Acadia Healthcare Company Inc (ACHC) 2008 Q4 法說會逐字稿

Good afternoon. My name is Beth, and thank you for joining us today for the Pioneer Behavioral Health Fourth Quarter and Fiscal Year 2008 Conference Call. 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 questions, may include forward-looking statements that are subject to the Safe Harbor provisions of the Private Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and future financial performance of PHC that involve risks and uncertainties.

[Listeners] 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.

Joining us today is Mr. Bruce Shear, the Company President and Chief Executive Officer, and Paula Wurts, the Company's Chief Financial Officer. Following their comments, we will open the call for questions and answers. I'd like to remind everyone that this call will be available for replay through October 25, 2008 starting this afternoon at 7 p.m. Eastern time.

Now, I would like to turn the call over to the President and CEO of Pioneer, Mr. Bruce Shear. Mr. Shear, please proceed.

Thank you very much, and good afternoon, everyone. I apologize for the rush-rush in getting all of this out, but we had a lot of events happen in the last couple of days with the Pivotal transaction, so we needed to make a lot of changes to sort of get ready for this call. Thank you for joining us today to discuss the results for our fourth quarter and our fiscal year ended June 30, 2008. We are glad to have this opportunity to address you.

I would like to begin this call with a few comments and then I will turn the call over to our Chief Financial Officer, Paula Wurts, who will provide with a detailed overview of our financial results. I will then return with some additional comments, including our outlook for fiscal 2009, and finally, will address any questions that you may have.

Today, as you saw at the market close, we issued a press release announcing the results for the fourth quarter and our fiscal year ending June 30, 2008. The 5% improvement in net revenues over the previous quarter helped bring us to another record-breaking year in annual revenue, as well as breaking the $50 million annual revenue mark for the first time.

Yesterday, we announced our plan to divest the operations of our Pivotal Research Centers, which comprise our pharmaceutical study segment. For some of you I understand this has been a long time coming, but I believe your patience has been rewarded by us finding an ideal buyer, a major research organization with whom we have signed a letter of intent for the purchase of Pivotal.

They also represent a great home for fine people at Pivotal, who have made an important contribution to PHC over the last few years. The terms of the sale involve $3.75 million in cash to be paid to Pioneer at the closing, plus proceeds from receivables estimated at about $1 million. The net cash received from the transaction is expected to total $4.5 million after fees and expenses, and we expect to close this transaction within the next 120 days.

The Company has reported an impairment loss from this sale prior to tax benefits of approximately $1,771,000. I should also note that this net cash amount that we expect to receive is exclusive of an estimated tax liability reduction of approximately $600,000. This effectively raises the total cash value of the deal to over $5 million.

The sale of Pivotal, which has represented less than 10% of our revenue over the last year, reflects our fiscal 2009 strategic plan to focus more on our faster, and more consistently growing core business of delivering behavioral health care. We intend to use the proceeds from this sale to further the operations we have under development in key markets, like Las Vegas and Detroit, as well as take advantage of a number of expansion opportunities we have currently under consideration.

While this sale provides us significant working capital to strengthen our core operations, the divestiture of this non-core business also eliminates the inconsistent results traditionally generated by research. We can now enjoy better clarity and insight into our future revenue growth and profitability, which I will discuss more later in this call.

Now, before we go any further, I would like to turn the call over to Paula Wurts to drill down on some of the financial results for the quarter and the fiscal year. Paula?

Thank you, Bruce. Good afternoon, everyone, and thanks again for joining us today. Let's turn now to the income statements for the fourth quarter and fiscal year 2008. For the fourth quarter ended June 30, 2008 our net revenue from operations totaled $12.8 million. This was virtually unchanged from the fourth quarter of fiscal 2007.

