Acadia Healthcare Company Inc (ACHC) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the PHC Incorporated Third Quarter Fiscal 2011 Financial Results Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

Today's conference is being recorded, May 10, 2011. I would now like to turn the conference over to our host, Cameron Donahue of Hayden IR. Please go ahead.

Thank you and welcome. Joining us today on the call are Bruce Shear, Pioneer Behavior Health, Chief Executive Officer, and Paula Wurts, Chief Financial Officer. Before we begin, let me remind you that this call is being broadcast over the internet and that a recording of the call and a text of recorded remarks will be available on our website.

I would also like to direct listeners' attention to the Safe Harbor Statement contained in our press release issued today and posted with these prepared remarks, both of which apply to the context of this call.

This conference call may include 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 in its future plans and objectives. Various future events or factors may cause the actual results to differ materially from those expressed in any forward-looking statements made in this conference call. For discussion of these factors and risks, see the Company's Annual Report on Form 10-K for the most recent fiscal end-of-quarter.

I'd like to now turn the call over to Mr. Bruce Shear, Pioneer Behavior Health's President and CEO, to provide opening remarks.

Bruce, congratulations on continued strong results to your fiscal Third Quarter 2011.

Thank you, Cameron; and good afternoon everyone. And thank you for joining us this afternoon.

We again delivered positive financial results for the quarter in the year-to-date. Our metrics continue to be strong. We reported our ninth consecutive quarter of profitability and maintain strong revenue growth and steady gross margins.

Patient census was up at Seven Hills Behavioral Institute, as well as at Highland Ridge Hospital and the Harbor Oaks facility. Seven Hills was profitable throughout the third quarter. In the current quarter, Seven Hills will add side beds to grow this business even further. In addition, a rate increase effective March 1, 2011, from a major customer in Las Vegas, will generate an additional $2 million of new annualized revenue going forward.

For the 2011 fiscal third quarter, net revenues per patient increased 10% to $528 from $480 in the year-ago period. Average occupancy rates also increased to 83.2% from 76.8% in the year-ago period - impressive patient-day gains here.

We currently have the infrastructure to generate significant revenue without increased costs or adding additional beds. In addition, we are experiencing increased revenues from the expanded contract with the Detroit, Wayne County Community Mental Health Agency that became effective in December of last year. We expanded our existing contract with the organization offered as an entry point for any person requiring information, care, and services related to mental health needs, concerns and challenges in Wayne County, Michigan. Contract services as a result of this were up 66% in March 2011 quarter, compared to the same period last year.

I recently announced Renaissance Recovery Facility, a 24-bed residential program located in Detroit, has now been open for a couple of weeks after our grand opening in April. Renaissance is designed to provide behavioral treatment to chemically impaired adolescents, ages 12 through 17. In addition, we were able to offer an integrated behavioral model within our system. Cases with higher acuity may be admitted to our full service psychiatric hospital, Harbor Oaks, and then transferred down to a lower level of care offered at Renaissance Recovery, when appropriate.

Renaissance Recovery is our first free-standing adolescent program, and we've begun marketing the program nationally to clients who will be attracted to the facility due to its unique program offerings. We expect that Renaissance Recovery will add an additional $3 million in annualized revenue. This is up from our original estimate of $2.5 million to the above-mentioned marketing initiatives. In addition, we expect Renaissance to reach profitability in our first fiscal quarter of 2012.

We did have several non-recurring charges in the quarter, and these one-time charges reduced our operating net income. We had a $446,000 legal settlement, which was in escrow but not expense. This relates to litigation involving the Company and a former employee that was terminated in late 2005. As a result of binding arbitration, the employee was awarded approximately $410,000, plus costs. We appealed this matter on a number of occasions, but did not prevail. As a result of that, we've placed $512,000 in escrow, as required by the Court. When the Michigan Supreme Court found in favor of the terminated employee, we are required to pay $446,320, which includes accrued interest to the terminated employee to satisfy this judgment. This amount is shown as legal settlement expense in operations of the current quarter in the accompanying income statement. In addition, we had some start-up expenses of approximately $250,000 related to administrative costs at our newly-opened Renaissance Recovery Facility.

