Acadia Healthcare Company Inc (ACHC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second Quarter 2007 Pioneer Behavioral Health Earnings Conference Call. My name is Shaquana, 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. Peter Seltzberg with Hayden Communications. Please proceed, sir.

Thank you. Good morning again, everyone. Thanks for joining our call today. Earnings were released yesterday after the close of trading. If anyone needs a copy of the release, please feel free to contact me at 646-115-8972 or by e-mail at Peter@HaydenIR.com. The call today will be hosted by Bruce Shear, President and Chief Executive Officer and Paula Wurts, the Company's CFO. Following management's discussion, there will be a formal Q&A session open to all the participants on the call.

Before we get started, I'm going to review the Safe Harbor Statement. The statements on 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 such statements are based on current facts and analyses.

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, needs for market acceptance, dependence upon third parties, destruction of vital infrastructure, disruption of services and due to natural disaster. Forward-looking statements are made pursuant to Securities Litigation Reform Act of 1995. Additional information and factors that may affect the business and end result of Pioneer can be found in the filings of the company with the SEC.

Without further adieu, at this time I'd like to turn the call over to Bruce who will provide the highlights of the second quarter, discuss the company's accomplishments and specifics on operating divisions and the ongoing growth initiative, particularly in the Las Vegas metro area. We will then turn the call over to Paula to provide a summary of the financials. Bruce will then conclude with his outlook before turning the call over to answer questions.

Bruce, the floor is yours.

Thanks, Peter, and thank you all for joining us on this snowy, combination icy morning. We have a great turnout so far, so thanks for joining us so early. Good morning again, and hopefully you've had a chance to review the release we filed earlier. This was a productive quarter for Pioneer on a variety of levels including the signing of our largest contract in the company's history, a ten-year $80 million contract with Health Plan of Nevada, and the completion of a $2 million private placement to bolster our financial strength and provide the equity component for our new psychiatric hospital being built in Las Vegas, Nevada.

We are making tremendous progress in our efforts to build a platform to support the next growth phase of the company. And meanwhile, the efforts of fiscal 2006 have begun to pay tangible benefits in terms of increased patient days, higher revenues and ongoing profitability. As most of you know, we track patient days as the key indicator of our financial and corporate health. This metric is driven by our total bed count, and after significantly increasing our bed count with the opening of the Detroit Behavioral Institute during fiscal 2005 and 2006, we have been working on the next major growth phase which involves the Seven Hills Behavioral Hospital near Las Vegas.

We expect to open our new hospital in the fourth calendar quarter of this year. I would like to address the reason for the delay. The delay was due to certain plan modifications that we chose to implement, some were required by the state and others that we determined would yield increased long term returns on our investment. We decided to be proactive and make as many of the changes we could in anticipation of future changes imposed by the state during the construction.

We also took this opportunity to improve our position on the lease and become equity owners now as opposed to one year from now after the opening date. As was consistently said on past conference calls and conference presentations throughout fiscal year 2006, we believe that we are putting the right pieces in place to enable our next growth phase late this year and into fiscal 2008 into the treatment services and the patient care areas of our business which is our largest business segment.

Additionally, we added 20 adjudicated juvenile beds at the Detroit Behavioral Institute during fiscal 2006 and these beds have helped us recognize a 12.2% increase in patient days compared to the second quarter of last year and a 560 basis point increase in patient care revenue compared to the first quarter of 2007. We have approximately 50 beds left to add in Detroit in 2007 and as we bring these online we will continue to build the revenue contribution from this facility while maintaining our increase in the profit margin. And this will benefit us significantly as we head into fiscal 2008.

We also made progress on our 60 bed hospital that I mentioned, Seven Hills Behavioral Institute. We now expect this facility to be open in the second half of 2007 after facing some delays related to the planned development and organizational structure. We are confident we will quickly reach capacity, even more confident now due to the strong demand in the region, the rapid growth of the Southern Nevada and Greater Las Vegas area and the lack of alternative resources nearby.

