31, 2006. Bad debt expense was $446,000 for the fourth quarter as compared to 334,000 for the third quarter, as we continue to provide for unpaid accounts and write off uncollectible accounts.

For the full-year period ended June 30, 2006, we reported revenues of $38 million, an increase of 11.6% compared to 34.1 million for the same period last year. The components include net patient care revenues were 27.9 million, up 6.8% compared to 26.1 million for last year; pharmaceutical study revenues increased 28.6% to 5.8 million, from 4.5 million reported for the same period last year; and contract support services revenue increased 25.5% to 4.3 million from 3.5 million last year.

Total operating expenses were 34.8 million, an increase of 14.3% from 30.5 million for fiscal 2005, including a 50.4% increase in the company's bad debt expense to 1.9 million due to the software problem and billing delay that Bruce discussed, and a 16% increase in administrative expenses. Income from operations was 3.2 million, a decrease of 11.2% compared to 3.6 million reported last year.

Net income for the fiscal year period was 3.8 million or $0.21 per basic, and $0.20 per fully diluted share based on 19.1 million shares, compared with net income of 3.2 million or $0.18 per basic and $0.16 per fully diluted share, based on 18.4 million shares for last year. Our provision for income taxes was $448,544 for the year, significantly below the federal statutory rate of 34%, primarily due to the availability of net operating loss carry-forward. This tax expense for the year was offset by the recognition of $1,545,200 in deferred tax benefit, leaving the net tax benefit for the year at $1,096,656.

Turning to the balance sheet, we completed the year with 1.8 million in cash, up from $957,000 as of March 31, 2006 and from $918,000 on June 30, 2005. Total net receivables from patient care for the fourth quarter of 2006 were $7 million, which was a 10.5% increase from 6.3 million at June 30, 2005. Our balance sheet showed a current ratio of 1.9 to 1 at June 30, 2006. Stockholders' equity increased 45.5% to $13.2 million at June 30, 2006, from 9.1 million at June 30, 2005.

With this out of the way, I will turn the floor back to Bruce.

Well, it's great to talk about numbers like that Paula, certainly makes your job a lot easier. Thank you, very much. In the last call, I spent some time discussing what we believe Pioneer will look like a year from now. For those of you new this call, I would encourage you to read the transcript from the past call, which Matt Hayden can send to you. As I said earlier in the call, we believe we have made tangible positive progress in preparing the company for future growth by establishing a platform of four businesses during the past two years.

Just to summarize, at the end of our 2004 fiscal year, we had 121 beds nationwide for inpatient psychiatric and chemical dependency treatments, a pharmaceutical research division, which was on a revenue run rate of approximately 1.2 million, and a small contract business. As a consolidated organization, we were marginally profitable, reporting approximately $0.01 per share in quarterly earnings. Today, a different company, we have approximately 180 beds nationwide.

By the end of fiscal '07, we will be 240 beds, with an additional 50 still planned in Michigan. Our pharmaceutical research division is growing. Harmony is now the largest provider in Las Vegas, and has exceptional reputation nationwide with many, many new business opportunities. Additionally, we continue to benefit from significant macro drivers within our industry.

The Mental Health Parity Act is still actively discussed in Congress and has gained significant White House support and is driving widespread support at local and state governments nationwide due to the increased recognition of mental health as a meaningful problem and an issue that needs treatment. The federal legislation would require insurance companies to treat mental health related claims in the same way they treat any other medical claims, which would only continue and further validate mental health issues as a real disease in the overall health, and thus increase the consumer's access to much needed mental health services, like those that we provide as a company.

Already, health insurance providers are moving in this direction proactively, providing benefits they did not previously. We are well positioned to expand both our inpatient and our Internet-based services if this bill is signed, but are seeing the initial benefits today. We are certainly not basing our business strategy on this piece of legislation but it is worth noting that the entire industry including PHC would benefit significantly should this become a reality.

Looking forward and it is very, very exciting. At this juncture, we would like to provide an outlook for fiscal 2007. For the full year, we anticipate greater than 20% revenue growth with a majority of the growth coming in the last half of the fiscal year, supported by organic growth for recently announced contracts and the opening of our new hospital in Las Vegas, which will only begin to contribute most likely in the latter part of the third and fourth quarters. Our growth rate should continue to grow and expand beyond fiscal 2007, as our pipeline to new business gets stronger and stronger.

I would like to thank you all for joining the call today. I hope I clearly explained the opportunities for the future and our star-studded growth strategy. I have to say, I am very, very excited. We have worked real hard to get the Company to this position. The stage is set for 2007 and 2008. And I am pretty proud that even in a transition year, our profit came close to our record profitability reported in fiscal 2007. At this point, I would like to open it up to questions from the group. We have a very, very large audience out here. And I would like to turn it over to the operator, in terms of opening it up for questions. Thank you.

[OPERATOR INSTRUCTIONS]

Operator, we don't see any questions at this point, do you?

Yes, sir. There are five questions.

Well, why don't you just start until our queue comes up, and do them in order please?

Yes, sir. And our first question comes from the line of Jim Kennedy with Marathon Capital Management. Please proceed.

