Acadia Healthcare Company Inc (ACHC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Pioneer Behavioral Health Earnings Conference Call. My name is Candace, 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 conference, Mr. Peter Seltzberg with Hayden [Communities]. Please proceed.

Thank you, Candace. Good afternoon and thank you very much for joining us today for the PIHC fiscal 2007 first quarter earnings conference call. Earnings were released earlier this afternoon. If anyone needs a copy of the release, please feel free to contact our office at 843-272-4653 or by email to Jennifer@haydenir.com. Our call today will be hosted by Bruce Shear, president and CEO, 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 will also be available until November 21st, 2006 at 888-286-8010 for callers within the United States and 617-801-6888 for international callers. Please use pass code 24225834 for the replay. The information is all contained on the website. Before we get started I'm going to review the Safe Harbor statement. Statements in this conference that are not descriptions of historical fact 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 and 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, 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 '95. Additional information and factors that may affect the business and financial results of PIHC can be found in the filings of the company with the SEC. Without further ado, I'd like to turn the call over to Bruce Shear, the company's president and CEO, who'll provide the highlights of the quarter and discuss the company's accomplishments and specifics on its operating divisions. He will then turn the call over to Paula, who will provide a summary of the financials. Bruce will conclude with an outlook before turning the call over to you to answer questions.

Bruce, congratulations on Pioneer's second consecutive quarter of 10 million plus in revenues. Bruce?

Thank you, Peter. Good afternoon and thank you all for joining us. Hopefully you've had a chance to review the release that we filed earlier this afternoon in which we reported another $10 million plus top line revenue quarter while maintaining strong profitability and strong revenue growth despite certain planned expenses related to expansion initiatives. I'll talk more about what we've done, what we'll continue to do and what benefits and value we'll expect to reap from these efforts later on in the call.

As we've been saying throughout fiscal 2006, we are putting the pieces in place to enable our next growth phase late this year and into fiscal 2008. This is most evident with our largest business segment, treatment services or patient care, where we saw a healthy increase both in top and bottom line while moving toward higher bed counts in the future to facilitate growth.

If you've been following our progress for a few quarters, you probably are aware of the initiative underway with the Detroit Behavioral Institute. This future 114-bed hospital at the Detroit Medical Center has been [steadily] increasing our bed count. The first phase began in October 2004 with 30 beds and is full. Our next 20 beds went on line in October 2005 and is also full and both actually are operating with a strong wait list.

The final 50 some-odd acute psychiatric beds are in the final planning stages and we are expected to come on line during calendar 2007. This is strategically an important piece of business for us as once we've fully implemented our program there, it alone will double our inpatient psychiatric bed capacity. As I mentioned, we have approximately 50 beds left to add in 2007 and as we bring these on line, we will continue to build the revenue contribution from this facility while maintaining or increasing the profit margin and this will benefit us significantly in 2008.

We also made progress on our new 60-bed psychiatric hospital in Las Vegas, the Seven Hills Behavioral Institute, which will be open by the end of our fiscal year. Once open, we believe we'll quickly reach capacity due to strong demand in the region, the rapid growth of southern Nevada and the greater Las Vegas area, and the lack of alternative resources nearby.

While construction is ongoing, we will be working with local referral sources, including hospitals, mental health professionals and the like, to build strong relationships that will enable us to quickly and effectively meet the mental health and substance abuse treatment needs of the population and help us fill the facility quickly to accelerate our return on investment.

We also believe that we will sign a significant new contract related to our patient care segment, which is based on several months of negotiations. We anticipate signing prior to the end of this calendar year. If successful, this would represent by far the largest contract in our history, would have a material impact on both the revenue and the operating profit beginning early in calendar 2007, while furthering our leadership position in a critical geographic market. Beyond that, all I can tell you as of right now is that it would be a major contract and we'll issue more information as soon as it is finalized and we can communicate publicly more details.

By the end of fiscal 2007 we would expect our total bed count to be at 240 across all facilities compared to 180 for fiscal 2006 and 131 for fiscal 2005, representing growth of 61% and 30% respectively. Regarding our pharmaceutical division, Pivotal, we did see a slowdown in contracts and revenues for the quarter -- in the current quarter but this was not a surprise. We know and we've been saying all along, this business is one that fluctuates quarter to quarter, so while we're still over the $1 million mark for the quarter, we're below where we were in the year-ago period and have some work yet to do further -- to further reduce the cost structure in this business until we generate new additional contracts that will get us to a position to generate an acceptable level of returns.