Our patient care segment revenue increased 2%, to $10.4 million for the same year-ago quarter, driven by a 6.2% increase inpatient days over the same year-ago quarter. Our contract support services revenue from the Company's Wellplace subsidiary, decreased marginally, about 1%, to $1.1 million. As Bruce mentioned, we announced yesterday the plan to divest the operations of our Pivotal research center, which is comprised of pharmaceutical study segments.

In the fourth quarter, the pharmaceuticals studies segment revenues, excluding the impairment for the write-down, declined 13% to $1.3 million, which is due primarily for the timing of the start of the start of the clinical research activities. Income from operations for the fourth quarter, before the impairment loss of Pivotal, totaled $380,000, a decline of 69% from the $1.2 million reported for the same period a year ago.

Income before taxes and the impairment loss decreased 76% to $342,000, from $1.4 million for the same year-ago period. This decrease is primarily attributable to a $183,000 or 124% decrease in the income from the operations of the pharmaceutical studies business segment, and the startup losses that we incurred from the opening of the Seven Hills hospital.

Net income for the quarter, before the impairment loss, totaled $206,000, or $0.01 per fully diluted shares, based on the 20.5 million fully diluted shares. This represented a decline of 75% from net income of $822,000, or $0.04 per full diluted share, based on 20.5 million shares for the fourth quarter fiscal 2007.

Including the impairment write-down of $1.8 million, this represented the Company's 25th consecutive profitable quarter, which was sustained while incurring substantial startup losses from the Company's new Seven Hills facility that started admitting patients in May of this year.

During the fourth quarter, we continued to reduce our long-term debt and revolving credit note balances. We decreased these amounts from the previous quarter by $291,000, to a now total of $2.6 million at June 30, 2008.

Now, turning to our full year fiscal 2008 results. For the fiscal year ended June 30, 2008, total net revenue from operations increased 12% to a record $50.3 million, as compared to $41.5 million in the previous year. This was our sixth consecutive, record annual increase, which was primarily attributable to our improved contribution of the Company's patient care segment.

Revenues from this segment increased 13% over the previous year to a record $40.9 million. This is reflected by a 6.5% increase inpatient days over fiscal 2007. Income from operations for fiscal 2008, before the impairment write-down, was $2.9 million, a decline of 4% from fiscal 2007.

Income before taxes decreased 5% before this impairment write-down, to $2.7 million as compared to fiscal 2007. This decrease is primarily the result of the startup losses from our Seven Hills Behavioral Institute of approximately $765,000, and an increase in the number of inpatient bed days under our Company's capitated contracts.

Net revenue for 2008 fiscal year, excluding the impairment loss, was $1.6 million, or $0.08 per fully diluted share, based on 20.5 million fully diluted shares. This was a decrease of 11% as compared to net income of $1.7 million, or $0.09 per fully diluted share, based on 19.7 million shares in fiscal 2007.

Now, turning to the balance sheet. The Company's cash and cash equivalents totaled $3.3 million at June 30, 2008, which decreased marginally from $3.4 million at the end of the previous fiscal year. Total net receivables from patient care were $6.4 million at year end, which decreased 1%, from $6.5 million at the previous year end. The balance sheet current ratio was 2 to 1 at June 30, 2008.

Stockholders' equity increased marginally to $18.7 million at June 30, 2008, from $18.3 million at the end of the previous year. This increase was negatively affected by the $1.8 million asset impairment write-down. Our balance sheet continued to strengthen with total liabilities reduced by $1.3 million since the end of our last fiscal year.

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

Thanks, Paula. Now, while our strong results for 2008 reflect solid growth inpatient care, it also means we have seen an increase in the utilization under our capitated contracts, particularly in Las Vegas. While this has impacted our income over the short term, specifically the last quarter, it has triggered a process of renegotiating these agreements for future periods, meaning the potential for increased revenue and improved margins for this large segment of the business.

Yesterday, it was in the news that the Senate finally passed their version of the Parity Bill again. Now they are working up the final language for the House, for the measure to reach the President's desk soon. The bill, when signed, and we are hopeful that it will be very quickly within the next couple of weeks, will further improve reimbursement to us, as well as make behavioral health services accessible to the many that currently cannot afford them due to the high copays.

