Acadia Healthcare Company Inc (ACHC) 2009 Q3 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Third Quarter 2009 Pioneer Behavioral Health Earnings Conference Call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Michael [Wex] with the Company's outside investor relation firm. Please proceed, sir.

Good morning, and thank you for joining us today. I would like to welcome you to PHC Inc.'s 2009 Third Fiscal Quarter Conference Call. Before I turn the call over to Bruce Shear, PHC's Chief Executive Officer, and Paula Wurts, the Company's Chief Financial Officer, I would like to read the following statement.

On this conference call, we may make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include information about possible or assumed future results of the operations or the performance of the Company and its future plans and objectives. Various future events or factors may cause the actual results to vary materially from those expressed in any forward-looking statements today.

For a discussion of these factors and risks, see the Company's Annual Report on Form 10-K for the most recently ended fiscal year. The Company is under no obligation to update statements made on this call today to reflect subsequent events. Now I would like to turn the call over to Bruce Shear. Bruce?

Thank you, Michael. I presume most of you have seen the press release that was issued pre-market this morning. We're certainly pleased that we were able to return to operating profitably again. Those couple of quarters were not favored times, but the great news is we're back in the black and moving forward in the right direction. Before I discuss the details on our business and forecast for the balance of the year, I'd like Paula to discuss the financial highlights.

Thank you, Bruce. As Bruce alluded to, the Company generated a very modest operating profit during the fiscal third quarter, helped by revenue from continuing operations increasing 5.9% to $12 million for the three months ended March 31, 2009, compared to $11.3 million for the three months ended March 31, 2008, primarily due to the significant increase in patient care revenue from rate increases on PHC's taxated contracts and the opening of Seven Hills Hospital. Revenue also increased 8.2% sequentially, reflecting the new facility.

Net patient care revenue increased 9.1% to $11.1 million for the three months ended March 31, 2009 from $10.2 million for the three months ended March 31, 2008. The increase in revenue is due primarily to the increase in captated contract rates, increased utilization of the step-down programs, and the opening of Seven Hills Hospital. However, the contract support services revenue provided by Wellplace declined 22.3% to $0.9 million for the three months ended March 31, 2009, compared to $1.2 million in the year-earlier period. This decrease is due to the expiration of a contract with a large smoking cessation contract with a government contractor.

Income from continuing operations was $7,388 for 2009 fiscal third quarter, compared to $606,824 in the year-earlier period. Operating income improved approximately $941,000 from a loss from continuing operations of $843,000 in PHC's second fiscal quarter for the period ended December 31, 2008. Operating results were impacted by start-up costs associated with Seven Hills Behavioral Institute and Capstone Academy.

The net loss from operations was $151,643, which includes Pivotal or $0.01 per share based on 20 million basic and fully diluted shares, which compares to net income of $156,035 or $0.01 per basic and fully diluted shares based on 20.2 million basic shares and 20.5 million diluted shares. The loss includes approximately $1.1 million in aforementioned new facility operating losses, plus expenses related to increased utilization of our cap contracts in the Company's Harmony Division.

The Company had approximately $3 million in cash and cash equivalence at the end of 2009 fiscal third quarter, excluding $0.5 million in restricted cash. During the 2009 fiscal third quarter, the Company repurchased 32,640 shares of its common stock under its stock buyback program initiated in June of 2008, which authorizes the Company to purchase up to 1 million Class A common shares on the open market through June 2009. The Company has purchased a total of 334,232 shares to date, including 200,000 shares purchased from a beneficial owner in December 2008.

For the nine months ended March 31, 2009, the Company had revenue of $34.7 million, a 2.4% increase compared to revenue of $33.9 million for the nine months ended March 31, 2008. Net patient care revenue rose 4.2% to $31.8 million for the nine months ended March 31, 2009, compared to $30.5 million for the year-earlier period.

Loss from continuing operations was $1.3 million for the first nine months of fiscal 2009, compared to income from continuing operations of $2.6 million in the first nine months of fiscal 2008. The loss was due to start-up expenses at Capstone and Seven Hills, as well as a decline in contract support services revenue.