It is important to examine our financial results exclusive of these non-operating one-time items. Excluding start-up costs and fees associated with the legal settlement, operating margin in our fiscal third quarter would have been 45.5%, adjusted net income before taxes, including these charges, was well over $1 million, which is 40% ahead of last year's same quarter, and is coupled with continued, solid top-line revenue growth. EBITDA for the quarter was $725,000, including these one-time items. Total expenses as a percentage of sales were higher in the quarter than in the year-ago period due to higher census and the start-up of the Renaissance Recovery Program.

However, we continued to decrease administrative expenses as a percentage of sales to a 33.1% in the quarter, from 36.2% in the comparable quarter last year, which demonstrates our close attention to managing these expenses and also points to economies of [scale] as we begin to leverage our infrastructure more efficiently with the higher revenues.

Excluding these one-time charges, we are on-track for our stated goal of 10% operating margins by year-end. And after the integration of the Meadow Wood Facility in the first fiscal quarter of 2012, we expect to maintain or exceed the 10% operating margin and significantly increase our top line growth.

All-in-all, third quarter of 2011 was solid. It continued the excellent results we generated through the first six months of our fiscal year and 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. She'll walk you through some of other financial results. Paula?

Thank you, Bruce. For the three months ended March 31, 2011, total revenues increased [15.5] to $15.5 million, which is up 14.2% from the $13.5 million in the third quarter of the prior fiscal year. For the third fiscal quarter of 2011, net patient care revenues increased 10.8% to $14.1 million from $12.7 million in 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 in Detroit, as well as from improved patient mix. Census for the quarter ended March 31, 2011 increased 8.4%, or 1,481 days for the quarter as the result of increased census at these facilities.

As Bruce mentioned, Contract Support Services revenue provided by Well Place increased 66% to $1.4 million for the three months ended March 31, 2011, compared to $839,000 for the three months ended March 31, 2010.

Total operating expenses for the quarter ended March 31, 2011, were $14.9 million, as compared to $12.8 million in the same fiscal quarter last year. This increase in expenses is due to increased census, as noted above, and higher utilization under the capitated contracts. The majority of the increases in expenses relate to direct care expenses such as payroll, taxes, consultant services, and contract expenses, which includes payments to unrelated individuals and facilities for services provided under our capitated contracts when we are unable to provide the services internally.

Income from operations was $530,000 for the 2011 fiscal third quarter, compared to $781,000 in the year-ago period. This decreased was primarily related to the legal settlement and start-up costs Bruce mentioned earlier. Excluding these charges, income for operations would have been $1.2 million.

Income before taxes was $364,000 for the three-month period ended March 31, 2011, compared to $758,000 in the year earlier period. Again, absent the extra charges, income before taxes would have been $1.1 million.

Net income applicable to common shareholders was $65,000 for the fiscal 2011 third quarter, or zero per basic and diluted shares, compared to net income of $469,000, or $0.02 per basic and diluted shares in the fiscal 2010 third quarter.

For the nine months ended March 31, 2011, total net revenues increased 15.7% to $45.2 million, compared to $39 million in the year-ago period.

Net patient care revenues increased 15.1% to $42 million for the nine months ended March 31, 2011, compared to $36.5 million in the year-ago period.

Census at our inpatient facilities increased 6.2% for the nine months ended March 31, 2011, compared to the same nine months last year. Contract Support Services increased 23% to $3.2 million from $2.6 million in the year-ago period.

Income from Operations increased 51.1% to $2.5 million, compared to income from operations of $1.7 million in the same period in fiscal 2010. Excluding the previously mentioned charges, income from Operations would have been $3.2 million.

Net Income applicable to common shareholders was up 27% to $1.2 million for the nine months ended March 31, 2011, or $0.06 per basic and diluted share, compared to net income of $981,000, or $0.05 per share for the previous year for the same period. Excluding the above mentioned one-time charges, Net Income would have been $2 million.

We generated $642,000 in cash from operations for the fiscal 2011 year-to-date, compared to net cash generated from operations of $641,000 for the same period last year.

As of March 31, 2011, the Company had cash and cash equivalents of $2.8 million, compared to $4.5 million as of June 30, 2010.

Working capital increased 18.5% to $9.7 million as of March 31, 2011, from $8.2 million as of June 30, 2010, and long term debt less current maturities decreased to $70,000 as of March 31, 2011, from $292,000 as of June 30, 2010.