Additionally, the contract with Health Plan of Nevada was the icing on the cake and the strong presence of our Harmony Healthcare subsidiary, including contracts with 21 separate hotels and casino properties in Las Vegas, will provide us with a bevy of referral opportunities for appropriate candidates for the Seven Hills Behavioral Hospital. In short, Harmony and its parent company, Pioneer Behavioral Health, are well positioned as the region's leader, in mental health and substance abuse treatment services, and with the rapid growth throughout the Las Vegas area, we're excited with this strategic positioning.

While construction is ongoing, we are working with local external 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 service needs of the population, and help us fill this facility quickly to accelerate our return on investments.

By the end of fiscal 2007 we continue to project the total bed count system wide of 290 compared to 180 for fiscal 2006 and 131 for fiscal 2004, representing a compounded annual growth rate of 61% and 30%, respectively. Regarding our pharmaceutical research division, Pivotal Research, we continue to see a slow down in contracts and revenues but this is not a surprise. We know this business is one that fluctuates quarter to quarter and year to year.

Be reminded that last year was the best year in our history at Pivotal. We do have a growing backlog there which we expect to realize within the next six months. In addition, we remain comfortable with our positioning there as new studies by major pharmaceutical players in the behavioral care are proliferating where roughly 40% or more of all new drugs in clinical trials right now are targeted toward behavioral health care. There is more than $1 million in new studies that are approved.

At this point, I'd like to turn the call over to Paula Wurts, our CFO, to discuss the financial details and then I'll summarize the call and then we'll open it up to questions. Thank you. Paula?

Now that you've got everyone's attention, let's turn to financial results for the second fiscal quarter. Total net revenue from operations increased 14.4% to $10 million for this three months ended December 31, 2006 from $8.7 million for the three months ended December 31, 2005. The components of the net revenue growth include net patient care revenue increase of 22.9% to $7.9 million for the three months ended December 31, 2006 from $6.5 million.

This increase in revenue is due primarily to the addition of the 20 adjudicated juvenile beds at Detroit Behavioral Institute which helps to create a 12.2% and 16.8% increase in patient days for the three months and six months ended December 31, 2006, respectively over the same periods last year. Excluding Detroit Behavioral Institute, combined census in our other inpatient facilities increased 1.1% and 2.1% for the same periods.

Revenue from pharmaceutical studies decreased 19.4% to $875,000 for the second quarter, compared to $1.3 million for the last year's period. This decrease is due to the cyclical nature of the pharmaceutical research business where the size and number of clinical trials starts and stops changes monthly. Contract support services revenue provided by Wellplace decreased 1.8% to $1.1 million for the quarter ended December 31, 2006 from $1.2 million for the three months ended December 31, 2005.

Total operating expenses for the quarter increased 15% to $9.3 million from $8.2 million in the second 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 three quarters. More specifically, our operating expenses consisted of the following. Notable increases in operating expenses were 28.9% rise in patient care expenses, and a 17.1% increase in the cost of contract support services, partially offset by a 17.5% decrease in the operating expenses of the company's pharmaceutical patient care business.

Increases in administrative expenses for the quarter of approximately 13% were primarily due to several factors including an administrative payroll increase of 11.7% and employee benefits increase of 21.4%, partially due to the increase in expense attributed to stock-based compensation, and increasing staff in preparing for our new contract implemented at Harmony on January 1.

Rent expense increased approximately 111% due to the increase in space of Detroit Behavioral Institute for the girls' unit, insurance expense increase of 121% for the six months ended December 31, 2006. Our provision for doubtful accounts decreased 27% to $347,000 for the three months ended December 31, 2006, from $476,000 for the three months ended December 31, 2005, while the total allowance for doubtful accounts was $3.4 million compared to $3.1 million as of June 30, 2006.

The percentage of bad debt expense to net patient care revenue decreased to 4.4% for the quarter ended December 31, 2006 from 6.9% for the quarter ended June 30, 2006. Income from operations for the quarter was $605,000, up 10% from $550,000 reported in the same period last year.

