Acadia Healthcare Company Inc (ACHC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Pioneer Behavioral Health Earnings Conference Call. My name is Shantalay and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Brett Maas of Hayden Communications. Please proceed, sir.

Thank you. Good afternoon and thanks to everyone for joining us today for the PHC Inc. Fiscal 2007 Third Quarter Conference Call. Earnings will be released after the close of trading today and if anyone needs a copy of the release, please feel free to contact my office at (843) 272-4653 or by e-mail to jennifer@haydenir.com.

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. Before we get started, I'm going to review the Safe Harbor Statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties.

Words such as 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, the need for market acceptance, dependence upon third parties, disruption of vital infrastructure, disruption of services and due to natural disaster.

All forward-looking statements are made pursuant to the Securities and Litigation Reform Act of 1995. Additional information factors that may affect the business and financial result of PHC can be found in the filings of the company with the Securities and Exchange Commission.

At this time I'd like to turn the call over to Bruce, who will provide highlights of the third quarter, discuss the company's accomplishments and specifics on its operating divisions and the ongoing growth initiatives particularly in the Las Vegas metro area. We will then turn the call over to Paula, who will provide a summary of the financials. Bruce will then conclude with the outlook before turning the call over to answer questions.

Bruce, congratulations on reporting the highest quarterly revenues in your company's history. The floor is now yours.

Thanks, Brett, and good afternoon, and thank you all for joining us. The third quarter marks another productive quarter where we built upon our second quarter success and reported record revenue. We continued our investment in the growth initiatives in the Las Vegas area.

In the second quarter, the majority of this was related to our Seven Hills Behavioral Hospital in Henderson, Nevada. During the third fiscal quarter, we shifted the majority of our spending to the new BHO contract, the ten-year $80 million contract with Health Plan of Nevada, which many of you remember is the largest contract in our company's history.

We are making tremendous progress in our efforts to build a platform to support the next growth phase of the company. Following some significant investments in the Seven Hills project this quarter, we have now begun construction. The initial permitting and the details are behind us and complete and construction is well underway. We continue to project early calendar 2008 as the date this hospital will open.

Meanwhile, we continue to reap the benefit of the various growth initiatives we completed during fiscal 2006, particularly related to our presence at the Detroit Behavioral Institute. Our bed counts remain at all time highs. Patient census remains strong and our patient days continues to increase sequentially quarter-over-quarter. This has resulted in record revenues of $12.3 million this quarter, an increase of 23.8% compared to the prior year third quarter and sequentially versus the second fiscal quarter this current year.

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. We do have a growing backlog there and we are already seeing a surge in sales during our fiscal fourth quarter.

While it is still early, we think this segment of our business may be turning around. We remain confident in this portion of our business as new studies by the major pharma players in the behavioral healthcare field are proliferating with roughly 40% of all new drugs in the clinical trials right now are targeted toward behavioral healthcare and there is over $1 million in new studies that are approved.

We just recently opened our Phase I new inpatient unit at Pivotal which could have the overnight capacity of up to 15 patients. We believe this will be a new and significant revenue producer once the new Phase I study flow has come online. But currently, Pivotal contributed a loss of over $300,000 to the quarter and this shortfall, along with the initial startup fees for the AMEX essentially was the entire difference of our profit compared to the previous year.

We believe Pivotal's performance is already beginning to swing back in a positive direction and I'm confident this progress will be evident in our fourth quarter results. I'm now going to turn the floor over to Paula Wurts, our CFO, to discuss the financial details.

Thanks, Bruce. Let's turn to the financial results for the third fiscal quarter. Total net revenue from operations increased 23.8% to $12.3 million for the three months ended March 31, 2007 from $10 million for the three months ended March 31, 2006.

The components of our revenue include net patient care revenue increased 37.4% to $10 million for the third quarter from $7.3 million. This increase in revenue is primarily due to the addition of the Behavioral Healthcare Options contract with Harmony and 20 adjudicated juvenile beds at Detroit Behavioral Institute, which helped to create a 3.4% increase in patient days for the three months over the same period last year.

Revenue from pharmaceutical studies decreased 23.6% to $1.2 million for the third quarter. I should mention that on a sequential basis, this segment saw a 33.2% increase in top line revenue. The year-over-year decrease, as Bruce mentioned, is due to the cyclical nature of the pharmaceutical research business for the size and number of clinical trial starts and stops changes monthly.

