Acadia Healthcare Company Inc (ACHC) 2007 Q4 法說會逐字稿

Good afternoon. My name is Henry, and thank you for joining us today for the PHC's Fourth Quarter and Fiscal 2007 Year-end Conference Call. Joining us today is Bruce Shear, PHC's President and CEO, and Paula Wurts, the Company's CFO. Following their comments we will open up the call for your questions. I'd like to remind everyone that this call will be available for replay [for] October 25, 2007 starting this evening at 7:30 p.m. Eastern time.

I would now like to turn the call over to the President and CEO of PHC, Mr. Bruce Shear.

Henry, thank you very much, and good afternoon, everyone. Thank you all for joining us today to discuss PHC's results for the fourth quarter and fiscal year 2007. We're very happy to have this opportunity to address you. I'd like to begin this call with a brief overview of the recent quarter in the year, and then discuss some of our significant achievements and important events since our last call.

Then our CFO, Paula Wurts, will walk you through a detailed review of our financial results for the quarter and the year. And finally, we'll open it up -- open the call up, for questions and answers. Today, as you saw, at the market's close, we issued a press release announcing the results for the fourth quarter and fiscal year 2007. Hopefully you've all had an opportunity to quickly look at the press release.

In opening, I must say our management team is very pleased with these results. Now, let's talk about some of the right now. Starting with the fourth quarter, we saw total net revenue increase 23% over last year, to a record $12.8 million. This exceeded our expectations. The increase is primarily due to the tremendous performance of our core patient care segment, which was up 38% to $10.1 million in the quarter.

This top-line growth resulted in a 32% increase in income from operations for the quarter, which totaled $1.2 million. Net income for the fourth quarter came in at $822,000 or $0.04 per fully diluted share, which on a comparative basis was off 65% from last year's fourth quarter, due to the last year's tax loss carry forward recapture.

However, the year ago quarter included the effect of this one-time tax gain of over $1.6 million in fiscal 2006. And also when calculated before taxes, our net income increased 68%, to a record $1.4 million from $848,000 in fiscal 2006. Net income for the fourth fiscal quarter represented an increase of 160% over the previous or third fiscal quarter, in which we reported net income of $316,000, or $0.02 per fully diluted share.

Now turning to the results for the full fiscal 2007, we realized total net revenue of $45.1 million, 19% over 2006 and represented our fifth consecutive year of record revenue. The increase is largely due to a 29% increase in net patient care revenues, which increased to $36 million last fiscal year.

Income from operations for the fiscal year was $3 million, which represented a 5% decrease over fiscal 2006. But net income totaled $1.7 million, or $0.09 per basic and fully diluted share, which was a decrease of 58% for the prior year. However, it's important to note that this decrease is primarily due to the result of a $1.1 million provision for tax expense we quoted in fiscal 2007, as compared to a $1.3 million in income tax benefit recorded in fiscal 2006.

So before taxes, we actually realized an increase in income of 3%, to a record $2.8 million, a remarkable outcome considering the significant ramp-up expenses in our significant new contracts. Overall, fiscal 2007 proved to be a milestone year for Pioneer, as we achieved a number of major wins across our organization.

Our Harmony Healthcare subsidiary signed a ten-year, $80 million contract with a major healthcare provider. This was the largest in company history, and it's expected to increase Harmony's annual revenue by 160%. In fiscal 2007, we began construction of our Seven Hills Behavioral Institute, near Las Vegas, Nevada, which is on track to open in early 2008. Seven Hills is projected to contribute annualized revenue of approximately $12 million, with higher margins expected -- than the Company's other inpatient facilities.

We also reduced our cost of capital by successfully renegotiating the Company's line of credit, increasing it to $6.5 million at a lower, more conventional bank interest rate. This accomplishment in fiscal 2007 was reflected in another year of record revenues and record pre-tax quarterly profit, as well as record shareholders equity.