Now, looking to the future, given the performance of Seven Hills now approaching breakeven, the divestiture of Pivotal and its lumpy results, and no new major construction startups in the immediate future, we can now enjoy much better clarity into the future growth of our business beginning in January of 2009 and going forward.

We feel we can expect the growth of our patient care segment revenue to continue to accelerate and exceed greater than 20% in fiscal 2009, which compares to 13% growth this last fiscal year. Along with this core segment growth, we see an achievable growth goal of net income before taxes of 8% to 10% of net revenue as we approach 2010, and a higher percentage as we begin our fiscal year of 2011.

We spent the great majority of this growth and profitability to come join the second half of 2009, as I have mentioned in the past as our newest projects particularly, Capstone Academy in Detroit, come up to speed. We are anticipating opening that, by the way, sometime late September.

Our overall vision for the remainder of fiscal 2009 will be to continue to drive growth in shareholder value. And I assure you, my fellow shareholders, as one of the Company's largest ones, I am with you, and this is and shall always be my number one priority.

I am proud to say that 2008 represented some great strides, and some great struggles, in our efforts to build this value and position our Company to meet the great opportunities in our markets. As we continue through fiscal 2009, we are excited about the potentials ahead, as we are in an ideal position to reap the great rewards from our investments that we have made in 2008.

I am particularly grateful to the dedicated efforts of our colleagues in our hospitals and our treatment centers across the country that have truly made this possible. I want to significantly note here that this venture at Seven Hills was our largest venture to Company to-date, and even with significant startup losses we still had a reasonable profit for this fiscal year, and I do believe that it is significant.

Now at this time, I would like to open the call up to address your questions. Operator, if you would provide the instructions for our callers.

(Operator Instructions)

We will take our first question from Ali Motamed, from Boston Partners. Go ahead, please.

Hi, guys, how are you doing?

Good.

So, a couple of quick questions. First of all, you have got Detroit and Seven Hills, and Seven Hills should incrementally add over $12 million -- $12 million-ish, then Detroit should add something, and when you line it all up, that puts us nicely above 20%. Am I missing anything by chance?

Just the timing of opening Capstone, which we are already going to be starting Q2, and the still phase-in, and we are not quite full at Seven Hills yet, running at the annual revenue rate of north of $10 million, so we are still sort of ramping that up.

Capstone, we are anticipating an annualized revenue of about $5 million once that gets fully occupied. And we have had an experience, I mean, our track record on the adjudicated beds is that they do fill pretty quickly. But, again, I think on an annualized revenue base, you are right, compared to last year it is $10 million, $15 million plus on an annualized revenue rate. Yes.

Perfect, and then you had mentioned this capitated business. Can you explain the dynamics? So, you are going -- I am just a little confused.

Well, we have some large contract in Las Vegas where we get a fixed rate, no matter what the utilization is. If the utilization is low, then our profit margins are higher. If the utilization is high, then our profit margins are not as high.

There has been a national trend, and it has been reported by all of the health care companies, not only behavioral health companies, but medical companies, that they have seen significantly increase in utilization over the last six months.

We have experienced that, too, in Las Vegas. Now, we are able to moderate that to some degree because we are able to treat those patients in our own hospital, so we are not going to see such a huge impact as some of our other peers might, but again, it has had an impact.

And, as a result of that, we are going back to our customers, and they have acknowledged the fact that there has been an unusual increase in utilization, to renegotiate our contracts to take some of that into account.

We naturally had some guaranteed escalators built into those contracts, right?

That is correct.

And, so hopefully we will be able to go back and increase another amount, and then also get some better margin on those contracts?

That is the goal, is to be above the [naturally] built-in escalators.

And, now, what is the risk that they say no. What could happen?

