Acadia Healthcare Company Inc (ACHC) 2008 Q3 法說會逐字稿

Good afternoon. My name is Sarah. And thank you for joining us today for the PHC's third quarter fiscal 2008 conference call. Joining us today is Bruce Shear, PHC's President and Chief Executive Officer, and Paula Wurts, the Company's Chief Financial Officer. Following their comments, we will open up the call to your questions. I would like to remind everyone that this call will be available for replay through June 14, 2008, starting this afternoon at 1.00 PM eastern time.

Thank you. Before we begin 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 question 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 PHB 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, especially 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. 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 very much and good morning, everyone. Thank you for joining us today to discuss PHC's results for the third quarter 2008. We're glad to have this opportunity to address you. I'd like to begin this call with a brief overview of some of the financial highlights for the quarter, and discuss some of our significant achievements and important events since our last call. Then our Chief Financial Officer, Paula Wurts, will walk you through a detailed review of our financial results for the quarter. Finally, we'll open the call up for questions and answers.

This morning, we issued a press release announcing the results for the third quarter of fiscal 2008, which ended March 31st. In opening, I must say our management team is disappointed by the bottom line, but very encouraged by the core business' continued strength and its greater than that potential growth that these results will reflect. Now let's talk about some of them.

Starting with the third quarter, we saw total net revenue down approximately 2% over the same quarter last year, to $12.1 million. However, net patient care revenue did increase by 1.4% to $10.2 million in the same period. These third quarter results were primarily attributed to a decrease in net revenue of the Company's pharmaceutical studies segment, which was down 31% to $800,000 from the same period a year ago.

The cyclical nature of the pharmaceutical research business where the size and number of clinical trials starts and stops changes daily results in revenues and income that vary greatly from period to period. However, the recently announced Phase I study that began generating revenue in late April, which should have a positive impact in future revenue and income for the research division.

We see this decrease in pharmaceutical revenue to be temporary, but continue to see revenues and income rise due to the strength of our core business operations. In fact, in regards to Pivotal, soon after the quarter ended, we did initiate the Phase I Alzheimer's disease trial from a major national sponsor.

I do want to highlight a number of points. That our income from core operations, that's without Pioneer Pharmaceutical Research, was up 6% for the quarter, even after the greater than $200,000 in startup expenses related to Seven Hills. I'm also very pleased to report that today we began admitting patients to Seven Hills. The first patients are being admitted on the morning shift today.

The highlight for the quarter obviously was announcing the long awaited grand opening of our Seven Hills Behavioral Institute. This is our first facility built from the ground up, and it requires significant startup costs which will continue until late in the quarter, when the facility reaches profitability. Despite roughly $200,000 in such costs incurred in this quarter, this segment of our business still achieved positive net income from operations of $717,000, allowing us to continue our record of sustained overall profitability.

During this quarter, we also made great progress toward identifying potential acquisitions as well as submitting proposals for the continued expansion of our well place division. Our cash position is strong, and we are focused on delivering margins company-wide that are consistent with expectations now that Seven Hills is open and has begun to admit patients. The opportunities for growth of our company have never been better. We're excited and we're very confident about our future. At this point, I'd like to turn it over to Paula Wurts, who will talk about the numbers. And then I'll close and we'll open it up for questions.

Thank you, Bruce. Good afternoon, everyone, and thanks again for joining us today. Let's turn to the financial results of the third quarter fiscal 2008. For the three months ended March 31, 2008, total net revenue from operations decreased 2% to $12.1 million compared to $12.3 million a year ago. As Bruce mentioned, the decrease is primarily attributable to a decrease in net revenue of the Company's pharmaceutical studies segment, which was down 31% to $800,000 from $1.2 million reported the same period a year ago.

Contract support services revenue provided by PHC's well place subsidiary was up 3.8% to $1.2 million compared to $1.1 million reported in the third quarter of 2007. Income from operations for the quarter totaled $287,000, a decrease of 55% from $638,000 reported a year ago. Net income before taxes decreased 51% to $255,000 from $519,000 a year ago.

Net income was $156,000 or $0.01 per fully diluted share based on 20.5 million total diluted shares, a decrease of 51% compared to net income of $316,000 or $0.02 per fully diluted shares based on 20.6 million shares. Total operating expenses for the quarter increased 2% to $11.9 million from $11.7 million last year. Included in this increase were expenses related to the opening of Seven Hills Behavioral Institute.

