Acadia Healthcare Company Inc (ACHC) 2008 Q2 法說會逐字稿

Good afternoon. My name is Mary and thank you for joining us today for PHC's second-quarter fiscal 2008 conference call. Joining us today is Bruce Shear, PHC's President and Chief Executive Officer and Paula Wurts, Company Chief Financial Officer.

Following their comments, we will open up the call for your questions. I would like to remind everyone that this call will be available for replay through March 14, 2008 starting this evening at 7:30 PM Eastern time.

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

Thank you, Mary, and good afternoon, everyone. Thank you for joining us today to discuss PHC's results for the second quarter 2008. We are glad to have this opportunity to address you.

I would like to begin this call with a summary of the recent quarter and 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. Finally, we will open the call for questions and answers.

Today, as you saw at the market close, we issued a press release announcing record results for the second quarter fiscal 2008, that ended December 31. In opening, I must say your management team is very pleased with these results. Now I would like to talk briefly about some of them.

For the second quarter, we saw total net revenue increase 28% over the same quarter last year to $12.7 million. For revenue, this was the best second quarter in our Company's history and it follows last quarter's similar record results. This top-line growth provided net income of $482,000 or $0.02 per basic and fully diluted share. This was an increase of 85% over last year's second quarter and a doubling of the rounded earnings per share. These results were driven by another period of strong growth in our patient care segment. Like the first quarter's doubling of net income over the prior year, the doubling in this period shows the beginning return of our investment in our Las Vegas market expansion. Also, historically, our second quarters have been the seasonally weakest in each fiscal year, so we are especially proud that we nearly doubled our net income despite the preoperational expenses of our new Seven Hills facility.

These results also helped our balance sheet, which continued to strengthen in the second quarter. We reduced our total liabilities by about $300,000 from Q1 2008 for the reduction in our long-term debt. Simultaneously, during the last quarter, we added nearly $1 million in cash, bringing our cash equivalents to $3.7 million by the end of the quarter. We expect substantial growth in both revenue and income to continue, especially as this new Seven Hills facility comes online later this year. We realize the fruition of some of our wellness programs -- we expect to realize that also. Sorry. We also expect to see the benefit of the expanded agreement for services with one of our major railroad customers that we signed during the last quarter.

Adding to a strengthening balance sheet to these positive developments, it's plain to see that Pioneer enjoys a very strong foundation as we seek new opportunities for growth and expansion in the second half of fiscal 2008 and beyond.

Now I would like to invite Paula to drill down on the call quarter's numbers. We will then open the call to your questions. Paula?

Thank you, Bruce. Good afternoon, everyone, and thanks again for joining us today.

As Bruce mentioned, we enjoyed a record second quarter for both revenue and net income. Let's go over some of the details. For the three months ended December 31, 2007, total revenues from operations increased 28% to $12.7 million as compared to $10 million in the same period a year ago. The increase is primarily attributable to an increase in the net revenue of our Company's patient care segment, which was up 27% to $10.1 million from $7.9 million last year. This growth reflected a 5.9% increase in patient days as compared to the same period a year ago. Pharmaceutical studies segment revenue was up 63% from last year at $1.4 million as compared to $874,000 a year ago. Contract support services revenue provided by PHC's Wellplace subsidiary remained relatively stable at $1.1 million.

Income from operations for the quarter totaled $833,000, an increase of 38% from $605,000 reported a year ago. Net income before taxes increased 86% to a record $787,000 from $423,000 a year ago.

Net income was $482,000 or $0.02 per fully diluted share, which is based on 20.5 million fully diluted shares. This represents an increase of 85% compared to net income of $261,000 or $0.01 per fully diluted share based on 19.4 million shares.

Total operating expenses for the quarter increased 27% to $11.9 million from $9.3 million last year. Included in this increase were some expenses related to the completion of the construction of the new Seven Hills Behavioral Institute and costs related to the major contract signed the beginning of -- signed in last fiscal year.

The Company's provision for doubtful accounts remained relatively stable at $342,000 in the quarter as compared to $347,000 a year ago. The percentage of bad debt expense to net patient care revenue for the quarter was 3.4%, which was a reduction from 4.4% in the same quarter a year ago.