The company's provision for income taxes was $162,000 for the quarter versus $65,000 in the second quarter of last year, due to the company's net operating loss carry forward. Please note that this doubling of our income tax provision reflects a tax rate of 39% which is now that we've established essentially used up our NOLs, is the tax rate we will use going forward in our financial statements.

Net income for the three months was $261,000 or $0.01 per basic and fully diluted share, based on 18.8 million basic and 19.4 million fully diluted shares, compared to net income of $347,000 or $0.02 per basic and fully diluted share, based on 18.2 million basic and 19.3 million diluted shares for the second quarter of last year. I'd like to also note that last year's pre-tax number, if it had been fully taxed at the 39% rate, our net income then would have been approximately $250,000, about 4% lower than what we reported in this quarter.

Total net receivables from patient care for the first quarter of 2007 were $6.8 million, compared to $6.9 million reported as of June 30, 2006. Overall days outstanding remain stable at 76 days for the six months ended December 31, 2006. Allowance for doubtful accounts were 10% higher at approximately $3.4 million since the end of our fiscal year. Bad debt expense was $347,000 for the second quarter, compared to $476,000 for the last year's period. The numbers reflect that the situation with our billing software has been resolved and we expect the reserve requirement as a percentage of accounts receivable to normalize.

Looking further into the balance sheet, we ended the quarter with $4.2 million in cash, up significantly from $1.8 million as of June 30, 2006, primarily due to the equity financing that was done toward the end of December. Our current ratio improved slightly to 2.3 to one on December 31, 2006, while stockholders' equity increased to $16.4 million, compared to $13.5 million as of June 30, 2006.

Looking at the debt side of the balance sheet, we have continued to pay down debt, trimming our draw down on the revolving credit line by $497,000, and we've paid down $500,000 of our term loan since June 30, 2006. Now moving to the six month period. Total net revenue from operations increased 13.4% to $20 million for the six months ended December 31, 2006 from $17.6 million in the same period last year, led by a 21% increase in patient care revenue which was $15.8 million, compared to $13.2 million for the six months ended December 31, 2005.

This increase was due primarily to the addition of the 20 adjudicated juvenile beds at Detroit Behavioral Institute which led to a 16.8% increase in patient days for the six months ended December 31. 2006 over the same period last year. Excluding Detroit Behavioral Institute, combined census in our other inpatient facilities increased 2.1% for the same period.

Contract support service revenue provided by Wellplace increased 9% to $2.3 million for the six months ended December 31, 2006, from $2.1 million for the six months ended December 31, 2005, due to the start of the smoking cessation contract with the government contractor in October 2005.

Revenue from pharmaceutical studies decreased 19.5% to $1.9 million for the six months ended December 31, 2006, from $2.4 million for the six months ended December 31, 2005 for the same factors noted earlier, summed up by the fact that the size and number of clinical trials is a non-linear business.

Total operating expenses for the first six months increased 14% to $18.9 million, from $16.5 million in the same period last year. The primary factors behind the increase included a 25.1% rise in patient care expenses to $8.2 million, and a 28.8% increase in cost of contract support services to $1.5 million, partially offset by a 15.4% decrease in those same expenses for our pharmaceutical patient care expenses to $908,500.

Increases in administrative expenses of approximately 15.5% were primarily due to increased personnel for the opening of the Detroit Behavioral Institute, ongoing construction expenses for Las Vegas Hospital and an increase in administrative staff to concentrate on outstanding bill collection. We expect to see a healthy return on each of these investments in the coming six month period.

Rounding out our operating expenses, our provision for doubtful accounts dropped by 29.4% to $800,000, compared to $1.1 million in the year-ago period, while the total allowance for doubtful accounts was $3.4 million, compared to $3.1 million as of June 30, 2006. Our percentage of bad debt expense in that patient care revenue decreased 5.1% for this six months ended December 31, 2006 from 8.5% in the last year's comparable period.