Hi, Bruce. Hi, Paula.

Hi.

Congratulations on a good quarter, a good year. First question for you on the contract research or the clinical research business, you mentioned that this is the first Phase I contract in the division's history, is there a possibility that Phase I trial would morph into business if it were to go a Phase II, or does it become a capacity issue for you all as the trial expands? And furthermore, is the target going to more Phase I business, or is the target going forward take that Phase I to Phase II to Phase III, or does that just get two exponential for you all?

Well, first of all, the Phase I trials are the most lucrative. And because of this great result we have had with this major Phase I, what we have done is we have expanded our capabilities to handle more Phase Is. We are in the process of adding space to have a larger overnight population in our Phase I studies in the Arizona area. I believe we will be geared up to have 15 to 18 overnight visits at once in our Arizona operation.

It will make us a much more attractive center with the [pharmcos], and because they have asked for actually larger opportunities in terms of larger capacity. We are also looking at adding some overnight Phase I capacity for our Utah operation. So, I think that the answer to your question is that this is great business, and it certainly rounds us off. And if we have more capabilities, then in all likelihood we will have more Phase Is. But, there is no guarantee. And as I said over the years, this can be a lumpy business.

So, the past revenue here is more based on additional Phase Is as opposed to taking the Phase Is in the Phase II and III?

Yes, that's correct.

Okay. Thanks. Great.

And your next question comes from the line of [Robin Knit] with Janney Montgomery Scott. Please proceed.

Thank you. Good morning. I just have two quick questions. First, the non-capital expenses related to Seven Hills Behavioral, Paula, could you expand a little bit on specifically what those were?

There are some expenses that we can't capitalize that mostly -- and it's harder to track. It's the focus of our staff that pays attention to the Seven Hills building and paying attention to the construction, while we have to cover their physicians at their other locations and different travel for us that -- to meet with the different builders and contractors that we really can't capture and capitalize at this point.

Okay. And then, just one additional note. Would you remind me what your allowance for doubtful accounts was in the last quarter?

Last quarter, I believe it was 344, if I am not mistaken.

3,044,000?

No. I am sorry. The allowance was at 3.1. It actually changed minimally. I think it went down maybe $50,000.

Okay.

It didn't change hardly at all from March to June.

And quantitatively, you don't see that coming down meaningfully until the new program is in place?

I really think that we -- we really need the new program to make it work. Right now, we are looking at an April 1 go-live date.

Just curious why it is taking that long to go live?

You would be amazed at the training that they go through, and the set up to make it work right, and we are committed to make this -- to make this work the best it can. So, we are making sure that our staff is all trained before we go live, and that we have all the data dictionaries in place to capture every revenue stream that we can. This is a very sophisticated program. It just doesn't happen that fast. The actually deliver of the software -- delivery of the software is not scheduled to happen until sometime next month and as you probably know, we signed the agreement back in April.

Right, right. Okay, thanks.

And your next question comes from the line of [Jeff Waters] with Inspire Capital Management. Please proceed.

Hi, Bruce. I wanted to kind of, maybe -- Robin touched on it with the non-capital expenses, but Paula could you help us to understand just in terms of dollar volume whether or not, just how meaningful that was in the increase of expenses, and maybe what that line is going to look like going forward the next couple of quarters, as it relates to a drag on earnings?

And then in addition to that, you mentioned in your comments that the operating expenses related to recent contract wins caused the expenses to grow a little bit higher than the revenues and I would be curious to know when you see the revenues from those recent wins begin to outstrip the cost associated with ramping them?

In answer to the first question, the non -- the expenses that we were not able to capture and capitalize for the Seven Hills probably close to $100,000. The ramp up cost that we talked about were for contracts that we had to -- we took a risk, a certain amount of risk, we ramped up to show that we could provide the services that are -- that are -- that this particular contract -- that these particular contracts were asking for.

So, we ramped up and had a lot of expenses without the revenue stream to go with it. And as it turned out, the contracts became effective July 1, the biggest contract in the group. And that -- of course, we will start to see the revenue streams from that. We have already started to see the revenue coming in for that. I mean we constantly ramp up for new contracts before they -- before they are actually signed, sealed, and delivered. We have to prove that we can provide the services.

Right. And so, I guess what I am driving at is, should we -- should we then expect in the current quarter to see expenses related to those contracts level off, even come down a little bit and the revenue start to show up from that, and then continue to expand in the following quarter?

I think what Paula was saying was that the major revenue source started July 1. So, you are actually, in this current quarter, you are going to see the revenue and then you will see the associated profitability from this new revenue source.

Okay. And then, that should continue as we -- ?

Well, it's a two-year contract, yes.

Right, right.

It will continue.

Right, okay. And then lastly, could you break out Harmony's contribution in the -- what do you see that looking like in fiscal Q1, Q2, working on [that] versus last year what they contributed?

Other than what we will report in the segment reporting, we don't break it out by individual subsidiaries, other than to say that both revenue and profitability are forecasted to both significantly increase.

Okay. But, Bruce, can you help us then with what kind of a contribution that provided last year relative to -- in other words, you mentioned in the comments as a driver of growth, I am trying to get my arms around how significant driver of growth overall?

