Acadia Healthcare Company Inc (ACHC) 2009 Q2 法說會逐字稿

Good afternoon. My name is Lindy and thank you for joining us today for the Pioneer Behavioral Health Second Quarter 2009 Conference Call. 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 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 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 would like to remind everyone this call will be available for replay through March 13, 2009, starting this afternoon at 1:00pm 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.

Good morning, thank you very much and good morning to everyone. Thank you for joining us today. We're glad to have this opportunity to address you. As you saw this morning, we issued a press release announcing the results for the second quarter of our 2009 Fiscal Year ended December 31.

As expected, this was a transitional quarter as we continued to start-up at Capstone, and awaited our final certification for CMS at Seven Hills Behavioral Institute in Las Vegas. Excluding the start-up losses of our new facilities in Henderson and Detroit, once again, this quarter, we continued our long tradition of operating profitably. As a matter of fact, the amount improved by approximately $235,000 over the September quarter and $388,000 over the same period a year ago.

So we are making good progress towards the ultimate goal of strong profitability. We also significantly advanced our Managed Care business in the Las Vegas area during the quarter with the renegotiation of capitated contracts which are structured to increase revenue and improve margins in this current quarter.

As these new rates come into effect and our new facilities come up to speed, we anticipate a return to Company-wide profitability before the end of the current quarter. Now before we go any further, I would like to turn the call over to our Chief Financial Officer, Paula Wurts, who will provide you with detailed overview of our financial results for the quarter.

I'll then return with additional comments including our outlook for the remainder of Fiscal 2009 and finally we'll address any questions that you may have. Paula?

Thank you Bruce. Good afternoon, everyone, and thanks again for joining us today. First, as you know we announced at the end of December 2008, the finally agreement for the sale of Pivotal Research Centers, which comprises our Pharmaceutical Study Segment, to premier research group PLC for a total potential consideration of $5 million.

The divestiture of this business will allow Pioneer to focus on its core business of delivering behavioral health programs and services. This transaction is expected to close by the end of the current month. Now let's turn to the income statement for our second quarter of fiscal 2009. Net revenue from operations totaled $11 million excluding discontinued operations representing a 2.2% decrease from $11.3 million in the second quarter of last year. Patient care segment revenue totaled $10.1 million a decline of less than 1% from the same year ago period. The slight decrease in patient care revenue was due primarily to the effect of general economic conditions offset partially by the contribution of newly opened operations.

Contract support revenue from the Company's Wellplace subsidiary decreased 19% to $0.9 million. This decrease is due to the expiration of the smoking cessation contract with the government contractor. We've submitted a bid to continue and expand the contract should the contractor decide to continue the program and expect to increase contract support service revenue through new contracts for Employee Assistance Programs and Smoking Cessation Programs.

Loss from continuing operations was $843,000 as compared to income of $834,000 in the same period a year ago. The loss includes more than $790,000 in start-up losses related to the Seven Hills Behavioral Institute and approximately $307,000 from start-up expenses at Capstone Academy.

The net loss from continuing operations was $404,000 or a loss of $0.02 per basic and fully diluted shares which is based on 20.1 million basic and fully diluted shares. This compares to net income from continuing operations in the same year ago quarter of $524,000 or a gain of $0.03 for basic and fully diluted share, and is based on 20.1 million basic shares and 20.5 million diluted shares. The loss includes approximately $1.1 million in aforementioned new facility start-up expenses plus expenses related to increased utilization of our capitated contracts in the Company's Harmony Division. Losses at Harmony are not expected to continue due to improved margins from significant rate increases from two major renegotiated contracts which became effective January 1.

Now turning the balance sheet. The Company's cash and cash equivalents totaled $1 million at December 31, 2008 compared to $3.1 million at the end of the previous fiscal year. Total net receivables from patient care was $6.5 million at quarter-end which increased slightly from $6.4 million at the end of the previous fiscal year.

