Acadia Healthcare Company Inc (ACHC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the PHC, Inc. Second Quarter Fiscal 2011 financial results conference call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions.

(Operator Instructions)

I would now like to turn the conference over to our host, Mr. Brett Maas, of Hayden IR. Please go ahead, sir.

Thank you and welcome. Joining us today on the call are Bruce Shear, Pioneer Behavioral Health's Chief Executive Officer and Paula Wurts, Chief Financial Officer. Before we begin, may I remind our listeners that in this call management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties. And management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of the Safe Harbor for forward-looking statement which is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represents management's estimates as of today, February 14, 2011. PHC, Inc. assumes no obligation to update these projections in the future as market conditions change. I'd like to turn the call over to Mr. Bruce Shear, Pioneer Behavioral Health President and CEO, to provide opening remarks. Bruce, congratulations on a continued strong quarter and for your Fiscal Year 2011. Thank you.

Thank you, Brett, and good afternoon, everyone, and thank you for joining us today. We again delivered positive financial results for the quarter and the year to date, delivering year over year improvement across the board. Our metrics continue to be strong, even though the December quarter is historically our slowest. We reported our eighth consecutive quarter of profitability, and maintained strong year-over-year revenue growth, steady gross margins and expanding operating income and net income.

For the quarter, we reduced total operating expenses as a percentage of sales to 95% from 96% in the year ago period. Year to date, we reduced total operating expenses as a percentage of sales to 93.4% from 96.6%. This improvement not only demonstrates our close attention to managing expenses, but also points to economies of scale as we leverage our infrastructure more efficiently. As further evidence of this leverage, we decreased administrative expenses as a percentage of sales to 34.2% in the quarter from 36.6% in the comparable quarter last year and year to date. So 34% from 36.7% in the same six-month period last year.

Operating income increased 41.8%. Income before taxes was up 40.5%. Net income increased 74.5% for the quarter, significantly faster than revenue growth of 13.7%, reflecting continued leverage in our business model. For the six months ended December 31st of 2010, operating income increased 126%. Income before taxes was up 122.6%. And net income increased 130.9% -- again, significantly faster than the 16.4% total revenue growth for the year ago period.

Earnings per share for the quarter were $0.03 versus $0.01 in the year ago quarter, and for the six-month period ended December 31, 2010, earnings per share were $0.06 versus $0.03 per share in the comparable period in 2009. All in all, strong fundamentals for our quarterly and year-to-date results.

Seven Hills Behavioral Institute became profitable in September of 2010, and has been profitable each month during the December quarter and right through the current period. We expect this profitability not only to continue but to accelerate, which will be a significant factor in reaching our goal of 10% operating margins. The patient census at Seven Hills was up 59% from the year ago period due in no small part to the Company obtaining census from Medicare/Medicaid services approval in August, which enabled us to accept patients enrolled in the Medicare programs.

In addition, Harbor Oaks Hospital experienced a 65% increase in census as a result of the addition of the Chemical Dependency Unit. For the 2011 fiscal second quarter net revenues per patient day also increased 21.7% to $567 per day from $466 per day in the previous year. Average occupancy rates also increased to 71% from just under 70% in the year ago period. We currently have the infrastructure to generate significant revenue without an increase in the number of beds or an increase in our fixed costs.

As a result of our continued financial improvement, our Board of Directors authorized the repurchase of up to one million shares of our Class A common stock for a one-year period commencing July 1, 2010. The three months ended December 31, 2010 we repurchased approximately 73,000 shares, an average price of $1.39 per share. All in all, the second quarter of Fiscal 2011 was solid. It continued the excellent results we generated in the first fiscal quarter and the 2010 Fiscal Year. We continue to strengthen our fundamentals and effectively leverage our infrastructure. Now I'd like to turn the call over to Paula Wurts, our CFO, that will walk you through the financial results.