Well, I think just nationally companies are seeing a syncopation, and I think it is different in every market. Las Vegas has its own unique reasons, whether it is related to the economy, or folks not seeking out treatment in the past.

In this business we have been lucky over the years. We are always able to have pretty good control, but we have had a bad run for six months and as a result of that we are going back to our customers, and we have close, long-term, partnershipping relationships, and saying to them, we are seeing this, what are you seeing in your other markets? What are you seeing on your medical side?

And, as a result, bringing to them viable information that shows that we need to sort of reconsider our rate structure. And, we are, again, I do not want to comment about the process other than the fact that we have identified it, they have identified it, and we are hopeful that that, plus maybe a little lower utilization to boot, will move us back to even a stronger position.

Thank you. Then two quick follow-ups. Net cash should be getting pretty high now?

Yes, net cash good. You know, we are paying cash for everything. We are going to be dropping $4.5 million net in the bank from the Pivotal sale. If you look at our balance sheet, when you read our K you will see our receivables balance continues to come down.

We have to borrow on our line just to meet our minimum balance requirements, so that we do not pay a penalty in fees. So the Company is clearly strong, cash-flow positive, and has basically paid for everything cash and without having to tap our line. As a matter of fact, we generate enough free cash flow to do that, plus pay down debt at the same time.

So, what should we be seeing within the next year? Should we see a $0.40-ish net cash position, or if you do not use it on other things, including Pivotal? Or, around what would you anticipate with what you just guided to, and the Pivotal business, and the fact that you are doing a good job managing your receivables, what kind of net cash should we be able to see, just roughly?

We are on the acquisition hunt, too, Ali --

Well, I mean excluding that, because I do not know what you are going to do there.

You know, I think the EBITDA numbers certainly are going to be well north of 10%. And our run rate, as you have identified, is on an annualized basis, by the time calendar 2009 starts is going to be close to $70 million without another deal. So, if we do not buy anything, or use that to pay cash for our next project then we are going to be in an even stronger cash position.

The good news is we do not have to borrow money right now. This market -- I think it puts in a small minority of companies that really do not have to worry about having to go to the credit market.

And then the one last thing, the startup loss, that is pretty much totally non-recurring, right? If you take that out -- I do not know -- you would probably have earned over $0.03 for the quarter excluding that, or am I reading wrong?

The fiscal year, without the startup loss, would have been slightly ahead of last fiscal year.

Okay.

Not a great number, but something north of $3 million, compared to $2.8 million or so -- I do not remember the numbers, but it was slightly ahead of last year taking that out. And, if we factored in the Pivotal loss for the current quarter, and [net] loss, I think the number would have been a little north of $0.03.

Perfect. Thank you very much.

Thanks for your support.

Have a good one.

Thank you.

(Operator Instructions)

Our next question comes from Darren Lehrich with Deutsche Bank. Go ahead, please.

Thanks. Hey, good afternoon, everyone. I had a few things. I just wanted to start with the Pivotal transaction itself. Can you just confirm for us that the accounting treatment for this will continue to be in continuing operations, until you have a definitive agreement?

I guess I just wanted what we will be seeing in your financial statements until the transaction either closes -- or does it need to move to a definitive agreement before it you move it out to discontinued ops?

Well, we are close to a definitive agreement so the expectation is that it will move to discontinued ops.

Okay.

Very soon.

And then the write-off that you took, or the loss that you took, this $1.8 million number, was that triggered by your devaluation of the deal in the LOI? Or, is that triggered by your review of Pivotal in its value in a normal year-end review?

Well, it was a part of a normal year-end review, but certainly we had a letter of intent in our hands, and that letter of intent is the driver, of course, to a certain extent.

So, the write-down basically brought the asset to where we anticipate a purchase and sale agreement would bring us to. In other words, we do not anticipate additional loss to be booked on a purchase and sale agreement.

Okay.

And it is significant to note that Pivotal is profitable now, too.

Right. They also are moving in the right direction in terms of the studies that we had started now, but it is an inconsistent revenue stream.