We do have a growing backlog there, that's the good news, which is over $1 million, much of which we expect to realize within the next six months to a year. We also anticipate having expanded Phase 1 overnight capacity available in Q3. As I mentioned in the past, the Phase 1 overnight capacity is the highest revenue source and resulted in that large contract that we had in Q3 and Q4.

Further to that on the macro level, we remain comfortable with our positioning there as new studies by the major pharmaceutical players and behavioral healthcare are proliferating with roughly 40% of all new drugs in clinical trials right now targeted towards behavioral health and there is more than $1 million in new studies that are currently approved. We expect this business, though lumpy on a quarter-to-quarter basis, to continue to grow and contribute nicely to our top and bottom line performances each year, as it did in fiscal 2006.

Integrated services, which we report as contract services and branded under the name Wellplace, had a healthy 22.5% revenue increase for the quarter. We have targeted this area for a more aggressive marketing program and we've been seeing some encouraging results. As you know, we were awarded and began to execute on a sizeable contract last year where we're servicing 2.2 million citizens of Wayne County, Michigan by offering credentialing and referral services. This contract is a significant contributor to the segment's results.

More recently we expanded our presence in southern Nevada through our Harmony Healthcare division. This expansion included the largest contract in our company's history up to now and we've discussed this in prior calls. We now serve 21 properties in Las Vegas, including some of the largest casinos in the world, providing EAP services and recently expanded to our first gaming contract in the state of Michigan.

Again, this is our first gaming contract in the state of Michigan. Harmony remains the largest provider in Las Vegas, has an exceptional reputation nationwide. What makes this particularly important is the presence -- this presence will reinforce our Seven Hills Hospital, as we'll be recognized as the leader in mental health and behavioral health services in the Las Vegas region with both EAP and inpatient capacity.

I'm going to now introduce Paula Wurts, our CFO, to discuss the financial details, but please stay with us so that I can offer some details on another corporate milestone for Pioneer what was recently announced which occurred subsequent to the end of our first -- fiscal first quarter.

So for the quarterly financial breakdown I'll turn it over to Paula.

Thanks, Bruce. Now that you've got everyone's attention, let's turn to the financial metrics for the first quarter. Total net revenue from operations increased 12.5% to 10.1 million compared to 8.9 million in last year's same period. The components of our net revenue include net patient care revenue increased 17.3% to 7.9 million from 6.7 million for the same period last year due to the increase in beds at Detroit Behavioral Institute in the second fiscal quarter of last year and an increase in [census] at our other treatment facilities, which resulted in an overall 31% increase in bed days.

Revenue from pharmaceutical studies decreased 19.5% to 1.1 million for the first quarter compared to 1.3 million for the same period last year. Contract support services revenue provided by Wellplace increased 22.5% to 1.1 million for the quarter compared to $926,000 for the same quarter last year. The growth was primarily due to the October 2005 commencement of a smoking cessation contract with a major government contractor that has again been renewed recently.

Total operating expenses for the quarter increased 14% to 9.5 million from 8.3 million in the first quarter of last year. The bulk of this increase included expenses related to ramping up new programs and services associated with contracts signed during the previous two quarters. More specifically, our operating expenses consisted of the following.

Our provision for doubtful accounts dropped by roughly one-third to 452,500 from 656,900 in the year-ago period, while the total allowance for doubtful accounts was 3.2 million compared to 3.1 million as of June 30, 2006. The percentage of bed day expense to net patient care revenue decreased to 5.7% for the quarter ended September 30, 2006 from 9.8% for the quarter ended June 30, 2006. Other notable increases in operating expenses were a 21.3% increase in patient care expense, and a 40.3% increase in the cost of contract support services, partially offset by a 13.5% decrease in the company's pharmaceutical patient care expenses.

Increases in administrative expenses, approximately 21.3%, were primarily due to increased personnel for the opening of the Detroit Behavioral Institute, new beds, ongoing pre-construction expenses for the Las Vegas Hospital and an increase in administrative staff to concentrate on outstanding billing collections, and we expect to see healthy returns on each of these investments in the coming year -- in the coming quarters.

Income from operations for the quarter was $553,974, down 7.9% from $601,404 reported for the same period last year. Net income for the three months was $283,283, or 2% per basic and 1% per fully diluted shares based on 18.5 million basic and 19.3 million fully diluted shares, compared to net income of $384,207, or $0.02 per basic and fully diluted share, based on 18.1 million per basic and 10.3 million -- 19.3 million diluted shares, for the first quarter last year.