Income from operations for the six month period ended December 31, 2006 -- $1.2 million, unchanged from the same period last year. Interest income increased 74.22% to $67,000 for the six months ended December 31, 2006, from $38,000 for the six months ended December 31, 2005. This increase is the result of increased cash in our investment account resulting in higher interest receipts.

Interest expense held steady at roughly $330,000 for the six months ended December 31, 2006, in spite of the interest of $80,000 on the Pivotal acquisition debt that was accumulated this quarter. [The company's] provisions for income taxes was $345,000 for the period, versus $160,000 for the six month period last year, due to our net operating loss carry forward expiring at the end of fiscal 2006, resulting in our tax rate jumping to the full corporate tax rate of 39% as I detailed previously in the call.

Net income for the six months was $544,000 or $0.03 per basic and fully diluted share, based on 18.6 million basic and 18.1 million fully diluted shares, compared to the net income of $731,000 or $0.04 per basic and fully diluted share based on 18.1 for basic and 19.3 million diluted shares for the six month period last year. Had last year's number been fully taxed, our net income then would have been approximately $543,000, essentially flat with what we reported for the current six month period.

Miscellaneous financial highlights that I should just touch on include that; one, that we generated $1.4 million in operating cash flow, almost all of which was in the second quarter. As we noted in the release, our cash generation enabled us to pay down our revolving credit line and term loan by $497,000 and $500,000, respectively. And two, that we announced on December 20 the closing of a $2 million private placement that we did with an institutional investor. We are using these funds primarily to secure our equity participation in the new Seven Hills Behavioral Hospital in Henderson, Nevada, now underway.

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

Thanks, Paula. It's great to have a great balance sheet. I have to tell you that. It continues to improve each quarter. It's really hard for me to hold back my enthusiasm. There's so many wonderful things going on. I'd like to reiterate that fiscal 2006 was a year of transition in which we worked to identify secure contracts and get started on the Seven Hills Behavioral Hospital, continue our progress at the Detroit Behavioral Institute, expand Harmony's footprint in Nevada and other growth areas, and set the stage for future growth. We are beginning to see these initiatives deliver in fiscal 2007 and we expect the growth phase to accelerate in earnest in fiscal 2008.

Some of you may have seen the recent article in the Wall Street Journal regarding Parity, Senate 558, a truly bipartisan bill that is supported by both sides of the aisle and, more importantly, supported by the business and the insurance sectors. We view this as a major development to further support and reimburse behavioral health treatment. We feel this has the right contingencies to get passed very, very quickly, and we'll keep you up to date.

Looking forward, we are reiterating our expectations of 20 to 25% revenue growth for calendar 2007 with a more rapid growth in fiscal 2008 supported by organic growth. Great things are happening at PHC. More than we have even discussed today and I look forward to more positive announcements on many, many fronts coming very soon. Looking forward, you know, we're just excited.

I'd like to thank you all for joining the call today. At this point, operator, we can open it up to question from the group. We do have a very large audience here today and thanks for joining, and as always, feel free to contact me directly, and we'll open the floor up to questions. Operator, maybe you'll just take the floor and explain how to queue in.

[OPERATOR INSTRUCTIONS]

Must have been a perfect presentation then, because we don't have any questions at this point. We'll wait another moment or two just to make sure everyone can get into there.

[OPERATOR INSTRUCTIONS]

We have a question from the line of David Block. Please proceed.

Good morning. I'm just curious. What portion of the investment and infrastructure expenses incurred in the quarter are going to be recurring going forward and is there a portion of that that's kind of, should be viewed as one time?

Well I would say that there will be some recurring expenses. We had a lot of ramp up and start up expenses for this huge contract, where we actually needed to hire 25 employees to have them ready to go live on this new contract January 1. So those expenses will not be recurring but they were expenses in the quarter with no revenue associated with it.

Okay. My only question, thank you.

Okay. Do we have any other questions?

[OPERATOR INSTRUCTIONS]

We'll wait one moment. If not, we'll move forward and...