Thank you, Bruce. For the three months ended December 31, 2010, total revenues increased to $14.6 million, which is up 13.7% from $12.9 million in the second quarter of our prior fiscal year. For the second fiscal quarter of 2011, net patient care revenues increased 14% to $13.7 million from $12 million for the same period in fiscal 2010. This increase in revenue is due primarily to an increase in census at Seven Hills Hospital in Las Vegas and at Harbor Oaks Hospital in Detroit. These census increases were partially offset by a decrease in Census at Capstone Academy, and a seasonal decline in census at the Company's other inpatient facilities.

For the three months ended December 31, 2010, net patient care gross margins were 45.7% compared to 46.3% for the same fiscal period of 2010. Total operating expenses for the quarter ended December 31, 2010 were $13.9 million as compared to $12.4 million in the same fiscal quarter last year, primarily due to increased census at Seven Hills and Harbor Oaks, and higher utilization under the capitated contracts with the majority of the increases in expenses directly related to patient care.

This reflects an increase in patient care expenses due to the increase in available beds, contributing to the increase in patient census at our inpatient facilities, and includes increased payroll and service-related consulting expenses, including agency nursing, food and dietary expense, hospital supplies expense, housekeeping expense and lab fees, among other direct expenses. All of the increases in patient care expenses are a direct result of increases in census, and the comparisons period over period are expected to reflect similar increases as the census grows in the new facilities and programs.

Income from operations improved 41.8% to $729,000 for the second fiscal quarter of 2011, compared to $514,000 in the year ago period. Income before taxes was $754,000 for the three-month period ended December 31, 2010 compared to $537,000 in the year earlier period. Net income applicable to common shareholders was $503,000 for the second fiscal quarter of 2011 or $0.03 per basic and diluted share, compared to net income of $288,000 or $0.01 per basic and diluted share in the second fiscal quarter of 2011.

For the six months ended December 31, 2010, total net revenues increased 16.4% to $29.7 million compared to $25.6 million in the year ago period. Net patient care revenues increased 17.5% to $27.9 million for the fiscal six months ended December 31, 2010, compared to $23.8 million in the previous year period. Census at our inpatient facilities increased 5% for the six months ended December 31, 2010, compared to the same six months last year. For the six months ended December 31, 2010 net patient care gross margins were 48.2% compared to 45.9% in the same period in 2009.

Total operating expenses for the six months ended December 31, 2010 were $27.7 million as compared to $24.6 million in the same period last year, due again to increased expenses for increased patient census for the fiscal year. Administrative expenses were $10.1 million or 34% of total revenue, compared to $9.4 million or 36.7% for the fiscal year 2009, demonstrating -- as Bruce mentioned -- greater operating leverage of our infrastructure.

For the six months ended December 31, 2010, income from operations was $2 million compared to net income of $870,000 in the same period last year. Income before taxes for the six months ended December 31, 2010 increased to $2 million from income before taxes of $894,000 in the year ago period. Net income applicable to common stockholders was $1.2 million for the six months ended December 31, 2010 or $0.06 per basic and diluted share, compared to net income of $512,000 or $0.03 per basic and diluted share for the previous year period.

As of December 31, 2010, we had cash and cash equivalents of $2.8 million compared to $4.5 million as of June 30, 2010. The decrease in cash is primarily due to the purchase of the mortgage on the property leased by the Company's Capstone Academy. Working capital increased 10% to $9 million as of December 31, 2010 from $8.2 million as of June 30, 2010, and long-term debt less current maturities decreased to $83,000 as of December 31, 2010 from $292,000 as of June 30, 2010. Stockholders' equity improved 6.3% to $18.3 million as of December 31, 2010 from $17.3 million as of June 30, 2010. With that, I would like to turn it back over to Bruce for additional comments. Bruce?

Thank you, Paula, and thanks for the great numbers. Seven Hills facilty's expected to be a key organic driver with projected revenue at approximately $12 million a year. In addition, after the end of the quarter we were awarded an extended service contract with the Detroit Wayne County Community Mental Health Agency, which increases our revenue from the current contract by 50% from $2.8 million to $4.2 million, as well as delivers our margin improvement.