The company's provision for income taxes was $182,767 for the quarter, versus $95,628 for the first quarter of last year. Please note that this doubling of our income tax provision reflects an estimated blended tax rate of 39% resulting from the recognition of 100% of our federal tax benefit of net operating loss carry-forwards in the fiscal year ended June 30, 2006. I'd like you also to note that, had last year's number been fully taxed at this rate, our net income then would have been approximately $293,000, essentially flat with what we reported for this quarter.

Total net receivables from patient care for the first quarter of 2007 were $7.2 million compared to $7 million reported as of June 30, 2006. Days sales outstanding decreased to 86 days for the queerer ended September 30, 2006. Allowance for doubtful accounts has held steady at approximately $3.1 million since the end of the second quarter of 2006. Bad debt expense was $452,500 for the first quarter, compared to $656,900 in the same period last year. We continue to work on reducing our bad debt expense as a percentage of net revenue.

Turning to the balance sheet, we ended the quarter with $1.8 million in cash, approximately the same as June 30, 2006, but up substantially from the $918,000 on June 30, 2005. Total net receivables from patient care for the fourth quarter of 2006 were 7.2 million, which was a 2.9% increase from $7 million at June 30, 2006. Our balance sheet showed a current ratio of two to one on September 30, 2006, while stockholders equity increased just slightly to 13.9 million compared to 13.3 million as of June 30 -- 13.5 million as of June 30, 2006, but represented an increase of 50% from 9.1 million on June 30, 2005.

Looking at the debt side of the balance sheet, we have continued to decrease our long-term debt, which stood at 1.7 million at the end of September 30, 2006 compared to 1.9 million June 30, 2006. This has had a favorable effect on our interest expense, which, at $120,000 for the period, represented a 22.6% decrease from the 155,000 in the same period last year.

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

Thank you, Paula. And wrapping up the prepared remarks I'd like to reiterate that following a year of transition in fiscal 2006 in which we worked to identify, secure contracts, and break ground on the Seven Hills Behavioral Hospital to facilitate future growth, we have built out and continue to put in place the appropriate resources and infrastructure to service the businesses we're signing on; and [constantly hitting] on better managing our receivables that we have implemented more aggressive billing and collection policies and we're training our employees to concentrate on current accounts receivables and resolve issues before they move into the uncollectible category.

Clearly, the results of our accounts receivables management and getting our bad debt back in the realm that's acceptable to us so there's no longer an ongoing issue. It's too early to gauge the timing of any policy changes from the new Congress. Historically, though, a Democratic Congress has been more pro-treatment and more enhanced reimbursement, so we see nothing but positive events as a result of this culture change in Washington.

Looking forward, at this juncture we'd like to offer an updated outlook for fiscal 2007. We have a lot more confidence in as a result of a recent announcement. For the full year we would anticipate 20 to 25% revenue growth, with the majority of our growth coming in the last two fiscal quarters, the first two calendar quarters of 2007, supported by organic growth through recently announced contracts, including the one we are mentioning today for the first time, and the opening of our new facility in Las Vegas, which will only contribute to fourth quarter revenues, and the continued ramp-up of our beds at the Detroit facility.

I'd like to thank you for joining the call today. I hope I've clearly explained the opportunities for the future and our [star-stepped] growth strategy. I believe we've executed our plan, our infrastructure continues to be in place, the building blocks are getting stronger and stronger, the wall is growing up, and we're very enthusiastic and encouraged that what we've been talking about for the 2007 and 2008 year is going to come to fruition.

At this point we can open it up to some questions from the group. I thank you all for joining us and as always, I welcome you to call at any time and we can go from there. Thank you so much and, Operator, if you can open the floor up and explain the questions, we can get started.

[OPERATOR INSTRUCTIONS]

Our first question will come from the line of [Shane Kent] of Camden Partners. Please proceed.

Thank you. Hey, Bruce. My first question relates to the contract support services. The revenues were flat sequentially and I had -- I was under the impression that we had -- you had signed this deal with the casinos and the hotel on the Teamsters, which I felt might be incremental. Was that already in the quarter -- the previous quarter?

The revenues actually were ahead --

That's not contract services.

That wasn't contract -- Paula, maybe you better answer that question.

That -- actually, the contract with the Teamsters was a Harmony contract. It wasn't -- it isn't recorded under contract services, it's recorded under treatment service.

Okay. Okay, so what about the deal with the hotel and the Teamsters?

That's the one that's recorded under treatment services.