Patient care operating expenses increased 24% as compared to the same period a year ago, reflecting the costs related to the large contract we signed in January of last year and some hospital-related expenses for Seven Hills. Pharmaceutical patient care expenses increased 94% and contract support expenses increased 20%. The Company's cash and cash equivalents totaled $3.7 million at December 31, 2007, which increased $948,000 from $2.8 million at the end of the previous quarter and increased approximately $300,000 from $3.4 million at the end of the previous fiscal year.

Total net receivables from patient care at December 31, 2007 were $6.2 million, which decreased 5.8% from $6.6 million at the previous year end.

The balance sheet current ratio was 2.2 to 1 at December 31, 2007. Stockholders' equity increased 6.4% to a record $19.4 million at December 31, 2007 from $18.2 million at the end of the previous year.

Our balance sheet continues to strengthen with total liabilities reduced by $1.8 million versus the previous year end. This was primarily due to a reduction in the revolving credit -- revolving debt.

This completes our financial presentation. I look forward to reporting back to you at the end of the third quarter with our continued progress. I will now turn the call back to Bruce.

Thanks, Paula. I'd like to just briefly summarize some of the pertinent points before we open it up to questions.

We continue to pursue synergistic acquisitions, and I hope to be able to report an agreement by the end of the fiscal year. As I mentioned in the last call, we have begun to look at potential deals, and we have a number that we're looking at right now.

Our opportunities for enhanced business on the government contracting in the behavioral parts of our business continue to move forward. I also mentioned on the last call that we're looking at expansion of some of our government-related contracts. And I think we are also -- I'm pleased to report that we're making very good progress on that front.

The positive reimbursement climate for our behavioral health services continues.

Our focus is clear. Our Las Vegas hospital will be a reality very soon. As a matter of fact, they are doing finish work on the interior now. Painting is ongoing. And we are coming very, very close to that opportunity and that date that we've been looking forward to.

We will continue to deliver consistent top and bottom-line growth. We do appreciate your support. And at this time, I would like to open up the call to questions that you may have. And as always, I welcome anyone that calls us directly. We enjoy the conversations.

So operator, if you'll give the instructions for asking questions, we can open up the floor.

(OPERATOR INSTRUCTIONS). Jim Kennedy, Marathon Capital Management.

Congratulations on what is I guess your traditionally weakest quarter; you guys did a great job! So glad to see the cash, glad to see the earnings, etc.

A couple of questions, Bruce. One or two sort of housekeeping. When you talk about the expense related to Seven Hills, where does that show up on the expense line? Is that lumped in administrative?

Yes, it is, Jim.

Okay. And is that primarily just a lot of administrative staff, people paying attention to the projects, spending time out there, travel, etc.?

Payroll, travel, direct expenses related to that. We are all now sort of accelerated our visits. We're going out there every couple of weeks and we do have a CEO, a COO onboard. We have an HR director onboard now. And we have a director of finance onboard, all on the payroll now.

Got you, okay. And do you break that out or we should just kind of know that that's absorbed into overhead starting next fiscal year?

It's absorbed into overhead. It's really hard to quantify because the number changes so often, as we bring someone on and the expenses come through. I guess the good point I think that's really worth noting is that this was and is seasonally our weakest quarter. Last year, we didn't have any really startup expenses to speak of for Seven Hills. So even with the ongoing new payroll and ongoing expenses, in our weakest quarter, we still had a great second quarter.

Yes. Very good. Also, your equity interest out there, is that reflected yet on your property and equipment on the balance sheet? Or are you waiting until the facility is done or how are you accounting for that at this point?

It's actually being accounted for as an investment in a nonconsolidated subsidiary.

Okay. So that's not showing up here yet?

No.

Okay. Do you have any idea what the approximate value of the building structure, etc., is going to be upon completion?

Well, in terms of book value and real value -- book value, we've made an investment in the FF&E and an investment in the partnership approaching $3 million.

Okay.

And we paid that in cash.

Okay. And will that remain on a nonconsolidated subsidiary sheet, balance sheet, or will we see that on our balance sheet at some later date?

Well, right now, the construction in progress is showing in our fixed assets.

Okay.