Contract support services revenue provided by Wellplace, decreased less than 1% to $1.1 million, essentially unchanged compared to the second quarter and a year ago third quarter. Total operating expenses for the third quarter increased 32.1% to $11.7 million from $8.8 million in the third quarter of last year. The bulk of this increase included expenses related to ramping up of 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 31.5% rise in patient care expenses and 8.9% increase in pharmaceutical study-related patient care expenses, and a 9.8% increase in the cost of contract support services. Increases in administrative expenses of approximately 52.7% were due to several factors including $65,000 in non-recurring expenses related to our listing on the American Stock Exchange, and approximately $100,000 in spending related to the startup of our new BHO contract.

We believe these expenses are now behind us and thus far in the fourth quarter, our profitability is improved. Specifically this spending was related to the training and double coverage of staff required to get the project up to speed. Our provision for doubtful accounts increased 27.7% to $426,812 for the third quarter as bad debt, as a percentage of revenues actually declined for the same period. Income from operations for the quarter was $638,155, down 42.7% from $1.1 million recorded for the same period last year.

The company's provision for income taxes was $202,924 for the quarter, versus $45,427 in the third quarter last year, due to the company's net operating loss carry forwards. Please note that this doubling of our income tax provision reflects a tax rate of 39% which, now that we've recorded our net operating loss carry forwards, is our effective tax rate.

Net income for the three months was $315,779 or $0.02 per basic and fully diluted share, compared to net income of $950,549 or $0.05 per share last year. Sequentially, our net income increased 21% compared to the second quarter due to higher revenues.

Total net receivables from patient care for the third quarter of 2007 were $7 million, compared to $6.9 million reported as of June 30, 2006. Overall days outstanding or days sales outstanding for patient care receivables, improved to 71 days. Allowance for doubtful accounts were 9% higher at approximately $3.4 million since the end of our fiscal year. The numbers reflect the situation with our billing software which 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 $4.3 million in cash, up [completed] significantly from $1.8 million as of June 30, 2006, primarily due to the equity financing in December. Our current ratio was 2 to1 as of March 31, and our stockholders equity increased 25.4% to $16.9 million, compared to $13.5 million as of June 30, 2006.

Looking at the debt side of the balance sheet, we continue to pay down debt, trimming our draw down on revolving credit line by $347,000 and we've paid down $872,000 of our long term debt [since] June 30, 2006. Now moving to the nine month period. Total net revenue from operations increased 17.1% to $32.3 million for the nine months ended March 31, 2007, from $27.6 million in the last year same period, led by a 26.3% increase in patient care revenue, which was $25.9 million compared to $20.5 million for the last year's nine month period.

Contract support services revenue provided by Wellplace increased 5.6% to $3.4 million for the nine months, from $3.2 million last year. Revenue from pharmaceutical studies decreased 21.1% to $3.1 million for the period from $3.9 million last year.

Total operating expenses for the first six months increased 20.5% to $30.5 million, from $25.3 million in the same period last year. Included in the increase was a 27.4% increase in patient care expenses to $13.2 million, and a 21.3% increase in cost of contract support services to $2.3 million, partially offset by a 16.4% decrease in the company's provision for doubtful accounts.

Income from operations for the nine month period was $1.8 million, down 20.6% from the $2.3 million in the same period last year. The company's provision for income taxes was $547,829 for the period versus $205,655 for the nine month period last year, due to the recording of our net operating loss carry forwards at the end of fiscal 2006, resulting in our expensed tax rate increase to the [full quarter] tax rate of 39% as I detailed previously in the call.

Net income for the nine months was $860,150 or $0.05 per basic and $0.04 per fully diluted share, based on 19 million basic and 19.6 million fully diluted shares, compared to a net income of $1.7 million or $0.09 per basic and fully diluted shares, based on the 18.1 million per basic and 19.2 million diluted shares for the last year's nine month period.

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

Now that you've all memorized those numbers I guess we'll move on. Thanks, Paula. As previously discussed, we are focused on building a strong diversified presence in the Las Vegas market to match our similar presence in the Detroit market. Patient care represented by a Detroit Behavioral Institute facility in Michigan and soon by our Seven Hills facility in Nevada represent the majority of our new revenues.

For the last decade, our Harmony Healthcare subsidiary has been creating a name for itself in the Southern Nevada region, contracting with hotels, resorts, casinos and other major employers to perform internet and telephonic support including things like their employee assistance hotlines. Today, we contract with 21 separate properties in the Las Vegas area for this type of service.