In addition to the year's great financial performance last February, we proudly rang the bell at the American Stock Exchange, making us a fully listed company on one of the world's greatest exchanges. With this great year behind us, our first quarter of 2008 is continuing the trend. Our pipeline for new business and outlook for internal expansion has never been stronger, setting the stage for another record year in fiscal 2008.

Looking forward to the first half of 2008, we are reiterating our expectations of 20% to 25% revenue growth and more rapid expansion in fiscal 2008, supported entirely by economic growth. Organic growth, I should say. Our profitability is strong, and I believe this trend will continue as well.

Now, I would like to invite Paula to drill down on some of the quarterly and fiscal year numbers, then she'll come back to me, and then we'll open it up to questions. Paula?

Thank you, Bruce. Good afternoon, everyone, and thanks again for joining us today. Let's turn to our financial results for the fourth fiscal quarter and year-end 2007. For the three months ended June 30, 2007, total net revenue from operations increased 23%, to a record $12.8 million, as compared to $10.4 million a year ago.

As Bruce mentioned, the increase is primarily attributed to the increase in net revenue of the Company's patient care segment, which was up 38% to $10.2 million, from $7.4 million last year. This was offset, however, by a 22% decrease in revenue from the pharmaceutical study segment, which totaled $1.5 million, as compared to $1.9 million last year.

Contract support service revenue provided by PHC's Wellplace subsidiary was essentially unchanged from last year, at $1.1 million. Income from operations for the quarter totaled $1.2 million, an increase of 32% from $921,000 reported a year ago. Net income was $822,000, or $0.04 per fully diluted share, based on 20.5 million fully diluted shares.

A decrease of 65% compared to net income of $2.4 million, or $0.12 per fully diluted shared, based on 19.2 million shares last year. Total operating expenses for the quarter increased 23%, to $11.6 million, from $9.5 million last year. Included in this increase were expenses related to the ramping up of new programs and services associated with our new contracts and Seven Hills Behavioral Institute.

The Company's provision for doubtful accounts increased to $706,700 from $445,000 a year ago. The percentage of bad debt expense to net patient care revenue for the quarter was 6.9% as compared to 5.3% for the year. Patient care operating expenses increased 39%, as compared to the same year ago period, reflecting the ramp-up of expenses on the new major contracts and the Meditech software implementation.

Pharmaceutical patient care expenses increased 9% and contract support expenses increased approximately 3%. The increase in patient care expenses reflects the Company's investments in it's Las Vegas market initiatives, including the Seven Hills project and the Company's ten-year, $80 million agreement with Health Plan of Nevada's Behavioral Health Options network, announced in December.

Now turning to the full year fiscal 2007 financial results. For the 12 months ended June 30, 2007, total net revenue was up to $45.1 million, which represents at an increase of 19% from $38 million in the previous year. The increase is largely attributable to the 29% increase in net patient care revenues, which increased to $36 million, from $27.9 million in fiscal 2006.

The improvement in net patient care revenue is attributable to the new capitated contract and high usage of step-down programs by managed care as a treatment alternative to inpatient care. This was offset by a 21% year-over-year decrease in the pharmaceutical study revenues, which totaled $4.6 million, versus a $5.8 million in fiscal 2006.

This decrease is largely due to the delay and the start of some significant studies, and an unusually large study that occurred in the last half of fiscal 2006. Contract support services revenue increased 4%, from $4.4 million to $4.5 million year-over-year, primarily due to routine increases in contract rates.

Total operating expenses were $42.1 million, an increase of 21%, from $34.8 million in fiscal 2006. The increase is primarily due to a 38% increase in patient care expenses, resulting from the increased patient census and utilization of patient services. The provision for bad debt remained approximately the same as the previous year, at $1.9 million and administrative expenses increased 13% to $12.7 million.