That part that we've invested in that. It's still -- the decision -- final decision hasn't been made, but because the rules are changing, even as we speak about consolidating organizations that you are not a primary owner or -- and consolidating -- the full consolidation of it isn't decided yet. I expect that it will have to be consolidated.

Okay. And then Bruce, I just wanted to switch gears, switch over to the qualitative side for a moment. Coming off of your traditionally weakest quarter, you are heading into what I would assume to be stronger quarter, certainly than your second fiscal quarter is, which obviously, is setting you up for kind of a record year in terms of pre-tax and taxable income. Can you speak at all to any visibility over the next couple of quarters? And then you've alluded to the fact that when Seven Hills comes on and we are ready to go in the new fiscal year, it sounds like there's more than just Seven Hills coming on that could lead us into an even better fiscal '09. Are you able to address things that are in addition to Seven Hills that we should look forward to in fiscal '09?

Well, I think regarding Seven Hills, I think it's important to say that we really have a double synergistic effect here. We have a new business that's going to generate north of 10 to $12 million in new-top line revenue. And at the same time, as we open that facility and be able to sort of control our own destiny on our patients, we will have a win on the Harmony side. So we've yet to really see the full impact of the positive outcome of that large contract we signed a little over a year ago because all we're getting is that revenue, and we're still having to buy beds and not being able to totally manage those days.

So once we roll into our hospital, which is, we are anticipating still in April, we will have both the positive impact on the Harmony subsidiary and the new revenue and new profitability from a hospital that we've said all along would have a higher margin than the rest of our Company.

To answer your second question, we are looking at opportunities right now. And as I mentioned, we've been in this business a long time and I think it's safe to say that every opportunity that is around gets presented to us. Our sweet spot is a business in the 4 to $10 million revenue range. And we are looking at a couple of them right now. And all in the behavioral health space, very, very focused.

In addition to that, we're making some good progress, as I mentioned on the previous call, to get some more traction on the government contracting side. Our hope is to expand our horizon there and be able to take sort of Department of Defense-related kinds of businesses to the next level. And we are getting some real strong interest in that regard.

So I'm feeling very, very confident that within the next six months, the end of this fiscal year, beginning of next fiscal year, we will have some new exciting sort of top-line growth opportunities that we will follow on over and above the Seven Hills and over and above the new facility that we are still trying to finalize a location on in Detroit. So there's plenty of top-line growth coming and there's still plenty of opportunities that are out there and that should fuel our growth well into fiscal '09 and beyond.

Great. Okay. Thanks a lot. Congratulations again.

Darren Lehrich, Deutsche Bank.

Pito Chickering in for Darren Lehrich. Two quick questions for you. What was the same-store facility based revenue growth this quarter?

Paula, do you have that in front of you or --?

I don't have it right in front of me.

Okay. I'll call back afterwards.

We do -- we did report that our patient [is] was up approximately 6%. So that's almost same-store in terms of the inpatient side.

Okay. And is there any update with regard to the Detroit replacement hospital?

The update is that we have still two offers that we're negotiating on, and a lot of folks think that with the market in Detroit we would be able to land something. And I think we're probably within 60 days of an announcement of a final new site, where we would move the facility to. That might push the timeframe a little bit beyond the January 1, 2009 start date. But again, as I said before, it's really important to us that when we make the move it's the right move, and it's a move that sort of meets all of our needs long term.

As I've mentioned in the past, we have a number of other opportunities at that site over and above just adding the 50 inpatient beds. And we have a huge waiting list for our beds right now, but we are looking at partial programs. We're looking at other kinds of outpatient programs. So I think it's really important that when we make this move, that we have enough space to really expand all of our programs really beyond what we initially thought of, which was just an inpatient bed facility.

Okay great. And then actually one more follow-up. On the Seven Hills, I guess we thought it was going to open in April. Now we're sort of talking sort of fourth quarter. Is that something that we were just mistaken on or did it slide -- was it pushed back at all or was that just my mistake from a modeling (multiple speakers)?

No, we are still -- April is the beginning of our fourth (multiple speakers). And so we are -- as I've said before, our delays now are measured in days. The building is virtually complete on the outside, finish work is ongoing. And we're making offers to staff and we're very, very close here.

Okay, perfect. Thanks a lot.

Ali Motamed, Boston Partners.