The balance sheet current ratio was 2.1-to-1 at December 31, 2008, stockholders equity at December 31, decreased about $2.5 million from the end of the previous year and $16.2 million. A portion of the decrease was due to the increase in treasury stock from the Company's share repurchase program. This completes our financial presentation. I look forward to reporting back to you at the end of the next quarter with our continued progress. I would like now to turn the call back over to Bruce. Bruce?

Paula, thank you very much. Overall, we made great progress during the second quarter. In addition to the successful renegotiation key contracts that will go straight to our bottom line, we advanced the development of our Capstone Academy, in Detroit, Michigan and in January 2009 officially open this facility.

Capstone represents the next phase of PHCs efforts to provide expanded residential treatment services to adjudicated youth in the Detroit Metropolitan area. In combination with the Company's Detroit Behavioral Institute this facility, if fully utilized, could double PHC's inpatient capacity in the area and had the potential to generate addition revenue of over $5 million.

With the addition of Capstone, we will have 14 ongoing treatment centers operating within five states in the behavioral health field. We continue to make excellent progress with Seven Hills to bring this new facility to capacity. Currently, we are waiting CMS Medicare Certification. With this critical approval and the recent JCAHO Certification, we will be able to take the highest paying patients; and therefore be in a great position to be profitable, as we projected, at this facility.

Given our progress in many areas this quarter, we can continue to believe our fundamentals and prospects for growth have never been stronger. Our efforts to focus on our core business of patient care allowed us to sustain our revenue levels, even in these trying economic times that has impacted other companies far more than us.

However, near term we want to be prepared and cautious and position our operation in light of the uncertain economy. In this regard, we have implemented company wide salary reduction plans as well as have temporarily suspended all bonus plan. In spite of this positioning we continue to see the demand for our programs and services remaining strong over the near and long term. And our industry is still prospering. The recent signing of the Mental Health Parity Bill is expected to serve as another strong market driver, one from which we are in an ideal position to benefit substantially over the years to come.

In addition, the economic stimulus plan if signed into law will add over $80 billion to be used by all of the state's health care needs, which will also significantly help in terms of reimbursement and availability of our services to folks that have government debt payers. As I mentioned before, with the divestiture of Pivotal and its monthly results and no new major construction of start-ups planned in the near future, we can now enjoy much better clarity into the future growth and profitability of our business.

As we have indicated in our prior reporting, due to the substantial investments we made in new facilities, we expect the most visible improvement of our performance in 2009 will come during the second half of 2009 and with our newest projects coming up to speed. Based on the continued expectations of the Company, patient care revenue maintains its forecasted growth of more than 20%. We continue to see that achievable goal of income before taxes of 8% to 10% of net revenue as we approach Fiscal 2010.

As a reflection of our continued confidence in the future, the Company has repurchased over 300,000 shares of its common stock for this fiscal year. We really have made great progress and I believe that what we've been discussing about the future and the balance of 2009 looks really strong. At this time, I would like to open the call to address your questions. Operator, if you would please provide the instructions to our callers.

(Operator Instructions) And our first question will come from Walter Schenker from Titan Capital, please go ahead.

Actually, I have a couple of questions then I'll get off but, the first of which is in discussing fiscal '09 guidance. And Bruce your comments, due to the fiscal year for Pioneer, it was not clear to me that time frames we were talking about. So I see the words, I just want to make sure I understand when you state that achievable goal of income before taxes of 8%,10% of net revenues, as it approaches fiscal 2010, fiscal 2010 starts on July 1, correct?

Correct, yes. And we are talking about those margins for the beginning of our next fiscal year which starts July 1, 2009.

And therefore, the statement -- "Most visible improvement or performance in 2009 will come in the second half" -- we're then bouncing to the first half of fiscal 2010 but the second half of calendar 2009, correct?

That's correct Walter, thank you.

No, no. The words were there, I just wasn't clear. The second question is, on the improvement at Harmony, due to new renegotiated contracts on capitated programs, does this cover all your capitated contracts or are there others that still need to be renegotiated?

It covers capitated contracts that we felt needed to be renegotiated. They're our two largest contracts there and the new rates have taken effect already, effective January 1.

And this is to bring us to profitability?