Income from operations for the fiscal year was $3 million, a 5% decrease from $3.2 million in fiscal 2006. Net income was $1.7 million, or $0.09 pre basic and fully diluted share, based on 19.7 million fully diluted shares, a decrease of 58% from $4.1 million or $0.22 per basic and $0.21 per fully diluted share, based on 19.1 million fully diluted shares in the prior year.

As Bruce mentioned, the decrease is primarily the result of a $1.1 million tax provision recorded in fiscal 2007, as compared to a $1.3 million net income tax benefit recorded in fiscal 2006. Income before taxes increased 3.8% to $2.8 million, from $2.7 million in fiscal 2006.

This increase is primarily due to the two new contracts added during the year that are projected to increase gross revenues by $10 million annually, and increased patient census. This increase is significant since it includes ramp-up costs of these contracts of approximately $100,000 and uncapitalized costs of the Meditech software implementation in progress and the construction in progress of the Seven Hills Behavioral Institute.

The Company's cash and cash equivalents total $3.4 million at June 30, 2007, which increased from $1.8 million at the end of the previous fiscal year. Total net receivables from patient care at 2007 fiscal year end was $6.6 million, which decreased 6% from $7 million at the previous year end. Provision for doubtful accounts increased 1.1%, to $1.93 million for the fiscal year, versus $1.91 million for the fiscal year 2006.

This marginal increase is the result of increased revenue and changes in accounts receivable aging, as the policy of the Company is to provide an allowance for doubtful accounts based on the age of receivables resulting in higher bad debt expense or as receivables age.

The balance sheet current ratio was 2 to1 at June 30, 2007. Stockholders' equity increased 36%, to a record $18.3 million at June 30, 2007 from $13.4 million at the end of the previous year. This completes our financial presentation. I hope you found this information helpful. I look forward to reporting back to you at the end of the first quarter with our continued progress.

I will now turn the call back to Bruce. Bruce?

I'd like to just add a couple of closing comments before we open it up to the floor for questions. On the legislative front, I wanted to mention that we're very pleased to report that the Parity Act, S. 558 passed the Senate by unanimous voice vote, making it one step closer to signature by the President. We're hopeful that the House will act on it very quickly and we'll have a national Parity Act on the books very soon.

This is really the culmination of many years' efforts on the part of our associations and our peers, and we're really, really excited to see that this is coming to fruition and sort of recognizing the legitimacy of what we do. We're also please that Deutsche Bank has initiated coverage on Pioneer. This further enhances the strength and the importance of our industry to the public markets.

The fourth quarter results showed that our operational plans are working. We are experiencing strong revenue growth that will be accelerating. We have many new business opportunities on our plate, and we are exploring strategic acquisitions. We look forward to reporting our successes as the new fiscal year progresses.

Again, the fourth quarter was just a great quarter for us. We're ecstatic about both the revenue growth, the record profitability, and we're just looking forward to continuing to report improvingly better results. At this point, what I'd like to do is open the floor for questions. And I see we have a couple in the cue, operator, if you'll get started on that.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And our first question is coming from Darren Lehrich of Deutsche Bank. Please go ahead.

Good afternoon, everyone, how are you?

Hi, Darren. Thanks for calling in.

Hi, Darren.

Good, good. So we just had a couple questions. Sundeep's on the line as well. I guess I wanted to start with Detroit, and could you update us please on the timing of beds and whether you have cited -- if you need to cite a new location for those beds to come on line.

I've been to Detroit a couple of times. We're actually looking for a larger location and we have two locations earmarked that are within our reach, and both of them would result in the ability to significantly expand our bed count there, and also to add some of the other educational, school, and partial programs.

They would involve some construction and renovations, but I think even though it would take us a little bit longer to get it done, long term we'll be in a much better position with our own facility in the Detroit market that has great growth potential.

So in terms of the timing -- I've said all along that this was the late calendar year '08 issue and just depending upon the extent of the renovations and the reconstruction, it's certainly not going to be earlier than that. But our view is that we're better off getting all of this lined up for what we need to be and where we need to be -- two and three years down the road, and have it ready so we'll never have to move again and we'll have our own facility.