Stockholders equity improved to $18.5 million as of March 31, 2011, 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. We will continue to focus our energies on organic and inquisitive revenue sources, as well as opportunities to improve our current margins and leverage our infrastructure.

Our acquisition of Meadow Wood Behavioral Health is a prime example of our acquisition strategy. In late March, we agreed to acquire Meadow Wood Behavioral Health facility for $21.5 million. This is expected to add approximately $15 million in annual 12-months trailing revenue. The transaction is expected to close July 1 of this year. The facility is a licensed acute-care psychiatric hospital with 58 beds, providing services on its 11-acre campus to adults suffering with mental illness and substance abuse. Meadow Wood has both inpatient and partial hospitalization services focused on geriatric, co-occurring, and acute mental disorders. This acquisition will help accelerate our growth and will improve our geographic penetration. It is expected to be highly synergistic and inline with our growth-related goals.

Not only will the expansion into Delaware open a new market for our services, but the margins of this facility are strong due to Meadow Woods' operating model. This will help to improve the Company's margins after the acquisition is fully integrated into our system. We expect this transaction to be accretive and it represents a significant growth opportunity. We anticipate seeking approval for additional beds to expand the facility during the next 12 months after acquisition, and expect to retain the existing staff at Meadow Wood under our current management. This should improve efficiency by spreading more beds across the same operating leadership.

The anticipated acquisition is made in connection with the divestiture requirements imposed upon Universal Health Systems following its acquisition of Psychiatric Solutions. The closing is contingent upon regulatory approval, including approval of the FTC and appropriate regulatory agencies of the State of Delaware, and other customary closing conditions.

PHC has received a commitment for funding in connection with this acquisition from Jefferies Finance LLC, a division of Jefferies and Company Incorporated.

We are excited about the magnitude of this opportunity and look forward to finalizing and integrating Meadow Wood into the PHC family of facilities. We also think it represents an important opportunity to create additional shareholder value with its higher margins and significant earnings power. Our strong organic growth, experienced management team, and established financial model and solid balance sheet allows us to take advantage of such opportunities when they present themselves. And we do see many opportunities for acquisitive growth.

In summary, our operating fundamentals remain strong. We look forward to continued momentum throughout the remainder of our fiscal 2011. We are confident that we are on track and on the right path from a strategic standpoint. Since the beginning of the calendar year, we have announced three new revenue-drivers - the expansion of our call center operations in Detroit, Renaissance Recovery, and the Meadow Wood acquisition. In total, these announcements account for over $23 million in additional new revenue, or increase of over 38% run rate since we started the new fiscal year. These increases will accelerate the visible leverage within our business model translating to bottom line results, and we expect to add similar transactions as we move forward.

I would now like to open the call for questions. Operator, please open the call for questions.

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

(Operator instructions).

Our first question comes from the line of Joe Munda with Sidoti and Company.

Good afternoon, guys.

Hi.

Hi, Joe. How are you today?

Good. Real quick, just two quick questions about Meadow Wood.

One being, were you guys bidding on the other two hospitals, Monte Vista and Red Rock, as well?

We were, initially; yes.

Okay. Do you know who those were sold to?

I do not believe it's been determined yet.

Okay. And, Bruce, do you think Meadow Wood could do over $15 million when integrated into your business for next year?

Oh, absolutely. It did last year.

Okay. Okay. And, Bruce, what kind of multiple are you looking at when you guys are making acquisitions? Is it one-and-a-half time sales? What kind of multiple are we looking at?

Well, as low as possible. But it depends on the business. It depends on the growth opportunities, the expansion opportunities, the physical plant needs. Is it including real estate? And a number, certainly, less than ten times EBITDA. And as low as we can possibly get it for.

Okay. I mean, is - maybe my numbers are off. But did UHS pay roughly 1.7 times for PSI, and you guys paid roughly 1.4 for Meadow Wood?

Based on revenue, the UHS paid a higher premium for Psych Solutions than we did for Meadow Wood.

Joe Munda. Okay. Great. I just wanted to make sure I had that right. Thanks, guys.

Thank you for that point. I appreciate it.