Net loss applicable to common shareholders was $2.2 million or $0.11 per share, including a loss of $0.07 from discontinued operations, compared to income of $1.4 million or $0.07 per diluted share, which includes the loss of $0.02 from discontinued operations in the same period in fiscal 2008. Now I would like to turn the call back to Bruce. Bruce?

Thank you, Paula. As many of you can see, the opening of Seven Hills Hospital and Capstone Academy has begun to favorably impact our revenue. Seven Hills Behavioral Institute is the Company's facility that provides adult inpatient and partial hospitalization programs for mental health and substance abuse in Henderson, Nevada. The facility officially opened in May of 2008.

PHC is currently awaited CMS Medicare certification, which will allow it to gain government reimbursement for many of the services it provides. This certification, when obtained, will significantly increase the census at that facility. I am very pleased to report that the surveyors arrived at the hospital yesterday morning to complete the final requirements to full certification. As you know, we've been waiting on this survey to begin for quite a while. And they've started the process that we anticipated will be completed in four or five days.

The Company also opened Capstone Academy in Detroit, Michigan in January. Capstone represents the next phase of PHC's efforts to provide expanded residential treatment services to adjudicated youth in the Detroit metropolitan area. Each of these facilities is expected to contribute significantly to improve profitability in the second half of the calendar year. However, while we believe that CMS certification is close, since we are dealing with a government agency it is difficult to predict the exact timing.

Another factor driving our improved profitability has been increases from our two major contracts in Las Vegas, which became effective January 1, 2009. As we expand the number of open facilities, the increases should have an even greater impact on both our top and bottom lines in Las Vegas.

Given the challenging economic environment, we are very pleased to complete the sale of Pivotal to Premier Research Group. Not only does it allow us to focus on our core business and the many opportunities for growth at Seven Hills Behavioral Institute and Capstone, but it strengthens our balance sheet at a time when financial strength has never been more important. As a result of this sale, the Company reduced its bank debt to approximately $2.1 million from $3 million in the previous quarter. Day sales outstanding declined from 68 days at the end of fiscal 2008 to 58 days at the end of 2009 fiscal third quarter.

As most of you are aware, the economy has impacted all businesses. While we are fortunate that most of our business comes from areas that are not solely dependent on private pay, as government budgets come under pressure our business is not immune. However, we believe that the Mental Health Parity and Addiction Equity Act of 2008, which requires insurance plans to cover mental illness the same way as physical ones, which means no higher co-pays, no higher deductibles, or limits on hospital stays, this will ultimately provide a significant catalyst for our business when we start to see the impact, likely early next year.

We also believe that increased federal and state funding will increase adjudicated census in Michigan once the budget year is enacted, which begins on October 1 of 2009. Because of some of these uncertainties, we will look forward to -- we continue to look for ways to drive costs out of our business. We've accomplished a lot. We have reduced all salaries, renegotiated leases and vendor contracts so that we can continue to report improved operating results and be a much leaner, more efficient corporation.

Now I would like to discuss the outlook for the balance of the year. As many of you know, my enthusiasm for the business and its growth prospects has often caused me to set forecasts which have been difficult to achieve. But I have never been more excited about the prospects for our business. I realize the importance of meeting and exceeding expectations we set for investors. We believe that Seven Hills and Capstone will more than offset any losses from the Wellplace contract, and that as utilization of these facilities increases that the Company could achieve a new level of profitability. Some of this confidence has been reflected in our share repurchases, which continue.

However, we also believe that some of the factors, such as the difficult overall economic environment, as well as the timing of when we actually receive the final certification needed for Medicare, could impact our results. It is for this reason that I think it is better to underpromise and to hopefully exceed expectations, rather the reverse scenario.

As many of you are aware, we have a stock buyback that is currently in place for the end of the current quarter. And we anticipate it being extended into the next fiscal year. We will balance the need to maintain sufficient liquidity in the stock and alternative uses for capital with the opportunities that may be presented in the marketplace if the value of our stock does not fairly reflect the prospects for our business. Now at this point, I'd like to open the call up for questions. Operator?

Thank you. (Operator Instructions). Your first question comes from the line of Mr. Walter Schenker with Titan Capital. Please proceed, sir.

Thank you. A couple of questions, Bruce. First, it's good to see us get back to profitability. Obviously we're all looking happily to that. In Seven Hills, is pricing continuing to meet or exceed your modeling?