Okay, good, good. That's consistent with our thinking there. And then, Bruce -- you said you're evaluating strategic acquisitions. Can you just update us with regard to what you're seeing and what kinds of opportunities we ought to expect from you over the next year to two years on that front?

Well Darren, I think up until the most recent three months or so, we've said that we had no interest in an acquisition. I think really the deal flow has improved. I actually have an acquisition specialist working with me now that I'm giving deal flow to and doing initial due diligence.

We're looking at businesses that are consistent with our Harmony Healthcare managed care business, and we're also looking at some inpatient opportunities. There's some -- the market, with the Parity Act passing and really everything going on our industry, there's really no reimbursement risk that we see at this point.

So we're cheap, so when it comes to making an acquisition, it has to be on our terms, which -- I don't want to go down a road in sort of in a fruitless effort. But we're beginning to identify stuff. I don't see that something's going to drop out of the trees that we'll be making a major announcement in the next month or two, but it wouldn't surprise me if we can land something in this fiscal year that would be reportable and significantly improve our market position and our bottom line.

Okay, that's great. And then just on Meditech briefly, just how many facilities now are you up and running, and can you just talk about how that's going?

The balance of the facilities will be up and running October the 1st. So as of two weeks from now, all facilities will be up and running.

Okay, so you did Utah in July and then the rest in October? Is that right?

We did Utah in July because -- as a test, to make sure that everything was going to be flowing well. And we wanted to keep them online by themselves through a couple of month ends to get over any kind of glitches that came up with month end.

I'm happy to report they're doing extremely well, and we're getting ready for the October 1 conversion, which the four facilities are the three in Michigan and the one in Virginia. Then Nevada will come on after that, probably closer to the opening of Seven Hills, to do them together. Because you do them by time zones.

Sure, sure. Okay. Then, Paula, were there any prior period revenue adjustments or settlements in the period?

Not in this period, there were not.

Okay. And then just DSOs and pivotal, could you comment on where they ended up for the year?

Right off the top of my head, I don't have the number. But they didn't move significantly from where they were at quarter end.

Okay. And I think I'll stop. I think [Sundeep] had a couple more and then we'll pick up with you offline. Thanks for your answering all our questions.

Hi. Just a couple of quick housekeeping questions in the patient care business. Paula, do you have the average daily census for the quarter?

I do. Unfortunately, I don't have it with me right here. We were up on - - and I'm sorry I don't have that report with me. I will send that report off to you though.

Okay.

That's great. We'll get all the housekeeping items from there then Paula. Thanks so much.

Okay, sure.

Thanks a lot.

Thank you.

And we have another question, operator?

Yes.

(OPERATOR INSTRUCTIONS)

Our next question is coming from Rob Damron of 21st Century Equities. Please go ahead.

Hi Bruce.

Rob, how are you today?

I'm good. Congratulations. Real nice quarter.

Yes, it wasn't a nice - - it was a great quarter.

Wow. Good job. Listen, a couple questions regarding the incremental costs that you alluded to in this quarter regarding ramping new contracts and programs. Could you talk a little bit about what those costs are, how much they are, and I guess when do they start dropping off? And then ultimately, when do we start getting some operating leverage on that incremental revenue?

Well, I think firstly we're seeing the operating leverage on the incremental revenue for the new BHO contract in this April through June quarter. So yes, we're seeing that already. And the second part of your question, or I guess the first part of your question is that the majority of the sort of ramp-up expenses in that regard are behind us.

We still have some ongoing ramp-up expenses for the Meditech project that are not capitalizable, and we still do have some ongoing expenses for Seven Hills. For example, we have a full time Chief Executive Officer for the hospital that we thought we needed to bring on sooner rather than later to sort of make for the transition to be a little bit smoother.