During this period in Nevada, we have built many relationships in this region, and these relationships will serve us well now that we are adding two other major revenue centers to our Nevada operations. The first is the contract we signed with BHO. This is a ten-year $80 million contract, by far the largest in our company's history, and an opportunity to leverage our expertise at providing crisis management and mental health services as well as further building the relationships that we have formed in the last decade.

The Seven Hills Behavioral Hospital will take this to another level. I discussed the demands for chemical dependency and inpatient mental health services in Las Vegas on prior calls, so I won't get into that level of detail here. I will say that as this community grows, and is it growing, mental health facilities are often the last priority for local governments who are focused on schools, hospitals and infrastructure.

Based on the demographics of this region in terms of age, financial status and other factors, chemical dependency is a significant issue. And not surprisingly, our experience in this community and our conversations with local healthcare providers have reinforced this perception. Clearly, there is a need for what our Seven Hills Hospital will provide and we can't wait to open our doors.

Finally, we continue to evaluate the opportunities for our Pivotal Research subsidiary and will likely proceed on these options as Pivotal's segment returns to consistent growth and profitability. As I mentioned on the previous call, our smoking cessation contract was renewed and we are currently evaluating plans to further expand this contract, as well as other contracts in the government arena. This area has extraordinary growth potential and we are very, very focused on growing this portion of our Wellplace division.

In summary, by early in calendar '08 we'll have a total bed count system-wise of 290 beds compared to 180 for the fiscal 2006 and 131 for fiscal 2005, representing compounded annual growth of 61% and 30%, respectively. In the last two quarters we have accelerated our revenue growth and our top line performance is on track.

I believe we can maintain this 20% year-over-year growth for the next few quarters until our BHO contract and the Hospital begins to significantly contribute further to revenues. Our profitability is accelerating in the current quarter, and I believe this trend will continue as well. Looking forward, we are reiterating our expectations of 20% to 25% revenue growth for calendar 2007 and more rapid growth in fiscal 2008 supported entirely by organic growth.

I'd like to thank you all for joining the call today. It's very, very clear that our plan is coming together. We're very excited about it, the projects that we've been working on are real. They're in place. Construction is ongoing. Contracts are moving in the right direction. So we really feel like our platform is ready now and we're just excited about rolling it out over the next one to two years.

At this point what I'd like to do is open it up for some questions. Operator, if there are any questions please open it up.

Yes, sir.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Darren Lehrich of Deutsche Bank. Please proceed, sir.

Good afternoon. Just a couple of housekeeping oriented questions. What was the patient days count in the most recent quarter here and if you can provide any detail around your inpatient and outpatient revenues on the patient care line, that would be helpful. And then, Bruce, if you can just remind us the quarterly progression of your beds in service going forward getting you to 290 beds in '08? Thanks.

Okay, remember the last fiscal year we added the additional adjudicated girls' beds in Michigan, and that will be followed up with the 60 acute psychiatric beds in Nevada. So that will get us to the 290 bed number. I don't have the patient counts in front of me, Darren. I'd be happy to get them to you later. We're just actually filing the Q as we speak and the patient days are there so I'd be happy to get that to you at a further time.

Okay, great. And the bed count at the end, beds in service at the end of this period was 200 you said?

180 beds.

180, okay.

Right. And what I did miss, and I'm sorry, I did miss the third phase of the Michigan beds which have yet to come on line so that's what will take us up to the additional 50 to 60 beds to get us up to the 290. I'm sorry, I missed that.

Okay, perfect. Thanks.

And your next question comes from the line of Rob Damron of 21st Century Equities. Please proceed, sir.

Hi, good afternoon. Nice quarter, Bruce. I wanted to -- so if you could just give us more color on when these hospitals open. Both the Vegas and then the expansion in Detroit. Do you expect the expanded hospital in Detroit to open first and then Vegas after that?

No, Vegas, as we've said all along, will open first. We're anticipating January of '08. Construction is ongoing. I'm actually on a plane out there tomorrow morning and we anticipated the next additional beds in Michigan will be later in calendar '08.

Okay, and then in terms of -- do you expect one-time costs associated with getting these new facilities up and running, or will most of these costs be capitalized?

Well some costs are capitalized, but we are having a lot of ongoing costs and have for Seven Hills Hospital, and we did have a lot of startup costs for this large contract with BHO. Both of those are pretty much behind us. The BHO contract is well underway, but we had quite a bit of debt in the first quarter -- the first calendar quarter of '08 or our third -- '07 or our third fiscal quarter. The Michigan phase [up] of the next beds will not have the kind of opening costs that we've seen out in Las Vegas because our infrastructure is pretty much more in place there now.