Yes, it is. I mean, the pricing of how the contract -- the contracts that we've able to secure for inpatient services are at or above our previous projections, so no changes there. We continue to see good news.

And you are slowly but steadily driving capacity utilization there just from better marketing that facility? I realize we need the audit to be completed to really fully utilize that facility, but we are succeeding in continuing to improve just through better knowledge of the facility?

We have a full-fledged Marketing Department now that is out daily. We needed to get enough of the insurance contracts under our belt. They won't be 100% effective until we get this final certification. But we continue to see newer referral sources referring us patients to the hospital, which is a good sign.

Okay. And just the third is more a comment than a question. Buying 33,000 shares in the quarter approximately of stock I view as almost an insult. Maybe I'd use a stronger term. With the -- especially how low the stock got and with the sale of the clinical labs, it seemed to me there were opportunities, and I know there were black-out periods to be more, I don't mean to use the term aggressive, just to act on the buyback. Either it's a buyback or it isn't a buyback. Effectively the only real activity was buying back from a related party. And I would like you to better explain your philosophy or the Board's philosophy of what a buyback means, and what it takes to actually have you buy some stock back.

Well, we have purchased about 350,000 shares of stock this fiscal year, as I think I'd mentioned to you and others. It's very difficult with a low liquidity of the stock for our Company to buy stock. And there can be a week or more at a time, depending upon the volume and depending upon when the sales are made, if there appears a time we can even buy a share of stock. And we tried to be aggressive. Again, we're looking for blocks, and there have not been any blocks that have come available. But, again, I think we're not going to, I won't say the word overpay because we think the stock is still undervalued, but at the same time we have a lot of restrictions that we just can't buy whenever we want to buy and be more aggressive. And you're right. I mean, we have plenty of cash in the bank. We have no debt. And the Company continues to try to buy stock when it can.

Okay. Thank you.

And your next question comes from the line of Mr. Michael Gregory with Cummings Bay Capital. Please proceed.

Good morning. I was hoping you could first review the terms and the outline of the renegotiated contracts. As I recall, the BHO contracts of approximately 400 buys was capitated per member per month with internal utilization review. Is the same structure in place? And can you comment on the price increases that you were able to attain?

Our last contracts had price increases in the 15% to 20% range for actually our one, two, three capitated contracts out there. And they also have built-in CPI increases, and if the benefit model changes, the potential to renegotiate. And that did take effect January 1, and we are recognizing that revenue at our Harmony Division.

Great. And secondly, Bruce, have you received the JAYCO certification yet for Seven Hills?

Yes. We have.

Excellent. And CMS certification progress, congrats on survey receipt. When did you begin that process?

The day we opened the hospital.

Okay.

And, again, we were considered fast-track, believe it or not, so we're excited that they showed up yesterday morning. And there's a team there, and they anticipate being through the hospital by Tuesday. And so this was the first step to the step of being able to accept all these government payers. So we're actually very excited about that.

Great. As far as cash flow generation going forward, with the uptake in earnings do you anticipate an increase in free cash flow, as well?

Well, earnings will result in free cash flow, number one. And number two, we don't have any capital costs that we're funding with that cash. So we will continue to pay down our debt. As you can see, we did in the last quarter. And look for opportunities either to purchase stock or pay cash or negotiate better deals when we're doing overall purchases for the Company.

Okay. And one last question, if I may. The earn-out payment for the divestiture of the CRO, according to historical performance it looks like a fairly low bar. I'm wondering if you can comment on what your expectation is, and perhaps just review what the earn-out criteria is.

Well, the earn-out criteria was based on last year's revenue. So we believe it's a reasonable bar. We have yet to get -- we are to get monthly reports on their revenue. And I'll be in a better position to comment on that when I see their run rate for the month of April and May when they've ramped up. The broker that delivered the buyer to us stated that on all other acquisitions that they have done, and there's no guarantee here, that had any earn-out formulas that the company made them. And we're hearing on the side that they're generating a lot of new contracts and driving new Phase I business, which is high-revenue business. It's not tied to profitability. It's only tied to maintaining revenue.

Okay.

Thank you, Michael.

Thank you.

Your next question comes from the line of [Robin Nip] with Janney Montgomery Scott. Please proceed.