So I think Meditech will be behind us by the end of the calendar year, and the hospital expenses will continue until the hospital opens. But we have seen the leverage, and I think that's partially to the fact that our numbers were so good in this fourth quarter. I think you're seeing some of the leverage from that new huge contract.

Okay, good. And then, maybe talk a little bit about the pharmaceutical study revenue. What's the expectation for that business over the next several quarters?

Well, any of you that have talked with me in the past, you'll be used to my comment that it's a lumpy business. And as evidenced by how great it was in the fourth quarter of '06 and how weak it was in the first quarter of '07. The good news is that the business is operating in the black again, and seemingly growing.

We're beginning to get more traction on our phase I, 15-bed unit that we opened four months ago. We have a new development person there that is helping us with business development. So I'm feeling, Mike, that we'll be moving better. It will always be a lumpy business but I think this year will be a growth year, as compared to fiscal '07.

Okay, and then just the last question. We're only a week from completing Q1 -- fiscal Q1. Would you care to give any guidance surrounding the current quarter?

Things are looking good, and that's about all the guidance I'll give you.

Okay. All right. Thank you.

Thanks a lot. Operator, do we have any other questions?

Yes, sir. Our next question is coming from Shane Kim, of Camden Partners. Please go ahead.

Hey, Bruce. Can you quantify the cost related to the Meditech and the sort of ongoing uncapitalized cost of Seven Hills in the quarter?

Paula, maybe you can help me with that. The Seven Hills cost uncapitalized might be -- .

Well, it basically it's travel and the like. The time spent for our employees that can't be capitalized of course, but their focus is on the Seven Hills operation. It's also -- this is why it's a hard number to quantify. We also, as Bruce said, put a CEO on staff for Seven Hills already.

And of course, that expense isn't producing any revenue, but it's still 100% expense. We have put the financial director for the Nevada operation in place, which is a level above a business office manager, so we have someone out there who's strong financial that can oversee the operations of both Seven Hills and Harmony.

So it's just that the start-up costs that are involved. We'll be putting on a - - we'll be also putting on an HR director because we have to get employees for the facility before it opens up. And I'm not real sure when she's scheduled to start.

The Meditech costs are things that -- there are things that are normal routine expenses, except you have to build -- you have new forms that operate on that system that don't -- your old forms don't work. So you have to do all that kind of stuff that really isn't programming or isn't part of the software, so you really can't capitalize it.

And we have our staff, our management team, focused on doing that and a lot of extra people have to be -- we're doing a lot of part time hires to cover areas that we're pulling our other people out of. . So it's moving along; it's just expenses that crop up. You just see that the payroll is just a little bit larger because you had to put temp help on and stuff like that, and do a little more overtime. So it's kind of, like I said, a hard number to quantify.

How about this? What was your administrative expense for the quarter?

Administration expense? And that is actually -- are you talking about in total?

Yes.

Okay. Our total administrative expenses for the quarter, and I have it right here. Administrative expense for the quarter was $3,328,000 as opposed to $3,016,000 in the same quarter of last year.

Okay. And so, at least as it relates to Meditech, there's going to be some level of expense that's going to continue even past the fourth quarter. Is that what you're trying to tell me?

Absolutely. I mean there's going to be an operating expense of the system. We're not going to have the training expense and some of the out-of-pocket expenses. And --, the expense that's the hardest to quantify is sort of, I call it the distraction expense, where we have all these folks sitting in Boston in training where they could be out making sure that we're posted on time and collecting --

Opportunity?

Yes. So I mean that's an expense that's really the hardest to quantify, so that part's going to be behind us.

But we will have additional expense, because until July 1st, when we began using the software, we weren't depreciating or amortizing the software or depreciating the equipment that was put in place for each one of the operations. Now some equipment, of course, is direct expense. Like printers. I mean we direct expense them, we don't capitalize them. I mean, that's the kind of thing that we end up direct expensing.