Sure. Yes, it has obviously been pretty hard to model quarterly. Are you in a position at this point to disclose who the buyer is, just so that we can get some assurances from you, Bruce, that the buyer is capable of closing?

I cannot disclose the name, but I can assure you that this is a buyer of significant substance on a national and international basis, and the cash purchase price is not a very important aspect of their overall operation. So, I am not concerned that they do not have the wherewithal to close. It is not a local company, or a smaller group that we have any risk in that regard.

Okay, that is helpful. And then just going back to the first questioner's questions about the capitation, it sounds like you are going to be reopening some arrangements that you have -- some contracts that you have. I am assuming that you will reopening that with Sierra. Can you just confirm that?

And given the terms and the length of that contract, can you just help us think about what we should expect coming out of this? That was viewed as a long-term arrangement, so might it now be different in length, and what should we expect from this situation here?

We have a long-term partnership that we do not anticipate changing at all. We are a significant provider in their puzzle. I am not going to address the specific customer, but I will say that we are looking at all of them. There has been a utilization increase in the Las Vegas, and it is not isolated to one customer.

So, we will take this opportunity to revisit every contract that we have with the hopes that either we will have better controls, better partnershipping relationships, or a combination of all of that plus increased capitated rates.

So, this is not an isolated contract. We are going to look at all of them. We are looking at all of them. And, I think we will have some more guidance in that regard by the end of the next quarter.

Okay, and then just as far as Seven Hills goes, can you just comment for us on where the census is roughly right now -- where it has been averaging in recent weeks? And, have you settled on a leadership team at Seven Hills?

Yes. I can comment on the census. We have been hitting high numbers. Actually, we had 40 patients one day last week, which was certainly a company high. We opened our second inpatient unit -- you recall seeing the hospital about three weeks ago, and we consistently need that unit. Our census has been running anywhere between, I would say, at the lowest now the low 20s, and generally high 20s to low 30s.

So, in terms of our inpatient days, it is probably above projections for inpatient days. And, we have hired, a couple of months ago, a very, very, very seasoned executive. Someone that worked for a large company with over 20 years experience, who brings a lot of strength to the leadership team. We have brought in a new director of nursing. And so, I think our strong leadership team is coming together out there.

And, as you know, understanding our business a lot, we are still waiting for -- the Joint Commission needs to come and survey, and we have a date from them now, which is exciting. They will be in October 15th. So we will then be able to add another tier of patients that their insurance did require JCAHO approval. And on the first survey you get a conditional approval, and we are ready for that, so we are hopeful that that will help.

The application for CMS and Medicare certification is also in process. We do not have a commitment date for that yet, but that also is in process. So, these are all components of [centers] that we have not been able to see yet, and they are in process, and I think we are moving in the right direction there.

Great. And then, just in the quarter, could you comment on your same store, patient day growth, I guess just excluding Seven Hills? What that was, and what the same store revenue growth was on the facility side?

Well, I do not have a whole lot of detail with me right now, but with Seven Hills it did not open until the middle of May. And, of course, it does service some of our cap patients, which means no revenue, but a bed in service. So we have some of the patient days, relative to that, are included in our occupancy rates, but not included in our revenue per patient day calculations.

Our revenue for patient day did go down slightly from prior quarters, and that is largely because of the number of adjudicated beds that we have. It is just adjudicated beds are, as you know, lower paying group -- a lower paying bed day, so that the revenue per patient day goes down significantly as those patient days go up.

But you will be able to get -- Darren that schedule--

Oh, yes, I will get you a schedule. Certainly.

Once we get sort of --. We have had to do a lot of quick moving around, this Pivotal deal came on very, very quickly. And so, as you can imagine we needed to have everything ready and that, coupled with the end of our fiscal year, and our K being due, it sort of --

But even in that last quarter, with just the $0.5 million all of June, we had 502 bed days that were attributable to our cap contracts that we would have had to pay a significant amount of money to put them in someone else's facility. So already, it is beginning to do what we need it to do to relieve our expense piece of that cap contract.