Thank you. Bruce, can you update us on -- I believe there's a little over $512,000 in restricted cash set aside for a lawsuit pending. Can you just update us on the status of that?

Sure. We have officially filed the appeal, which has been accepted. And their first pre-appeal conference was held last week. And indications were that it's moving in the right direction. Ultimately, our counsel believes that there was an error in the calculation, and no money should be due. I'll reserve judgment on that until it's completed. And, like I said, the money is in a bond. We did not take a reserve for that because based on our advice of counsel that this will reversed. So the appeal process could take anywhere from a month to two years.

Okay. Thanks.

Thanks a lot. It does not look like we have any other questions. Operator?

We do have another question in queue.

Okay.

Your next question is a follow-up from the line of Michael Gregory with Cummings Bay Capital. Please proceed.

Bruce, thanks for taking the follow-up. One question on the utilization trends you've seen over the past three to six months with the downturn in the economy in the employer assistance plan visits. Just, if you could, comment.

I would say surprisingly we've not seen a downturn in admissions and referrals from any of our commercial payers and companies. I think I've mentioned that Las Vegas, obviously, has had a lot of layoffs so a number of our clients have had layoffs, and their lives have been reduced. But at the same time, we've also increased our business there. So, I mean, net/net our business is still increasing in Las Vegas.

In Michigan, on the acute side, again, we've actually seen an increase in the census in our hospital in the last 30 days at Harbor Oaks. We have seen a slowdown of some adjudicated admissions that is related to some of the funding sources. But on the other side of that, as I think we mentioned in the press release and I mentioned in the script, is that as the new fiscal year for the government comes in, which is October 1, they're all anticipating increased funding for our services.

So on balance, everyone says, "You're doing greater than 99% of the world in terms of business." So I feel like we have not seen an impact negative any place other than on the adjudicated of admission. I think we're going to just have to tough that one out until October. But at the same, we have a new program open there that is filling up rather rapidly that could very well make up for the decrease in the admissions on the other two programs that we have.

Okay. For some other managed care companies operating in the government/Medicaid space, there was concern about state budgets putting pressure on contract prices, which was mitigated by some of the stimulus funds and FMAT match. Have you seen any benefit or relief on the state or adjudicated level on the fees that you would receive from a government-sponsored subsidy, or increase in payments?

Not yet.

Okay.

Thank you.

Thanks. Operator?

Your next question comes from the line of Ali Motamed with Boston Partners. Please proceed, sir.

Hi, Bruce. You mentioned that you think you can get to higher levels of profitability than before in this Company. And I look back at the history, and you were doing 10.5% operating margins in '05 with mid 12% EBITDA margins. How long does it take, do you think, if we get all our approvals here to get back to those levels?

Another six months or so. We need to get the traction from the full marketing impact in Vegas, and the bounce-up of the adjudicated services, which we're seeing by October. The new unit that we opened in Michigan is actually filling up rather quickly. So I'm not -- I still feel pretty confident that those are the kind of margins we'll be looking towards.

Thank you.

Your next question comes from the line of Simon [Burusch], a private investor. Please proceed, sir.

Good morning. I'm not sure if I missed this. But did you give the census for Seven Hills?

I'm sorry. I missed your question, sir.

Sure. Did you give the census for Seven Hills, as beds occupied as a percent of total beds?

No, we didn't. Our occupancy rate, we've been running a census of anywhere between 25 and 40 patients at Seven Hills. I mean, that's a big range. But that's pretty much the range.

Right. And the max is 60 number of beds, I believe?

55 beds right now.

I'm sorry. 55?

55. Right.

Okay. And was the census any higher this quarter on average than the previous quarter?

Slightly higher, but not significant.

Okay. Thank you.

Thank you very much.

And with no further questions in queue, I would now like to turn the call over to Mr. Shear for closing remarks.

Thank you, operator, and thank you all for joining us today. And I look forward to speaking with you all individually if you have any questions. As I said, we feel very good that we returned the Company back to profitability after a couple of quarters. We're excited about that we're getting closer with the CMS certification at Seven Hills, and that we have Capstone open, and our new programs are beginning to populate. The cash position of the Company is strong. We have no debt. And we're looking forward to the numbers continuing to improve, both in our top line and our bottom line. And I thank you all for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.