Thank you. Our next question comes from the line of Eric Stevens with Wren Capital Group. Please go ahead.

Hi, fellows. It's [Russell Cleveland] here with Eric. Question - good numbers here. It's too bad we had to pay this employee this amount of money. By the way, is that still on appeal? That's not my main question. But is that still going to be appealed or are we just going to end it and pay the man the money?

It's over. We exhausted our last means of appeal. This is something that's been going on for five years, Russell. It's over. The money's been paid out and we can move on.

The big question here on the Meadow Wood, the $21 million - what type of financing are we talking about with Jefferies? I don't think you mentioned that.

It's basically a term loan that's securitized by the assets of the Company and will involve a refinance of our existing lines. And a LIBOR press kind of rate.

Right. But no equity or anything like that?

Zero equity. It's all debt.

Okay. Good. Well, the other following-up question - these other sales from United - it looks like we're not going to be in the running for further purchases here from that source?

No. We don't anticipate being in the running for the San Juan or the Las Vegas facilities.

Okay. But we're finding that there's other Meadow Woods around that we might be able to buy?

We're looking at a number of facilities right now - a couple within that same range that are also profitable. And should we reach an agreement, it would be accretive to earnings the first quarter out.

Okay. I notice the announcement where we're getting the increased contract in Las Vegas. And that should flow, I guess, largely to the bottom line for next year. Is that right?

Yes. Correct. Their rate increase took effect March 1; so we had a short period of it in this quarter. But, clearly, we'll have a significant impact on the bottom line in this current quarter and moving forward.

Okay. And then I guess the last question - our goal of 10% - you use the word operating - I use the word net income before taxes. So that's our goal for the coming year, 10%?

Your term is the one that I use. And even though we may not have said it that way, it's net income before taxes is what I look at.

Russell Cleveland. Right. So, 10% on the revenues, which would be a very good year if we could do that.

That would be a very good year. And we believe that it's obtainable.

Russell Cleveland. Okay. Eric, do you have any questions?

Bruce, can you expound on the 401K expense and other non-operating items - those mentioned in the press release?

Yes. We have a third-party administrator that administers our 401K. And without getting into the details, they did not do all of the testing that was necessary, and it resulted in some penalties that the Company had to pay out. And we have that straightened out, and it's caught up, and we're back on track. So we do see that as a one-time expense that we booked. And we're in the process of looking into how we can recover that.

And what part of the Income Statement is that in?

Where is that?

It's Miscellaneous Expense. It's non-operating.

Okay. Total Other Income or Expense?

Yes.

All right. Thank you.

Thank you.

Thanks so much.

(Operator Instructions)

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

Hi, Bruce.

Hello, Walter. How are you today?

Good. Sorry for this cell phone but I'm on two calls.

In respect to the five additional beds in Las Vegas, just to give us some sense of what that means, you're currently running what sort of average daily rate per bed, and roughly, what sort of utilization?

In the last month or so, the hospital has been running close to 100% occupancy. So we are diverting patients every single day. The beds are up, ready to go. We're just waiting to receive the license in the mail, which we're anticipating any day. Revenue per day, in the high sixes to low sevens.

And the variable cost is very low?

It's certainly a lot less than the revenue.

Okay. Secondly, I was somewhat pleasantly surprised by the rate increase you received in Nevada. This is on a 28% on a per-person basis?

That's correct.

Okay. And therefore, prior to 28%, you had been feeling some significant cost pressures (inaudible - multiple speakers) significant increase?

That's correct. And our contract does allow for that based on utilization. It was a negotiated process that was going on for a while. I think both parties are very happy with the outcome.

Okay. And therefore, without disclosing - at least over the last few quarters - the margins in running that capitated business have been gradually declining?

That is correct.

And so this is a big step toward getting to your net income target?

It's a huge number for us and has an immediate impact on our bottom line, both in Las Vegas and carried through to the parent.

The startup going forward as you actually get up and running in the fourth fiscal quarter before you're profitable in the first quarter of next year, and Renaissance's (inaudible) by how much?

We think it's not like a huge hospital. We think it could be another couple hundred thousand dollars. We didn't really make it - that's included in our operating expenses now. We're hopeful for a pretty quick ramp-up. We do have a number of patients in treatment already in a short period of time. And we actually just sort of kicked off our marketing this week.