(technical difficulty) revenues there. I had a couple quick questions, mostly related to margins. First of all, I was wondering when Seven Hills comes on, how much -- do you have any idea what kind of marginal contribution you're going to get from it relative to the cost you carry now?

We've talked pretty much about some of our goals in terms of revenue and margins north of 10% pretax. We think our hospital will be greater than that because of the rate structure there. So we think it will overall improve our overall margins.

So do you think that with that, you should be quite easily able to get your core business, the whole thing, up to 10% and beyond?

Yes, we do.

Okay.

Absolutely.

And then the revenues are going to be about $12 million, you said. How much of that is going to be in a net increase? Because I think you control some of the patient days already, so I'm wondering do you recognize that as revenue?

Well, we get the inpatient cap rate. We expense the cost of expense when we buy the beds elsewhere. So the increment of margin from that will be the profit margin on the inpatient days. I think 70+% of that may be -- our goal is actually a higher number. It could be 80+% of that revenue should be new revenue.

Should be new revenue totally. So at the very least, we'll get about a $10 million kick to revenue?

I hope it will be pretty close to that. Yes.

Okay. And then looking at the pharma side of the business, the pharma studies, it doesn't seem like you guys are getting as much traction into being profitable. I mean if I just add the two expense line items there, it seems to be kind of holding you back consistently. Obviously, you're doing better now than you were last year. Can you maybe elaborate a little bit on your view there? Because you have a core business that is growing very nicely and very profitable, and pharma seems to dampen the profitability and the consistency.

As we said before, this is a lumpy business at best. We did have a pretty good quarter ended December 31st, so we had a nice increase in top line and actually not a bad September quarter. We have a number of studies in the pipeline now that we will be starting on the Phase I slide that we've talked about. But having said all that and we said sort of in the past, we are looking at strategic alternatives here, and whether pivotal or rather the pharma is really the best part of our core business.

The business has strong value. The business is back on the growth track. So one way or the other, it's either going to contribute a higher margin to the Company or it will result in something that will be more valuable for the Company, should the Board decide to move in a different direction.

Well, even now it doesn't really -- even though it's improved, it doesn't really contribute much margin at all, does it?

Not much of a margin right now, but we are -- what we have here and we've opened a very large Phase I unit; and our first large Phase I study will be starting within the next 60 days. So I do anticipate that as we roll in sort of late towards the fourth quarter, that we're going to see an improved margin. And I think from a standpoint of value on this Company, the Phase I does have strong value.

And then my last one is mostly a comment, but the business is inconsistent, even when it's doing well. So I would encourage you to consider that when you think about whether or not to keep it because it's not just an issue of profitability. It's an issue of making your business unpredictable to investors and that takes away from the multiple a good bit.

Comment accepted, and we're not in disagreement with you.

Thank you, sir.

(OPERATOR INSTRUCTIONS). Jeff Moore, Ares Management.

Congratulations on a wonderful quarter. Had just a couple of questions. And I think one of them you might have addressed or tried to address in the past. Just wanted to take another crack at it.

In looking at your P&L for the quarter, your admin expenses are up about $900,000 from 2.9 million to about $3.8 million. You there?

Yes.

Any way to give a rough approximation, rounding to the nearest $100,000, about how much of that incremental G&A was Seven Hills specific?

Probably a couple hundred grand.

Okay.

And I'm not going to -- I can't give you a firm number, but I think it's give or take that number.

And then if that's the case, help me to understand the balance of the increase in G&A was largely a function of what, Bruce?

Well, we brought on our whole brand-new billing and collection and scheduling software, fully implemented with MEDITECH. This is a brand-new Company-wide system that was significant and is now online at all but one of our facilities. So that is an ongoing increase in admin expense that will not go away, that will just be spread out as the Company continues to grow.

Fair enough.

The Company did grow. Remember, revenue was up 28% and it does not come without a cost.

Sure.

Auditing fees do go up. And as much as we think we are cheapskates, expenses do come up.

Fair enough. Help me to understand -- you talk a little bit about it in the press release. Obviously as it pertains to the patient care side, you had a $2.2 million increase in revenues. Some of that was a function of the 6% improvement in patient days. But if we were to try to take the $2.2 million and break it down between patient day growth, pricing, improvement and then new business, if you would, can you give me some perspective on each of those relative to the $2.2 million of additional revenues?