The Company's provision for doubtful accounts decreased to $204,000 in the quarter from $427,000 a year ago. The percentage of that debt expense to net patient care revenue for the quarter was 2% as compared to 4% for the year ago third quarter. Patient care operating expenses decreased 2% as compared to the same year ago period. Pharmaceutical patient care expenses increased 17% and contract support expenses increased 15%.

The Company's cash and equivalents totaled $3.6 million at March 31, 2008, which increased from $3.4 million at the end of the previous fiscal year. Total net receivables from patient care for March 31, 2008 was $6.7 million, which increased 2% from $6.6 million at the previous year end.

The balance sheet current ratio was 2 to 1 at March 31, 2008. Stockholders equity increased 8% to a record $19.7 million at March 31, 2008 from $18.3 million at the end of the previous year. Our balance sheet continued to strengthen. Total liabilities reduced by $1 million versus the same period a year ago. This completes our financial presentation. I hope that you have found this information helpful. I look forward to reporting back to you at the end of the fourth quarter with our continued progress. I will now turn the call back over to Bruce. Bruce?

Thanks, Paula. In summary, the last quarter and the period through today has been a period where many milestones have been realized, including the opening of our Seven Hills Behavioral Institute this morning, the implementation of a large Phase I study of pivotal research, and I'm also pleased to report that we have a number of deals in the acquisition pipeline. We have recently hired an acquisition specialist to assist us in this area.

In the new business area, we have a number of [RFPs] pending in our well place division, that if awarded, will contribute new revenue and profitability to this division. The stage is clearly set to generate accelerating revenue, increased profitability and to drive some acquisitions during the next fiscal year.

We certainly are very excited about the future. We've worked very hard to get to this point. And nothing comes easy. At this time, what I'd like to do is to open the call up to address any questions that you may have. And operator, please give the instructions and we'll open up for questions and answers.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

We'll take our first question from the sight of Darren Lehrich with Deutsche Bank. Your line is open. Please go ahead, sir.

Thanks. Good morning, everyone. A few things here. First, just with regard to the facilities business, I think you noted in the press release that the patient day growth was 8%. Can you just reconcile the growth in patient care revenues with that growth? Was there some reversal in pricing? Just help me understand those two metrics.

Yes, it was primarily the mix we added to new beds on the adjudicated side, and those are lower revenue per day, as you know. And we also had a little higher increase in census on our downtown Detroit, which is also adjudicated revenue which is lower per day. The rest of the mix was pretty consistent. So it was really no other change, that's where the bed increase days came from.

Okay. And then as far as the startup goes, and I know you're stating your goal to be profitable there by the end of the quarter, which sounds like a very fast startup or ramp up relative to most health care [denovas] that we've seen. Can you just help frame that and what gives you confidence that you'll be profitable within 30 or 60 days, I guess, of opening.

Well I think the critical point here for our company is our contracts that are already in place in Las Vegas. As you know, we clearly have contracts with the three largest insurance companies that we are responsible for managing bed days.

So we know at any given point in time how many patients that we're responsible for that are in other folks' hospitals. Now they're not all going to be coming to our hospital, but a good portion of them will be. So we can gauge how quickly our revenue will start as opposed to generating and developing new business. As I've said all along, that's what makes this market very, very unique for our company and very, very special, and gives us that high confidence level that this facility will be profitable in a very quick startup period.

Okay. Great. And as far as Pivotal goes, can you just give us any sort of revenue guidance for the fourth quarter, just so we can better gauge how that's trending and I guess a comment from you, Bruce, with regard to how you're able to scale your costs up and down relative to the revenue, because it does change quite frequently quarter to quarter. So I guess two things there, revenue guidance with this new contract and the ability to leverage costs.

Well clearly the revenue will be higher in the fourth quarter than it was in the third quarter. The Phase I study, which is significant, just started admitting patients in the third week of April. So we really did miss three weeks of the first quarter. And it is ramping up. In terms of scaling costs, we actually needed to scale up to the end of April to be able for this new large study that again, is going to be approximately $750,000 in revenue in the next three to four months. So I think the costs are now stabilizing. What I think we will be seeing is now the increased revenue and profitability as a result of this study.

Okay. So that's annual revenues is about $750,000, what you're saying, on an annualized basis?

Well, we think it will roll through in about four to five months. So May, June, July, August, probably through the September quarter.

Okay. All right. And then, did these results impact the earn out and the liability you have in the balance sheet in Pivotal?

No, that's already been calculated and ended as of December. So the numbers are done and the payments are being made. And so that's behind us, any either upside or a downside.