Absolutely at Harmony, we are very, very confident in that regard.

And my last question and I'll get off. On Seven Hills, what's involved in getting the CMS Certification?

The final step in the CMS Certification process, all the application have been filed; we've been on the fast track list because of the shortage of beds in the Las Vegas market. We've been told we are scheduled for an unannounced survey that could happen at any moment, hopefully sooner rather than later.

Upon completion of the survey and correction, very short term, if there are any requirements to correct, we would then have a CMS Certification. I wish I could hone down the time frame, it's anywhere from between one week and 90 days. That is out of our control.

And that allows you -- again you said it, "To get higher revenue patients?"

Yes, we will be able to take a number of the government pairs that needed CMS Certification for Medicare, TRICARE and in addition to that our recent JCAHO Certification allowed us to complete the contracts with a number of the commercial pairs that will also be paying at higher rate.

So this is all coming together as we're speaking and many of these contracts are taking effect now, April 1st, and those are really our higher paying patients. We're currently treating the patients that we're seeing under our capitated contracts and some of the other patients. But these two, the JCAHO step and finally the CMS Certification allows us to accomplish our goals that we believed in along. So that's pretty much where we're at.

Okay, thank you.

My pleasure.

(Operator Instructions). We'll take our next question from Jeff Moore from Ares Management. Your line is open.

Good morning, Bruce.

Hi Jeff, how're you doing?

Very well, thanks. So just a couple of quick questions that might give us a little more granularity relative to -- just for the quarter, if you could for Seven Hills give us some perspective on your average census during the quarter and maybe where you ended quarter, would be my first question.

And then in your prepared remarks, you guys obviously commented on the fact that revenues were essentially flat because of some new -- you had some revenues coming from the new endeavors, offset by general market. I was wondering if give us some color on how much revenue we received in the quarter vis-a-vis, the same quarter as last year from the new endeavors? And then give us, as a result, some color on how much erosion that there was in the base business? And then maybe finally, your perspective on that base-business erosion, time lines during which that may actually begin to come back?

The base business erosion was minimal or really, I believe, pretty much flat. The new revenue coming - remember, we just opened Capstone program the first day of January so there was no revenue from that what so ever.

I was thinking more Seven Hills.

Okay, Seven Hills -- our average census at Seven Hills has been running in the vicinity of 20 to 35 patients, and we have 55 licensed beds. A good portion of those 20 to 35 patients are through our capitated contracts which are more pass-throughs for the Company, maybe 20% non-category. And as we've said all along, until we received the JCAHO, which we have now, and the final government approvals we have not been able to take those higher paying patients that will significantly increase the revenue going-forward.

Understood. And I guess just to -- not to pin you down but in your remarks relative to the CMS Certification I think I just heard you say "It could be one week, it could be 90 days." Is it fair to assume that you guys are assuming a fairly high likelihood that it does happen in the current quarter?

Yes, we're assuming a high likelihood that it will happen in the current quarter, the sooner the better. But again, it's unfortunately out of our control.

Understood. Thanks Bruce.

And our next question comes from Shane Kim from Camden Partners. Please proceed.

Hello, Bruce, can you just comment a little bit about, you know we opened Seven Hills in April 2008 and we're still waiting on CMS Certification which seems that they work on their own time clock. Looking back, is there anything that we could have done differently to have started that process earlier so we wouldn't have nearly a year's worth of start-up time waiting for what seems to be a pretty significant certification process?

Well, first of all, Shane, you can't file the application until you're open, and we opened in May. The application was filed shortly after our opening. We heard -- and I think that anyone in our business that's trying to get new certification -- will say they have been told that the delays could be one to two years because they're focused on more acute care hospitals right now. And when we realized that there was a significant delay we approached them about a way to expedite the process and we were able to get supported documentation that there was a shortage of beds in Las Vegas market and therefore justification of an imminent shortage and a fast-track survey. I wish I could control the survey process. I think everyone tells us that we're doing everything that we need to do and we just have to keep our fingers crossed that it should happen again.