The majority of it was in new business related to the contract that Harmony signed last year.

Okay.

We have had -- whenever we have an opportunity to renegotiate a rate, we are. I can say with 100%, that whenever we get a new rate, it gets higher.

Okay.

And so and we do expect that that will continue.

And is that sort of mid single-digits context, Bruce, in terms of pricing improvement?

I would say that's a fair number.

A 3 to 5, 4 to 6 kind of ZIP code?

Yes.

Okay. Very good. One, as it pertains to some of the things that might be in your M&A pipeline, should one assume that those would be in or around your current geographies? Would you be planting a flag in a new market? Any color there might be helpful.

Both. We've said all along that we feel that our biggest growth potential is in Nevada, Utah and Michigan. And we feel the same way still. And our -- when it comes to a government-related contract, they are really national in scope, but they are through our Wellplace division. And so I would say of the deals we're looking at, half are in those geographical areas and the other half are in areas that we feel are attractive to us both from lack of competition and good reimbursement.

Fair enough. And then the last question, you were kind enough to give us some insight as it pertains to Seven Hills and the incremental contribution. So if you are going to get approximately 80% of the revenue stream there being new, we're talking about an incremental amount of revenues that maybe is somewhere in the 9 to $10 million range once we are fully ramped. I know that's not going to happen in one quarter.

Is it fair to assume -- if you look across sort of a broad cross-section of well-managed inpatient facilities, I think these things generally run in terms of facility level EBITDA margin, that's into the low mid 20 context. So without tying you up too much, but for some modeling purposes, is your thinking such that when you have Seven Hills fully ramped up, that away from the extra 9 or $10 million of top line that you might get, that your incremental EBITDA contribution will, in fact, be something in the around $2 million context? Am I thinking about that right?

You certainly are.

Okay. Then you know what, one quick follow-up on that. Based upon your business in Las Vegas, sort of your readiness for the launch, your sense of how many months and/or quarters before you are essentially at capacity at that facility; Bruce can you update us on that?

We think it's going to be very quickly. We think it's going to be within a quarter.

Okay, very good. Congratulations again, Bruce. Always a pleasure.

Rob Damron, 21st Century Equity.

Most of my questions were answered, but just a couple. Maybe you could give us a little update on what you are seeing from the health care parity legislation and how that's moving through Congress.

Well, I get weekly updates from our association and they're all continuing to say the same thing, is that it's imminent. But we've been hearing that for a year. The landscape hasn't changed. Bush says that when both parts of Congress come to agreement, he will sign it tout de suite. As you know, there's a Senate bill that passed and there's a bill passed in the House. The House bill is a little bit different than the Senate bill. The last update that I read last week said they're caucusing on this with the hopes to try to get something out of it. So that, I think, is a little bit of progress as opposed to them both thinking their bill was the best bill and there's nothing in between.

So I'm still -- I thought it would have been a done deal by now, quite honestly. But it's not, and it could happen in weeks or it could happen in months. And I wish I could provide more color on that than I can.

Okay. That is helpful. But one other question. You mentioned in the press release an expanded agreement with a major railroad customer. Can you just talk a little bit about what that means?

Yes, one of our clients, Canadian Pacific, significantly expanded their -- they had a small contract with us, and so they have expanded that, where we're taking on a little bit more employee assistance responsibility.

We think it has further growth potential. I think the most important thing is that it was an expansion of a small contract that was in place for many years and it was insignificant revenue. It's still small revenue, but it's growing and we think that it has the potential to grow even more. So that's the new customer.

Okay, that's all I have. Thank you.

Thanks so much, Rob. Operator, I don't believe we have any other questions?

There are no further questions.

Okay. Well thank you all for joining us. As again, we're very pleased with our results for the quarter, and we are excited about what the second half of the fiscal year is going to bring with the opening of Seven Hills.

And operator, I'll turn it back over to you for closing statements and our full disclosure language.

Thank you. And ladies and gentlemen, that will conclude today's teleconference. And before we close, 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 the Safe Harbor provisions of the Private Securities Litigation Reform Act of 95. These forward-looking statements include, among other things, statements regarding future events and future financial performance of PHC that involves 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 to differ from those 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.