Great. All right. And then last thing, for Paula, just cash flow from operations in the period?

Cash flows from operations were up in the period, and -- I just want to check my numbers, they were up marginally, but they were up. A lot of it, we have a lot of operating cash flows that are non-cash that are actually for the options and other non-cash items like depreciation and amortization, and of course our depreciation went up significantly at the beginning of this year because of the implementation of MEDITECH. When we implemented the software, all of those expenses that we had previously deferred for the software and the hardware were then put in place and began depreciating.

Sure. Okay. So you did $1.5 million last year in the third quarter, so it would be a little higher than that?

Right.

Okay. Very good. Thanks very much.

Thanks, Darren.

Thank you. And our next question comes from the sight of Rob Damron with 21st Century Equities. Your line is open. Please go ahead.

Hi, Bruce. Had a few questions. First, on the Seven Hills facility you've been talking about a $12 million revenue opportunity there. How soon do you think you'll be at that run rate? And then, how soon do you think you'll get to the targeted operating margin on that facility?

I think that we'll be at that run rate, probably in 90 days. We opened the first unit today, that's the 20 bed unit. We'll open the second 20 bed unit, most likely in a couple of weeks. And then the third unit will open, probably two to six weeks after that. We've had the opportunity to sort of phase them in in stages of staffing. So I think we're in 90 to 120 days to get to the annualized run rate.

So we're on track. As we've said all along, we anticipate a very quick ramp up from this opportunity. And we have a very solid, strong market presence in Las Vegas with contracts in place. And a 15 to 20 year track record. I think it was very, very rewarding at the open house where three out of the four largest referral sources of ours and biggest payers in the community were our keynote speakers. And they spoke volumes about their commitment to Pioneer, their commitment to Seven Hills, and the fact that they're excited about a brand new hospital that they can utilize.

So everything that we've been working towards has been -- we're seeing the results coming through in terms of support from our client base. And also I think it's significant to mention that the revenues that we're anticipating in terms of revenue per day, the numbers are as strong if not stronger than we anticipated.

So we see a quick ramp up, we see in terms of highest operating margins in our company, we still feel confident with that. And I think that we'll be at that level in six months at the high operating margins. But obviously to a profitable level a lot quicker.

Okay. And then you've also announced, a couple of weeks ago, another expansion in Vegas. Maybe you could give us a little more detail on that. How quickly you think that might be built and what the costs that you expect to incur from that expansion. And then also talk a bit about the new Detroit facility as well.

Okay. In terms of the new site, what we've done is we've secured a site that's appropriately zoned for a behavioral health treatment center in the Sunset area of Las Vegas, which is a quadrant that we do not have a presence in, and also a fast growing quadrant.

What we've done is we've made an investment, we're a 25% owner in the real estate, where as opposed to we were a 15% owner in the real estate at Seven Hills. What we're doing is immediately, meaning within the next 90 days, we'll start construction of an outpatient facility that will be similar to our other three outpatient facilities so we could begin to provide services in that area.

After that point, and that will be open in mostly, probably 90 days, we'll have some good guidance in terms of for the demand there is, because we'll have a little track record for Seven Hills. And we're also working very, very closely with our strategic partners to determine exactly what their needs are. But the bottom line is that Clark County has anticipated doubling in size in the next ten to 15 years. The existing capacity, including our new beds, everyone still shows as a significant shortage of available beds.

So we have a market that's going to double in size, there's a shortage in beds, and we have the potential to develop as many as 100 new inpatient beds. And we've yet to really determine the capability as to how many may be acute, how many may be long term, how many may be substance abuse and how many may be adjudicated. So we really are in the best of all worlds. We have the zoned facility that we're an equity partner in. We have an outpatient site, and we'll have the benefit of sort of time on our side to further develop it as it grows.

And then I was also asking about Detroit.

Detroit. We are -- I'm a little bit premature, but I believe that we're very, very close to have secured both a new site for a new build and also potentially an interim site to actually add the additional beds that we've talked about over the last couple years.

That could be on board as early as 90 days from now in terms of the additional beds. Obviously the new construction is 12 to 18 months out. But if we can pull off this temporary site, then we'll be in a great position to both increase our revenue and profitability there and also be ready for the new build 18 months down the road.

Okay. That's helpful. Thank you.

Thank you. And our next question comes from the site of John Gibbons with Odin Partners. Your line is open. Please go ahead.