This contract, which runs through 2012, demonstrates our successful efforts to build upon our foundation to address current markets and expand our presence to provide additional services. We'll provide enhanced access services to over 60,000 consumers in Wayne County, Michigan. In addition, accelerating our organic growth, we acquired Renaissance Recovery, a 24-bed residential program located in Detroit.

Renaissance Recovery is designed to provide behavioral treatment to chemically-impaired adolescents ages 12 to 17. This facility is expected to add an additional $3 million to $5 million in annualized revenue when it opens, which we anticipate sometimes toward the end of the month. This is our first freestanding adolescent program to address the needs of this population with specific focused inpatient services.

We anticipate marketing this program nationally to clients who will be attracted to the facility due to its unique program offerings. The Detroit area represents a key growth market for us. We continue to expand our presence and expect to build upon our reputation to provide additional services. We will continue to focus our energies on these new revenue sources, both organic and acquisitive, as well as opportunities to improve our current margins and leverage our infrastructure.

In summary, our operating fundamentals remain strong. We look for continued momentum throughout the remainder of fiscal 2011 and beyond. We are strategically leveraging our business model and leveraging our infrastructure. Our balance sheet is solid with minimal debt. These positive fundamentals position us well for future growth and potential acquisitions, and we are confident that we are on the right path from a strategic standpoint. This is the end of my prepared remarks, and Operator, you're more than welcome to please open the floor to questions. We have a large audience out there today.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions)

Our first question comes from the line of Gregg Hillman with First Wilshire Securities Management, Please go ahead.

Yes, hi Bruce and others. You know, Bruce, first of all, you talked about marketing the Renaissance Program nationally. Could you expand on that?

Yes. We feel that the Renaissance Program, not only being our first adolescent substance abuse program, also has some unique marketing appeal. It's right in the art district in Detroit. We're actually on the ground of the Art Institute of Detroit. And we're going to have sort of some very strong program components that will tie sort of the art aspect for the sort of artsy substance abuser that will be sort of tied to the whole treatment program. We believe there's a strong population of kids that have a strong interest in the arts, and because we're on the grounds there of the art institute and the African-American Cultural Center, it'll be a good attraction.

Okay, so you could help to develop a program that you could take on a road, basically?

Well, we think this'll have a national appeal, and potentially -- I mean, it's a small unit. It's only 24 beds. And if it takes off, we'll be looking obviously to expand it but in the same, similar location.

And also a question about national expansion. Your Seven Hills Program -- do you have a program that you could help HMO's on a nation-wide basis with their substance abuse/alcoholic type population to help save costs for them? I take it you've shown cost savings for the HMO's you deal with in Las Vegas.

Well, clearly we have a large capitated contract in Las Vegas. And a lot of our national contracts, typically in the railroad industry, you know, they are HMO-based and backed and they do consider us a center of excellence. So they do send us patients from throughout the country. We need a very captive population to do that so that we can clearly show them the cost savings. So we really need to treat a high percentage of their folks to be able to show that there's a cost benefit analysis. If we treat a small percentage of their folks, it's very hard to sort of quantify the savings. But we are doing that, and we have done outcome studies with our railroad contracts that have shown exactly that.

Okay. And finally, just your revenue growth going forward from this level. Are you forecasting like annual revenue growth of like 10% to 15% at this point?

At least.

Okay. Thank you. I'll get back in queue.

Thanks.

Thank you, and our next question comes from the line of Joe Munda with Sidoti & Company. Please go ahead.

Afternoon, Bruce.

Hi, Joe.

How are you?

I'm just doing great. And yourself?

I'm good. I have just two quick questions. What is the total current bedcount of all your facilities in total?

Don't have the number in front of me. But I think with Renaissance online it's about 300 beds.

Three hundred beds?

And I will firm that up and send you an email this afternoon or tomorrow morning.