Okay, you have a question from the line of Jim Kennedy. Please proceed.

Hi, Bruce.

Good morning, Jim.

How are you doing?

Good.

Hey, a question for you. When you mentioned that you're going to become an equity owner sooner in the Seven Hills facility, would you just talk a little bit about what that means? Are you a partial equity owner? Are you going to own the entire building? Who's in it with you? What's your obligation, etc.?

Yes, what that means is that we actually are now an equity owner in the real estate itself, even though we own the operations at 100%. We had an option to buy in and due to some reconfiguration in the structure, we've purchased about a 20% interest in the real estate, so we actually are 20% interest in the real estate.

So we'll have a 20% or approximately that interest in the profits from the real estate lease, which will be additional profit for us. We also have an option that if anyone -- we have a right to purchase any interest of anyone who wants out. We continue to ask them, and that's not happened as of yet.

What is your commitment for that 20%, the ownership piece?

Already paid.

We already paid it. It was $400,000. Yes, we -- remember, we locked into the real estate land deal three years ago. The property's tripled in value since then and the whole area has been developed around us, so we had a very small investment to own 20% of that.

And then, so essentially what will happen is --. Now, will you be the only lessee, if you will, of the property?

Yes, 100% of it is ours.

So essentially, you'll be paying rent or lease payments to the owners of which you are 20%. So essentially, after all expenses, etc., a certain percentage of that, something less than 20% of what you pay will come back to us in the way of profit, if you will?

Yes, the anticipated ROI is about 18% on the cash.

And that's on the original $400,000?

Correct.

Very good. Thank you.

Thanks.

Your next question comes from the line of Evan Greenberg. Please proceed.

Kevin?

Bruce, I'm sorry. I wanted to get an idea if there was any kind of distraction from the construction of Las Vegas. I don't know what you said the impact on the quarter was. Was it a penny or two, the impact on the quarter from the Las Vegas start up?

I would say there was some ongoing operating expenses that were in the December quarter, you know, not a huge, huge amount but again, we did hire employees for the new contract. We have spent a lot of time sort of reconfiguring the plans and a lot of that stuff is operational expenses and non-capitalized.

The point we wanted to make is that on balance, we had great revenue. Profitability was similar to what it was in the previous quarter last year and that included significant start up expenses and other expenses so on balance, we felt that we had an excellent quarter and it was right on track, and that's why we wanted to highlight it.

Thanks, Bruce.

Your next question comes from the line of [Nicholas Adams]. Please proceed.

Bruce?

Yes.

Nick Adams. Just a brief question. Now that the stock is $3.00 or better, any plans to get off bulletin board trading? We've talked about this from time to time.

Yes. We're actively pursuing a national listing and we're hoping to be able to give an update to the public very, very soon and we're very, very excited about it and this is something that's been in our long and medium-range plans and I'm hopefully that we'll have a very positive announcement very, very soon.

Nicholas Adams. Great. Thank you.

Okay. I just want to also add that we will be presenting at Ross next week. We were invited there about a month ago and it's a conference that we've wanted to get into and we sent out a press release in that regard but it is Thursday morning, I believe at 9:30. There is a press release. We also will have time for one-on-ones all day Wednesday. And I know a lot of our investors will be there and I look forward to seeing you again and also meeting some of our new institutional investors that we haven't met yet. So, I think that's another positive event.

There are a number of other things that are going on in our company that we clearly can't give a lot of details right now, but it's just very exciting and we're pleased with the quarter's results. We're pleased with where we expect to be going. Our plan is clearly coming together, and 2008 is going to be the year that we've been saying is going to be coming. And we have even more opportunities that are out there to further solidify that.

I thank you all for your support. We have a strong shareholder base of institutional investors that's growing. We have more and more reporting shareholders each quarter and that's very, very exciting and I've had nothing but very positive feedback from our current shareholder base. And we thank you, and I look forward to continuing to delivering enhanced shareholder value as our plan continues to come together. Thank you all for joining us today 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 good day.

Thank you.