Okay, and then maybe you could just give us a little bit of color on what kind of incremental margin or margin targets that you think the company could achieve if we looked out 12 to 18 months from now once the new hospitals and new facilities are up and running and the BHO contract is, I guess, fully operational. Where do you think the profitability of the company can go?

Well I think we've talked all along that we would see some synergies and some leveraging and our goal was to probably improve our net income before taxes margin by a couple of hundred basis points. I still feel that that's something that is doable. Looking at our peers, I think it's conceivable that we could see 12%, maybe even 13% net before taxes on a gross revenue standpoint, which would be a 200 to 300 basis points improvement in the margins we've been experiencing historically. So we will see some good leverage in that regard.

Okay, and just the last question from me. Can you talk a little bit more about your pipeline of new research drugs? You sound like you're a little bit more optimistic about that business? And then, you mentioned about 15 new beds for Phase I trials, just talk a little bit more about the pipeline and the expectations for that business.

Well, as I said all along, the problem with the clinical research business is that it's lumpy, and I think everyone in that industry would say the same. What we've done is, because of the pharmco's request, we opened up a new inpatient overnight stay as one unit. That's the highest end of the study site, the highest revenue per day and the highest potential margin.

We just completed the construction about three weeks ago and we have four or five phase Is that are sort of in the hopper right now. The Phase Is, if you recall last year, are our large Phase I resulted in well in excess of $1 million in revenue and really made our year. So with this 15-bed unit, it's going to give us the potential to run two or three of those at the same time, and we believe provide some revenue stability and profitability stability for that business.

So the study flow -- our focus really is on the Phase Is right now. I mean the Phase II through IVs are the bread and butter business, but if we can -- our goal is to have one good Phase I going every quarter. And if we can accomplish that, we'll see significant growth, and return back to sort of record profitability that we experienced nine months ago.

Okay, that's helpful. Thank you.

Thanks, Rob. Thanks for your support.

Sure.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Dan Rambert of Camden Partners. Please proceed.

Hi, Bruce.

Dan, how are you today?

I'm peachy. I apologize 9James] out of the office and couldn't jump on the call. I just wanted to clarify. The BHO contract startup costs you guys said was about $100,00?

At least $100,000 in additional staffing, training costs, all pretty much in the first quarter, I mean, it's behind us now.

Okay, and that's what I'm going for is just the kind of one-time fees. And the AMEX you said was $65,000?

That's correct and that was a one-time, a listing fee.

Okay. You guys also mentioned software expenses that couldn't be capitalized. Do you have a number on that?

I don't have the number. Paula, what would you estimate it for the quarter?

I would say for the quarter probably about $25,000, because it's actually gone down this quarter. We've been doing more of our training remotely than in person.

Okay.

There's a couple of hundred thousand dollars in pretty much one-time expenses in this quarter, which is a significant number for a small company.

Yes, and it's helpful when you guys break it out. I guess the other thing then is, one-time expenses from Vegas that weren't capitalized, and then were all the costs for the 15 new beds at Pivotal, were those all capitalized or were there some expenses run through on that as well?

The build-out costs were built into the (inaudible). There were some pre-opening staffing costs that were expensed costs. We hired a director of the Phase I unit who was online prior to the unit generating any revenues, so there is some there. But rather than sort of listing -- there's always going to be something. We're in a very fluid, growing company. It's not going to be to the significance that we've experienced in this current quarter but I think, in all fairness, there will always be something.

Okay. And I actually just wanted to follow up on the collection efforts that have been kind of ongoing since you guys have had to install the software.

Well I think it's what we reported the outstanding is under control. The bad debt percentage as a percentage of net revenue was lower this quarter. So I think we're fine. We're operating at or above our peer levels in terms of bad debt percentages, and there's not any bells and whistles on our end of it going on. We just need to just continue it and hope that sort of our next opportunity to improve it will be once we go live with our Meditech software in the fall.

Okay, fair enough. That's all I have. Keep up the good work, guys.

Thanks, so much.

(OPERATOR INSTRUCTIONS)

And there are no further questions in queue at this time and I would like to turn the call back over to Mr. Bruce Shear, CEO. Please proceed, sir.

Thank you all for joining us. As I said, we're just feeling like the plan is really coming together, and we're just excited about the execution stage of it now. We have a lot of work to do, but we have so much business ready to move in our direction that it's just very, very exciting. So I thank you all for your support. Again, I believe that I talked with just about everybody that was on this call today and we're always available. Thanks so much for your time and thanks for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.