As you talk to these other folks that have a little more experience with it, is it typical that once they come out for this survey that there's not additional like a commentary period where you go back and forth and they may do the survey next week. But is it a 30-day, 45-day, what time process before you actually -- what's the general feeling on actual certification?

We understand that it's 30 days. Again, there is nothing guaranteed when you're the only regulatory agencies. But we understand that the turnaround is very quick, especially under the process that we're in.

Assuming no issues?

Well, there will always be an issue. But the corrections -- whatever the issues are they will be corrected within a matter of days of getting the report. It's just a matter of a documentation issue. That will be nothing that will slow down the process. We will just have to wait on the third party.

Okay, you said what could be one week or 90 days, why is 90 days even an outlier date at this point or is -- how do you feel about that?

Only because they communicated to us that we're on track for unannounced survey soon. Without getting into any more details, I think soon is soon.

Okay. Thanks.

Thanks, Shane. Thanks for your support, I appreciate it. Operator, it doesn't look like we have any further questions unless there's another question in the queue. Operator, is there another question in the queue?

It does look like we do have a couple more in the queue.

Our next question will come from Gary Simon from UVE Partners. Please proceed.

Hi, good morning Bruce.

Good morning, Gary.

Just want to follow-up a little bit on Seven Hills. In September, when you announced the fourth quarter results or fourth fiscal quarter results, you said that Seven Hills was approaching breakeven. And now we have the first and the second quarter, you had a start-up cost of in excess of $1.5 million.

I'm just trying to understand what the start-up costs are, it seems like they're more operational costs at this point in time. And even when you add back, your margins are still decreasing. Your operating margins are down to about 3% so I'm trying to understand what, how you see the future turning into 10% margins?

Well, the future will turn the margins because the incremental patients that we will be seeing will be the highest paying patients as opposed to the patients we're treating now primarily under our capitated contracts. So that's what will turn the ship and those increments -- that incremental revenue will be over and above, so the breakeven, and that's what will bring the Company to the profit margins that we believe we can obtain.

Since this has been lower than we anticipated, it seems to have been ramping up quicker and then did slow down the month of December and early January. And so I think that's pretty much where we're at. The most important thing that we have to do now is get those certifications on board. As you can see, we've taken very positive steps to control our expenses and actually reduce our expenses to keep our company lean and mean in this economy. So I think we are doing everything we need to do.

As far as the buy back is concerned, I know there was a big, there was one big buy and you said -- for about 200,000 shares and then you said in total 300,000 shares. But with the price on the initial big block that you purchased, at these levels I'd think that you would be as aggressive as possible.

The Company right now is focused on its operations. I think what we need to do is close Pivotal and make sure that we have excess cash and we'll certainly revisit that situation in the future. But right now, we're sitting tight until Pivotal closes which is scheduled to close the end of February. And we'll revisit it after the closing date.

Operator, is there another question? And I think we may have time for one last question possibly.

And our next questions from Jeff Knightly from Ardsley Partners. Please proceed.

Good morning, Bruce. Just one clarification -- when you talk about 20% patient care revenue growth for fiscal '09, is that for the second half of the year because it looks like through the first six months were relatively flat. So what gives you that type of visibility that we're going to see that sequential increase?

And then my second question was, are there any restrictions from management or the Board of Directors to be buying back shares?

There are no restrictions other than our time frames for buying back shares. And I think the stretch on the 20% revenue growth is really more towards because of the delays in the opening of the Capstone. The delays are more 20% towards the second half of this fiscal year.

Thank you.

Okay, operator, I think we're out of questions right now.

At this point, I want to thank you all for joining us today. As I mentioned, I think we made great progress. Everybody wants faster progress but I think we're moving in the right direction. I think the fact that we've shown that we've improved the profitability of the core operations from the September quarter of -- last quarter and also December of last year.

We've got our rating increases on-board that have taken effect already. We'll have current impact and profitability. We're waiting for final approval to Seven Hills and we hope for a quick ramp up at Capstone. I appreciate your consideration and your support of our company and I look forward to reporting even better results as the quarter's progress. Thank you so much.

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