Good morning. I just wondered if you could give me some guidance on this provision for doubtful accounts and how you could possibly reduce that in the quarter when your revenues were pretty much steady.

Well, better collection. We work very hard at controlling that. And bad debts do go up and down, I think, but consistently over the last couple of years our track record has been stable in terms of bad debts. We've had some quarters that they may be up a drop and some quarters that may be down.

As a small company, the timing of the payments does affect our percentages. If we receive a big payment the first week of a new quarter, it's conceivable that the previous quarter will have a higher percentage. And if we receive a big payment the last week of a quarter ending, it's the opposite.

We're not concerned about -- I know this has sort of been a big issue healthcare wise. And I believe that we're adequately reserved, and especially with our MEDITECH system now fully on board in our facilities in terms of the billing and collection, we're confident that we have a pretty good handle on our bad debt percent.

Great. Thank you.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from the sight of Jay Goldman who is a private investor. Your line is open. Please go ahead.

Hi, Bruce. I'm wondering if you can expand a little bit on your comment about the potential acquisitions, the imminent nature of it, geographic area and how closely correlated it is to your core business.

Hi, Jay. How are you? Well, I can tell you that any acquisition will only be related to our core business. I can say that definitive. I've brought on an acquisition person to help our company not only identify -- we generally identify them, but really to do the due diligence and the legwork in the field.

We have a couple of RFPs pending right now. None that are signed and no definitive agreements that are signed that are announceable. We have maybe four or five potential deals that are earlier on in the pipeline. So I think the good news, in terms of the acquisition front, is that now that we're acquisitive to some degree, the deals are coming to us. And I'm pretty confident that we'll have a reasonably sized acquisition that we'll bring home in this next fiscal year.

And that's pretty much -- in terms of geography, it's all over the board. It doesn't necessarily mean that it would be in our area. Two of them are, two of them are not. But we're confident that the deal close coming they have a set of helping hands to do the due diligence and we're pretty confident that we'll bring home something of substance that will be accreted to earnings immediately post deal.

Okay. Thank you, Bruce.

Thanks.

Thank you. And our next question will come from the sight of [Simon Barush], who's also a private investor. Your line is open. Please go ahead.

Good morning. On the new Las Vegas facility that's planned, first of all, I want to make sure I understood. Were you saying that it might take 90 days from this moment until it opens or until the construction starts and then there would be another 90 days before the facility opens?

There's two components of the new site. The first is the 7,000 square foot outpatient building which we'll begin construction within 90 days. And most likely it will take six months to complete. So that's nine months to the opening. The second component is the inpatient facility that we do not anticipate beginning construction for at least 12 months.

And then would that construction possibly take an additional 12 months since it's a larger facility?

Oh absolutely. The last one took actually 12 months from start to finish.

Okay. And also, do you have a fourth quarter approximate earnings release date?

The fourth quarter will be our fiscal year, which will be released sometime late September.

Okay. And also for the pharma, in addition to this large contract, is there a good run rate of other business, let's say the about the $800,000 that you had this quarter, or anything like that?

Well, the pharma business is very lumpy. We have started a number of initiatives that have both short term and longer term potential. We've partnered with an oncology physician who has a full time practice in our building now. We're just completing an arrangement with a moving disorders clinic, which we'll anticipate generating some other [runs].

So we do have another -- I can't tell you there's one individual study of that substance, but together they could be. We're currently enrolling under 25 studies. And we have close to enrollment, 26 studies that are still active. And we have 21 studies currently in the backlog.

Thank you very much.

Thank you. Do we have any other questions, operator, or are we all set?

It looks like we do have a couple more questions. One from the sight of Ali Motamed with Boston Partners. Your line is open. Please go ahead.

Hi, guys. I was wondering, as we look at the Company and the value of what you've built versus the public value, there's a real big disconnect. And the problem is is that even as you keep building value by growing your revenues, by launching new [donova] facilities, it doesn't flow directly to earnings in the way that seems to get rewarded. And especially when you put on the research business which makes a little lumpiness, it makes it very hard.

How do you address that? Going forward, you've got a couple new projects now in the pipeline. The most important thing is that you make sure you launch them well. You spend the money going into it to have it come out and be a good facility, make sure that there's no problems with patients, build them up. These things cost money, and even though they drive a lot of value, it doesn't represent itself in the share price.

As you look at your company here, and you pass, let's say draw a pass out for the next two to three years, what do you think are the levers that are going to drive, not the private market value, because you're doing that, but the public market value?