Okay. And just a follow-up on Renaissance. Is it going to be an out-of-pocket to the consumer, or do you have reimbursement in place?

Both. No government insurance. It's going to be private pay and commercial insurance contracts that we already have in place at a very good revenue per day.

And do you have an expected revenue per day that you're eyeing?

Yes, we're north of $500, which is a pretty good number for a substance abuse program.

Okay. That's all I have right now.

Thank you.

Thank you.

Thank you. (Operator Instructions)

Our next question comes from the line of Russell Cleveland with RENN Capital. Please go ahead.

Hello, Bruce. Congratulations. A good quarter, and stock is responding, which we all like. Couple of questions. One, you know, our objective of 10% -- and I think 10% pretax income, that's our long-term objective, is that right?

Well, that's our mid-term objective. I mean, that's our first objective.

Okay, so if we hit that number, the earnings would be considerably above where we are today. That's for sure.

That's correct. That's our goal.

Now the other question is the allowance for doubtful accounts seems fairly high at $4.2 million. Touch upon that a little bit, would you?

Well, the allowance for doubtful accounts is a cumulative number. What I focus more on is the percentage -- the [bed head] expenses and percentage of net revenue, and that's what we've tracked. And it's consistently under 5%, which we think is a reasonably normal industry standard. And the only thing that would change the allowance for doubtful accounts would just be writing, writing it off. But anything that goes to the allowance for doubtful accounts has already gone through the P&L.

Right.

So I think from an accounting standpoint, you know, we're constantly trying to collect as much debt for as long out there as possible. And the old saying is, out of sight, out of mind. And we like to sort of keep it in front of our business office managers and our finance folks in the field to stay focused on it.

Right, right. Okay. That's all I had. Again, great, great numbers, and you know, looking forward to more.

Thanks for your support. I appreciate it.

Thank you. And our next question comes from the line of Gregg Hillman with First Wilshire Securities Management. Please go ahead.

Yes, Bruce, what's the borrowing capacity at [THC] right now?

We have, I believe we have availability of somewhere north of $3 million under existing lines of credit. Again, that number doesn't really mean a lot because we basically have paid off all of our mortgages. So we have unencumbered real estate that we could very easily reconfigure into a much larger line. And you know, we haven't needed to do that because there are fees associated with it. But we have, you know, we have an appraised property that -- and net accounts receivable that will more than support significant debt. And you know, we'll bring that on when we have the right acquisitions to support it.

Speaking of appraised property, you know, your book value I guess doesn't represent, you know, the true value of your company in terms of your intellectual property, your franchise and whatnot. And I was wondering if you could help me think about what the value of your franchise is, or just the intangibles at your company, what they're worth, in addition to your tangible book value.

Well, I really can't comment on what the potential value would be. You know, we do feel our company certainly is undervalued on the balance sheet, and the intangible value of our businesses is certainly much greater than the book value. I mean, we can look at industry peers and sale prices and companies have been valued at one or one and a half times revenue. So we -- I think it is undervalued, but that's the way the accounting world works, and we'll just go from there.

And Bruce, what are your costs to be public right now do you think on an annualized basis?

I think it's probably in the million dollars per year range.

Okay. And just about whether, the whole question about whether your company is capital intensive, whether you need a lot of CapEx to continue to let's say double sales for, from where you're at right now. What would it take in terms of CapEx and -- well, what programs do you have that you can grow without spending a lot of capital? And what other programs require a lot of capital to grow?

Well, you know, we have a lot of questions after this, and Operator, we'll move to (inaudible).

That's okay.

But I'll answer it just sort of quickly, is that, you know, Renaissance is a brand new program. We've already spent the money to renovate it and get it going. We still have some excess bed capacity minimally in Michigan, and we anticipate having a little more excess bed capacity in Las Vegas, because I believe we'll be able to add four or five beds to the existing structure with no CapEx. So there's still a little bit more room without spending any money. And you know, I don't know exactly what that number is, but to answer your question is that we really don't need to spend any more money in CapEx other than sort of routine renovation kinds of remodels to continue to increase the revenue. And that's where we see the margins coming into.