Okay.

I'm sorry, that's the [culinary] contract.

Okay. In terms of the ongoing expense that's related to Seven Hills and the buildout at Detroit Behavioral Health, can you -- can you talk to sort of what the ongoing quarterly spend is at that level until they sort of get up on line?

You know, Shane, we've talked about this. We've had this conversation with a number of our investors and I think the conclusion we came to, rather than breaking it out each quarter I think it's safe to say as a growing company we're going to have some ongoing expenses on a quarter-to-quarter basis.

The Detroit ongoing expenses I would say are out of the way and we're into full operations, so whatever there was is behind us. In term of the Seven Hills operation we will have ongoing expenses that are non-capitalized up to the time that we open the facility.

Yes. And when will be the -- when will the 50 beds go on line in Detroit?

Late calendar 2007.

Late calendar -- so a year from now.

Approximately a year from now.

And it sounds like we have a delay in Nevada at this point. What is that related to?

The delay in Nevada is related to additional internal changes we needed to make into the building based on state requirements. We had to make some structural changes in terms of doors, in terms of fireproofing that increased the capital costs. And at the same time what we decided to do rather than start the building fast track was to get all the approvals and everyone signed off before we started so we wouldn't have to change gears and do something twice. So I think in the long term it's going to end up being a more efficient operation in terms of the construction.

I mean the contractors are onsite but our concern was, and I've made a couple of trips out there now, our concern was that if we started to do something and there were changes still coming down from the state, we might have to redo something and pay twice.

Right. At this point, how much are you spending -- do you think you -- I mean the timing's a little bit off but in terms of what you had planned to spend in sort of the new whatever regulations with building codes, are you going to end up spending a significantly greater deal, whether capitalized or not, in terms of bringing this facility up to -- bringing it on line?

The monthly lease cost is going to end up being about $20,000 more a month than we anticipated back two years ago. So that's the additional cost. But at the same time, I have to say our reimbursement rates are significantly higher than we projected initially so we're -- our revenue is going to be a multiple of $250,000 more than we projected initially.

So, yes, costs are going up but at the same time our revenue will more than make up for that and we're anticipating that our bottom line and our margins actually will be higher just because the economy and the market is moving in our direction during that time.

Okay. And so this sort of gets back to I guess my earlier question, so the Teamsters or the hotel, whichever -- which one that was in the -- that's actually in the patient care expenses -- or revenues --

Right.

There's some seasonality in the patient care segment so I guess I was a little but surprised as to how -- that there was a big increase in the patient care side of the business. And so that's strictly related to that contract that came on line this quarter, right?

And also the 20-bed adjudicated girls unit in Detroit.

Okay.

As our --

And so --

As our business diversifies more, Shane, we're less and less prone to seasonality, which is a good thing.

But you expect some seasonality probably in the December quarter, though, right?

Generally always have seasonality on our inpatient business in the second quarter, right.

Right. And then as it relates to this new contract, it's got to be of the same type, my guess is that's got to be the same type of contract as this Teamsters or hotel, sort of advisory work. It couldn't relate to another facility could it?

It certainly is in that ballpark and it's of the scope that is much greater than that one and I really -- again, the progress is going on and the minute we can issue great details on this, we will be.

Okay.

But we really felt that it was important to get that out because people are talking about it.

Thank you.

All right, thank you.

Our next question will come from the line of [Greg Ballard]. Please proceed.

Congratulations.

Thanks, Greg.

You answered the question about when the 50 beds in Detroit will be on line but I didn't get what the current bed count was at the end of the quarter.

The bed count right now is 180 and we have scheduled two more projects. We have the 60 beds in Las Vegas, which will come on first towards the summer, and the 50 beds in Detroit, which will come on later in the calendar year.

Okay, and that gets you to the 240?

That's correct. Well, actually, when the final ones come on it'll be 180, then 240 and then 290.

290 will be when?

290 will be the end of calendar 2007, which is Q2 of our fiscal 2008.

Okay. All right, and you expect the tax rate to continue around 39% fully taxed?

Unless you have some input on that, I would -- yes, I would expect that.

Okay. That's all I had.

Thanks for joining us. Do we have any other questions, Operator?

I have no further questions in the queue.

Okay, well, then having no further questions I'd like to thank you all for joining us today. As always, I look forward to talking with you individually. We were pleased with the progress we continue to make and we are on the right track and as I've sad all along, this is a 2007, 2008 plan and I believe we're right on track. Thank you all for your support and I look forward to talking with you.