Well, you know, Ali, that is obviously the most, I think, important question for our larger shareholders, including yourself. And this is not a 12 month plan. There are a number of givens. Given number one is that the behavioral health industry is strongly supported by both government, private insurers, and is getting a lot of traction.

Another given is that reimbursement rates are going up. Another given is that values of these companies are going up over time. We have some very unique opportunities, the Las Vegas market is one, the Detroit market is another one, and we're building for three years down the road. And we believe that we'll develop a company that's going to be in excess of $100 million in revenue.

And as a result of that, it will give the rewards to our shareholder base, me being one of the largest ones. And we're not quarterly driven, and you're right. There are startup costs along the way. But again, our plan is long sighted, and I think as the size of our company becomes larger, which clearly will be evident with Seven Hills, the bliss of startup expenses will be less noticeable because it will be distributed over a larger base. Again, what gets me excited every single day, and our team excited, is really our industry and the opportunities and sort of the end game. And the end game is two or three years down the road.

I think -- do you think, I guess, you are doing a good job communicating that? Because as I look at your company, and you look at your assets, like you said, you had all the major payers in Las Vegas there speaking. No one's getting into Las Vegas without coming through your company.

Detroit, similar scenario. I look left and right and I see companies going out at two times the sales, not to say that you would do that, but do you think that when you come out and you put out a poor earnings number like you put out and the stock then trades down and it sort of takes away the momentum, do you think that in your whole process of talking to shareholders, you're doing a good job communicating what matters, and helping people to understand what to look at?

Because if you do that, then when you do have those milestones, whether it be opening new facilities and these types of things, that will be what drives the interest instead of coming out and you have a $0.01 earnings on a non-core business unit and the stock goes down again. And now we have to wait until September potentially. How do you evaluate how you are presenting the Company and what you're doing?

Always a good question. The conversations I have with strategic investors as long term related and the support and the feedback that I get from them is that make sure you communicate this is not a quarterly driven company and that the industry is doing the right thing and the Company's executing.

Two times revenue on a $100 million company does get our shareholders excited. And so you said the numbers, not I. And it's those kinds of things that I think that keep our folks intrigued about that. And we clearly have [act together] to get it. We clearly have built a company. We clearly have generated cash flow. And we're clearly identifying opportunities that will pay a significant reward to our shareholder base going forward.

And I'm always open to ideas, and maybe would enjoy us chatting over lunch some time. And you always kind of give me an interesting perspective, and maybe there's a better way to communicate that. And I certainly do appreciate your feedback and your candid comments. And we'll certainly try to keep more -- be more granular in our press releases as announcements come forward.

Thank you.

Thanks a lot. And we have, I think, time for one last question. Operator?

Absolutely. And our final question comes from the sight of John Gibbons with Odin Partners. Your line is open. Go ahead.

First, can I take Ali's question to a (inaudible)? Could you give us some idea just so we can begin to compare oranges and oranges, if you will. What do you suppose the all in costs, hard costs, soft costs and startup costs, are for Seven Hills at this point?

Well, I guess that's three or four different answers. We're leasing the building, number one.

Right. 15% owner of the real estate.

And we're a 15% owner of the real estate. The profit in the real estate ownership is going to be about $100,000 a year, maybe $75,000 at the minimum. The building cost us about $8 million to build, even though we are leasing it. The next building will be somewhere between the $10 million to $12 million range. We've had -- we funded out of positive cash flow all the FF&E of Seven Hills without incurring any debt. And we've probably had $500,000 in pre-opening [extensible] startup expenses.

Right.

On the scheme of things, based on a $12 million business that we're anticipating, the highest operating margins that we've seen in our company's history, it's a minimal investment.

Great. Thank you.

Thank you. And this does conclude our question and answer session. I would now like to turn the call back over to Mr. Shear. Please go ahead, sir.

Okay. Well, thank you very much for joining us. We had a great crowd today, and as I said, I think the building blocks are clearly in place for the Company. The major milestone of opening Seven Hills happened, we're admitting patients this morning. We have acquisition opportunities out there. Our industry is strongly supported.

So I think we're doing everything we need to do, and I do appreciate the support of our shareholders and always look forward to meeting with you and talking with you directly. We have a couple of conferences scheduled via New York at an Avondale presentation in June, just had a Deutsche Bank presentation last week. And so I just want to thank you all for your support, and I look forward to any further calls and follow up questions post the call. Thank you very much for joining us today, and have a wonderful day.

Thank you, ladies and gentlemen, for joining us today for our presentation.