That's (inaudible). We'll get that schedule. I guess just one clarifying question, though, I have is when you do reports the segments -- are you basically saying that the revenue will not be captured in the capitation? In other words, I was expecting it to be eliminated through --

It is eliminated.

Inner company.

That is correct. It is eliminated through inner company. That is why when you look at our financial statements, all of the eliminations have taken place, so that the revenue -- the net revenue per patient -- per patient days, is net of that capitated money.

Okay, but in your segment reporting, in the K, you are saying that the segments won't be -- I can follow up offline, but -- the segments won't be on a pre-elimination basis?

No, the segments will be after elimination.

Okay.

Absolutely, after eliminations.

Okay, we will look for that. Thank you.

All right.

Thanks a lot.

Take care.

(Operator Instructions)

Our next question comes from Quinton Maynard with Morehead Capital. Go ahead ,please.

Good afternoon. Just a couple of quick questions. Most of mine have been answered. You mentioned in '09, looking out at a net income margin. Is that after tax you are saying about 8% to 10%?

That is pre-tax.

Pre-tax. All right. As far as the bill that is going through Congress right now, do you know when that is likely to be voted on?

Well, you know, they are somewhat side-tracked this week.

Right. A little financial problem, right?

But, our association is saying any day, and we get daily bulletins from them. And pending another world crisis which we are certainly in one right now that they have not quite figured out, I am very hopeful that literally in the next 30 days we are going to have a signed bill by the President.

Would that actually have direct impact for you?

There is really a three-fold impact for us and for our industry. Number one, more recognition of mental health illness in America and the significant need, and the government commitment and support of providing care, and mandating the care is at a reasonable rate. That is number one.

Number two, the copays will be reduced. Now, they are going to be reduced, as it stands right now, over a four or five year period. So, reduction in copays has sort of the answer to number two and number three.

The second point is a reduction in copays reduces the potential of bad debt. And the third point that I wanted to make was that by having a lower copay it will provide easily more accessibility to the patients to come in for treatment.

And, that is something that we have not, and our industry actually has not been able to quantify yet, but if someone has to pay $50.00 to see their psychiatrist and they now are going to have to pay $10.00, I think we can come to a conclusion that more people will seek help.

Makes sense to me.

So those are the three points.

Thank you so much. One other thing. In Detroit, have you budgeted for operating costs -- opening costs?

We have budgeted for opening costs in the September and December quarters in anticipation of profitability in the March quarter.

And, roughly the number of -- the dollar amount of those opening costs, respecting?

I do not have that number in front of us. We do not have the budget in front of us.

Should it be roughly the same size as in Las Vegas, or --?

No, I think it will be a lot less than that.

A lot less, though.

Yes, and then like I said, we have not projected -- we have talked about the traction from all of these projects being in the quarter, in our third fiscal quarter, so we really do not want anyone to be under the impression that now that Seven Hills is open, and Capstone is going to open next week, that all of the pre-opening losses are behind us.

Got you. Well, thanks so much. Hang in there.

Thanks for coming and joining the call. Operator, do we have any other questions?

There are no further questions in queue, and this concludes our question and answer session. Now I would like to turn the call back over to you, Mr. Shear, for any closing remarks. Please proceed.

Okay, well I think having answered all the questions, we certainly have a lot of information to talk about and there have been a lot of things happening in our Company of recent times. And as I have said before, the building blocks are certainly coming together and we are excited for the next half of this fiscal year.

And, certainly, even more excited about where we see 2010 going, and we do have many potential acquisition opportunities out there. Our acquisition guy is identifying a lot of deals for us, so we are very optimistic.

And, we appreciate your patience, your confidence in our Company. And we appreciate your being a shareholder and welcome you any time to call. And I look forward to talking with you all off line. Thank you very much.

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