I don't have exactly the numbers, but I would be happy to share with -- what I can offline after the call. And we have the K ready to file and we can actually [give you] and quote you numbers from the segment reporting.

That's fine. Appreciate it.

No problem. Thanks for the questions.

Right.

And your next question comes from the line of John Peterson with AG Edwards. Please proceed.

Good morning, Bruce. Good morning, Paula.

Good morning.

I got here just a little late, and there is an obvious reason. But, your net income that was reported was actually down for the three months, or your operating income was down but your net income was up. That's my first question. And then the second question, about a year ago, Bruce, you had mentioned that you had applied for the listing on the American Stock Exchange, and I was wondering if there is any timeframe for that?

Let me ask -- let me answer both of those questions. As we have been reporting, and John it has been a long time since we chatted, but as we have been reporting over the last couple of quarters, this was more of a transition year for us. So, we did not anticipate significantly higher or even equal income for the fourth quarter compared to last year. The reason way the net income is higher is that we took in the deferred tax asset back into income because of our significant profitability now and projected in the future.

And that -- the focus of our activity is building the model for 2007 and 2008 which we are beginning to see. So, I think that answers your question and I would be happy to give you sort of a longer version, sort of to bring you back over the last few quarters when you have a few minutes. The second question is on the AMEX listing. The market cap requirement for AMEX is $50 million and we are not there yet. We have ongoing discussions with specialists and we are certainly working towards that. But, that's the market cap requirement.

Okay, thank you.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Shane Kim with Camden Partners. Please process.

Thank you. Good morning, Bruce. I just had a couple of questions on your contract and pharmaceutical business. How much volatility will we see in terms of revenue for the fiscal 2007 period quarter-to-quarter?

Well, the contract business, we should not see volatility and we should see continued improvement in revenue, both top and bottom line. That business is growing, and like I said, we just implemented the largest contract in the company's history out in Las Vegas and the potential contract pipeline is strong and growing.

As I have said before, the pharmaceutical business is lumpy, and so there could be some volatility even though we had a record quarter ended June 30. That's no real, clear indication that the next four quarters will be consecutively higher. So, yes there is volatility there, and that's sort of part of what we have with that business. We are trying to temper that by expanding our Phase I business to have more of a stable group of larger revenue studies to sort of negate some of that volatility.

When did that Phase I contract -- that $1 million contract begin? Or has it begun?

It began in March of last year, and there is some run-off still into the current quarter. Yes, into this current -- March of this year. The majority of the revenue was booked in June -- the June quarter but there is also some additional revenue coming through in the September quarter, and maybe even a little bit more into the December quarter.

Okay. And on an annual basis in terms of the new Nevada facility that is going to be up in '07, on an annualized basis, that capacity is probably something on the order of 10 million or $15 million?

Well, the projected revenue was $8.5 million for the 60-bed facility. We think it actually would be a little bit higher, because it looks like our rate negotiations are ending up being a little bit more positive than our internal projections.

So, this is on -- you are talking about on an annual basis, right?

Annual basis.

Right. Okay. So, in terms of the -- and I know you don't speak to specific numbers. You are talking about 20% revenue growth tiered into the second half, and I am curious how you get there considering, I know you just announced this $2 million hotel employees contract, you are sort of on your -- I mean, that's going to be 0.5 million a quarter.

Right. Yes, I think that's a conservative number. The 20% growth is a conservative number.

Okay.

I mean, just if you look at the run rate, the run rate without these new stuff was double-digits already.

All right. Are there any other opportunities to grow, expand within the other facilities that you have?

We are looking at some opportunities both in Michigan and also in [Las Vegas].

Okay. In terms of additional growth opportunities, I don't want to get too far in the future here, but obviously Vegas is a big market. But, what else -- do you have similar type of opportunities, or whether Greenfield acquisition in terms of expanding the patient care business in maybe fiscal '08 but -- that you would sort of look out in building the pipeline?

We are looking at one other inpatient potential capacity addition.

In the existing network, or it would be a new -- ?

In the existing network.

Okay. Thank you.

All right. Thanks, Shane. Are there any other questions out there, operator?

Your final question is a follow-up from Jeff Waters. Please proceed.

Yes. This is probably -- Paula. Just curious as to having used the NOLs and so forth, what would you all be looking at or what should we be modeling for a tax rate in fiscal '07?

I am looking at 38.75% based on federal and state taxes.

Right.

Overall.

Okay.

The good part of course is I still have the NOLs, so I don't have the cash going out, but we will have the expense.

Right. Okay. All right, I appreciate it. Thank you.

Okay. Thank you all for calling in. As I said, we have a large group out there. This is very exciting times for our company. It's nice to see that everything we have been working towards is starting to pay dividends, but more importantly, the building blocks are in place for 2007 and 2008. We anticipate spending a little bit of time on the road.

We have a major presentation in Charlotte next week, at the Noble Financial Conference. And we anticipate scheduling a few more trips out into the field, because our story is strong and we are very, very excited about it. Thank you all for calling in. As usual, I would be happy to field any questions you may have individually. You can give us a call. Thanks so much, and have a wonderful day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.