I just want to come back to the fact that there's always going to be these kind of expenses, but we did see sort of the leverage and -- by seeing a 60% improvement over the last quarter of '06, and there's always going to be something. It will be less certainly, but we're a fluid company and we're always looking for opportunities to be efficient and we may have software or staffing additions. But --

Just from an Investor's standpoint, it would be nice for you to be able to quantify for us, because we'll put different values based on the top earning cash flow from basically existing businesses, and we'll fully be cognizant of things that are either sort of short term in nature or -- as start up costs for new locations coming on line. They're two different things and it would just be helpful to quantify it.

No, no, no. I appreciate that. We'll try to do more of that for the current quarter, the September 30 quarter, and for the October-December quarter.

And how many beds are you at right now, today?

180.

180. Okay. Thank you.

All right. Thanks a lot, Shane. Do we have any other questions, operator?

Yes. Our next question is coming from [Robin Nipp] of Janney Montgomery . Please go ahead.

Thank you. Gentlemen -- I'm sorry, ladies and gentleman, nice job on growing the top line. I guess my only question, and Bruce, I've asked this question of you in the past and I guess it keeps nagging at me. The provision for doubtful accounts isn't going down; it is on a percentage basis, but not on a real basis. And at what point in time can we see that reversed?

Well, we said all along that after we had sort of the uptick of it a year and a half ago that it would stabilize. And I think what you're seeing is that it's stabilizing somewhere in the vicinity of 5% of net revenue. You know, maybe the Meditech system will be able to improve it a little bit, but we're very conservative on our bad debt expense.

And I think as a company that's just a decision we've made all along, so that we don't have to worry about ever catching up or making an adjustment. I think for projection purposes -- a percentage of revenue at or slightly below what we're seeing right now is the cost of doing business.

Okay. So then let me frame it a different way. The provision for doubtful accounts, at one point, $9 million. What percentage of that do you see being fully recoverable?

Well, the bad debt expense we anticipated an expense. I mean the allowance for bad debts, which is much greater than that, is a different situation. I mean, I believe that if we anticipate and estimate 5% bad debt expense, then I think that is going to be non-recoverable.

Okay. So then --

And it's booked right through the income statement.

Okay. So we should look at that as a constant, moving forward?

Yes, I'd love to cut it in half, but -- and like I said, maybe we can make some good progress with the Meditech billing and collection software, and if we can knock a percent off of that, I think would be a big win.

Sure. So do we. Thanks very much.

Okay. Do we have any other questions, operator?

At this time, this does conclude our question and answer session, sir.

Great. Thank you.

You're welcome. And I would now like to turn the call back over to Mr. Shear. Mr. Shear, please proceed.

Well, I'd like to thank you all for joining us this afternoon, and especially I want to thank you for your insightful questions. I hope you all continue to be interested in PHC as we continue to make progress, and I look forward to talking with you further in the future. Again, we think the fourth quarter just a very exciting quarter and certainly sends a message that we can operate this company very, very profitably, and that we can begin to see leverage coming from the growth in our businesses.

Before I conclude this call today, I'd like to take a moment and have Henry read our Safe Harbor Statement. And as always, I look forward to speaking with all of you individually and seeing you in person. It's going to be an exciting year, and thank you all for joining us.

Thank you. Before we conclude today's call, I would like to take a moment to read the company's Safe Harbor statement. The Company's remarks made during this call and answers to your questions may include forward-looking statements that are subject to Safe Harbor provisions of the Private Litigation Reform Act of 1995.

These forward-looking statements include, among other things, statements regarding future events and the future financial performance of PHC that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results.

Listeners are referred to the documents filed by PHC with the SEC. Specifically, the most recent reports on Form 10-K and 10-Q, each as it may be amended from time to time, which identify important risk factors that could cause actual results differ from these contained in the forward-looking statements. These forward-looking statements represent the Company's judgment as of the date of this conference call.

Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.