Okay. As a comment in passing, which is worth nothing because you pay nothing for it, Meadow Wood is the first significant acquisition you've made in quite some time. In fact, given the size, probably the biggest acquisition you've made in quite some time, you have started up both Seven Hills and now Renaissance. So you've had a number of things on your plate. As a shareholder, I would like to get a few nice clean quarters and actually see the benefit of all the investment you're making before I realize it's opportunistic, but before you go ahead and move on to the next acquisition.

We're in agreement with you. We're in total agreement with you. And we had this opportunity in Meadow Wood that we couldn't pass. And we have no de novos planned at this point, even in any states right now. I think we're on the same page there, Walter.

And I guess the last comment is, given that you're at the end of both - and getting the benefits from now Seven Hill and Renaissance, and you have the accretion from Meadow Woods, cash flow should be pretty significant as we go through the next twelve months?

Cash flow is very strong and our income has been for a number of years.

Okay. Thanks a lot, Bruce.

Thank you, Walter. Appreciate it.

(Operator Instructions)

Our next question comes from the line of Jon Evans with Edmunds White Partners. Please go ahead.

Bruce, can you talk about Vegas and how much more profitable it was this quarter, sequentially versus last quarter? And then maybe your expectation for next quarter? And then also, can you just talk a little bit about the acquisition and what kind of margin you think that business will come in at, because I assume it will be at or above your goal of 10% for the Company? Is that true or false?

The Meadow Wood margin will be at or above the 10% goal for the company. I don't have the actual Seven Hills numbers in front of me, but it was a profitable quarter. And the current quarter that we're in is looking even better.

Unfortunately, you have these one-offs that kind of cloud the quarter. As you go into the next quarter, do you feel like you have any of these more? Or do you feel like, as you go into the next fiscal year, the numbers will start to be even cleaner going forward? Or what?

No. We're almost through the fiscal year, so there's no one-offs that we have in this current quarter, which is the good news. And it's always our goal to not have any of them. But there are a lot of moving parts year. But I do not see any in this current quarter ending June 30. And my crystal ball has not seen anything in the future, but there's no guarantee there, of course.

Thanks so much.

We feel very good, Jon. We really do feel very good about the way our businesses are running right now. We have a strong team and a strong operational team in place. The metrics have increased. Occupancy percent certainly says a lot. A higher revenue per day, rate increases, and new contracts. So we believe that really, in summarizing, we think we're in a very good position finishing off the fourth quarter of this year and setting us up real strong for the beginning of next fiscal year.

And then the last question - relative to the Jefferies debt, do you have any idea what the pricing will be? Will it be LIBOR or plus something? I'm sure you're in some kind of negotiations, but can you give us any kind of insight so we can start to plug something into our models?

I wish it were just LIBOR; but it's LIBOR plus something. And I think we'll be able to get a little more clarity on that shortly.

Okay. Thank you so much.

Operator, I think we have time for one more question, if you have one.

I do have a question. I have Michael Needleman with Preservation Asset Management.

Good afternoon. I wonder if you might just walk through how the occupancy for the quarter kind of progressed? And if you can, shine a little bit of light on what you're seeing in the current quarter as far as your occupancy is concerned?

The occupancy has been improving since the first of the year. We had a very strong March, and we've had a stronger April, and a stronger May. So I'm very confident - I feel really good about the numbers. Like I said, we did have - we did report pretty reasonable occupancy in the last quarter. And I think we're on track at that level and probably a little bit higher in the current quarter. We're tracking where we feel we should be at this point.

And just in terms of Renaissance - I know that it's very new - but you said that you do have patients. Are you able to talk about what current number of patients you have in that facility?

I believe we have four or five patients in the facility. Again, it's only a 24-bed facility and we just started admitting in the last two weeks. And we, generally, when we open a new facility go slowly intentionally so that we get the bugs out of the system. But, as I mentioned, we just started our marketing and advertising on Monday of this week.

Thank you.

Thank you all for your support. Operator. I thank you all for joining us. We had a very large attendance today. And I want to thank you. And as you all know, we're open and available. Should you have any further questions, just give us a call at any time. Thank you all and have a wonderful day.

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