Okay, thank you.

Thank you. And our next question comes from the line of John Evans with Edmunds White Partners. You go ahead.

Bruce, can you talk a little bit about kind of what you've seen so far in January and February because of the inclement weather? I know that doesn't affect Vegas, but I'm sure it affects Michigan. Has that caused you any problems from people in beds or anything?

No, I don't think the weather's affected us. We've had a very strong period in Michigan this year. So I wouldn't -- I don't think the weather ... I mean, we may have had some patients delayed flying into Virginia or in Utah if there was a storm. But we generally get them rescheduled. And it has not been, has not been an effect on us.

And then on a follow-up question, can you just talk just a little bit -- last quarter you talked about the provision was a little bit high because of some delays for payments in Michigan. Did you receive those payments, or are those still outstanding? And just kind of the question that the other person has too, is where do you think this provision kind of shakes out over time? Because it seems like you continue to build it as a percentage of a P&L, and I'm just trying to understand that.

Well, some of the old receivables have come in, and there's still a few that we're working on that we're hopeful that will come in. We're actually negotiating a few of those right now. In terms of the allowance for bad debts, again, I don't mean to keep going back to the same thing -- I mean, I look at a percentage of net revenue, and that's sort of what drives me. And we could easily cut the allowance in half by just writing it off. Some companies are more aggressive in writing that off to reduce the allowance. To me, it really doesn't -- I mean, the impact, has no impact on the P&L. And our view is that having it out there gives our business manager some more focus to continue to try to collect it.

Okay. All right. Thanks.

Thanks. And our next question comes from the line of Walter Schenker with MAZ Partners. Please go ahead.

Two things. First, could you just address what it takes to get Renaissance to break even to profitable having lived through Seven Hills for years. And secondly, could you sort of, could you address where you stand on your capitated business on your cost versus pricing? Thanks.

Thanks, Walter. Renaissance is a much smaller operation. Break even's about a dozen patients. And we're actually hoping that we'll be there within 30 days of opening. And knock on wood there. But I think you're going to see a significantly faster ramp-up than we did in Las Vegas. In terms of the capitated business, Vegas is a tough market. The good news is that things seem to be stabilizing in the economy.

The number of capitated [lives] are at least not dropping anymore. And we do have the right to bring the contract back to the table based on two major factors that we did write into the contract the last we negotiated it, which was a reduction in lives and a change in benefit plan, which is related to parity. So we're in the process of negotiating that right now. And I expect to have some news on that within the next 30 days.

Thanks a lot.

Thank you, Walter. Last question, Operator, I think.

All right. Our final question is a follow-up from the line of Joe Munda with Sidoti & Company, LLC. Please go ahead.

Yes, Bruce, you had mentioned acquisitions. Can you give us a little bit of leeway onto the size possibly of an acquisition and what you guys are looking for, whether it be another hospital or another adolescent program? I'm sorry, and how would you guys fund that?

First of all, we'd fund it through debt, not equity, or mostly through debt.

Okay.

And you know, we're looking at a couple of business, revenue base in the $10 millions and $20 millions in revenue. These would be businesses that are immediately accretive in a month out after the acquisition. So I think we're -- and you know, we're actively in the market and looking at a number of opportunities, and hopefully in this next year or this current fiscal year we'll have some good news to report on another significant acquisition.

Okay, thank you.

You're welcome. Hey, Operator, I think that's the last question in the queue. I'd like to thank you all for joining us, and we appreciate your interest and support of our company. We're certainly feeling very good about the progress we continue to make. And certainly more excited about the future. So thank you all, and I look forward to talking with you all off line individually. Have a wonderful day. Thank you.

Ladies and gentlemen, this concludes the PHC, Inc. Second Quarter Fiscal 2011 Financial Results Conference Call. Thank you for your participation. You can now disconnect.