Acadia Healthcare Company Inc (ACHC) 2012 Q2 法說會逐字稿

Please stand by. We are about to begin. This call is being recorded. Mr. Turner, you may begin.

Thank you. good morning. I'm Brent Turner. President of Acadia Healthcare. And I would like to welcome you to our second quarter 2012 conference call. To the extent, non financial measure discussed in today's call. You may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to gap on our website by following the Investor Relations link to press releases in viewing yesterday's release. This conference may contain forward looking statements within the meaning of the Private Litigation Securities Reform Act of 1995, including statements, among others regarding Acadia's expected quarterly and annual financial performance for 2012 and beyond.

For this purpose, any statements made during the call that are not statements of historical fact, may be deemed to be forward looking statements. Without limiting the foregoing, the words believe, anticipate, plans, expects, and similar expressions are intended to identify forward looking statements.

You're hereby cautioned that these statements may be affected by the important factors among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release. And consequently, operations and results may differ materially from the results discussed in the forward looking statements.

The company undertakes no obligation to update publicly, any forward looking statements, whether as a result of new information, future events or otherwise. At this time, for opening remarks, I will now turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

thank you for being with us today for our second quarter conference call. In addition to Brent, I'm here today with David Duckworth, who was recently promoted to Chief Financial Officer and other members of our chief executive team. David and I each have remarks about the second quarter and future expectations. Then we'll open the line for your questions.

Acadia continued to demonstrate very strong profitable growth with its financial results for the second quarter. this growth reflects the increase in the bids over the past year. Primarily, from the PHC acquisition and the purchase of three facilities from Haven. As well as approximately 200 new bids added through facility expansions during the 12 months ended June 30, 2012. We also continued to produce substantial same facility revenue growth which increased 7.3% for the quarter and helped drive a 60 basis point increase in our same facility pivotal margin. the 23% for the second quarter. Our average pivotal margin for all our facilities which 220 basis points to 24.6% for the quarter.

Highlights the solid potential for our ongoing same facility margin expansion. The growth in our facility margins contribute to an 83% increase in adjusted consolidated EBITDA for the second quarter to $20.4 million and an increase in margins of 280 basis points to 20.3%. Looking forward to the second half of 2012. We expect continued expansion in our beds through both acquisitions and additions of new beds to existing facilities. In our last call, we mentioned plans to open 140 beds for the last three quarters of 2012. We've opened up 38 of these beds since the end of the first quarter and still have another 137 to complete.

We expect to bring 80 of these beds online in the third quarter with the remaining 57 in the fourth quarter. For all of 2012, we expect our total increase through facility expansion will be 294 beds. With completion of our secondary public stock offering in May, we are very well positioned to fund our acquisition and initiatives for 2012 and beyond. We are confident, we have ample opportunities to deploy the capital from the offering in accretive transactions. We do not complete any transaction in the second quarter are thus far, the third quarter. In part, due to our highly investment process and our unwillingness to pursue any transaction beyond the limits of what our analysis indicates makes since for Acadia.

We are actively working on several transactions and we expect to close one or more in the coming month. Because our guidance does not include the impact of future acquisitions, we've made an adjustment in our guiding service that reflects the increase in outstanding shares from the offering. As David will describe in greater detail. As is customary, we will update our guidance in conjunction with acquisition closings.

To summarize our operations to the first half 2012 are producing strong results with the addition of the bids already achieved through acquisition and (inaudible) growth. As well as though planned for the second half of 2012. We are building significant momentum for additional growth for the remainder of the year and beyond. We have the operations infrastructure and financial strength to meet our expansion objective. We also have the people with the experience and expertise to continue building a company that optimizes the care we provide our patients. The work environment for our colleagues in the long term for our shareholders.

We look forward to updating you on our progress after our third quarter. David Duckworth will now discuss our financial results in greater detail.

Thanks, Joey, and good morning. Acadia's revenue for the second quarter of 2012 was $100.5 million. An increase of 58.1% compared to $63.6 million for the second quarter of 2012. Adjusted income from continuing operations for the second quarter was $6.5 million or $0.18 per diluted share. Compared to the loss of continued operations of $7.7 million or $1.01 per diluted share last year. These adjusted results exclude transaction related expenses of 670,000 for the second quarter of 2012. And transaction related expenses sponsor management fees totaling $6.3 million for the second quarter of 2011.

Our same facility revenue for the second quarter increased 7.3%. Primarily due to a 9.3% in same facility patient day. Same facility revenue for patient day declined 1.7%. Primarily due to the unusually low level of bad debt expense in the second quarter of 2011. Adjusting for this same facility to revenue for patient day would have been flat in the comparable periods. The same facility pivotal margin rose 60 basis points to 23% compared with the second quarter of 2011. Total facility pivotal margin increased to 24.6% from 22.4% for the second quarter last year. Acadia's consolidated adjusted EBITDA for the second quarter was $20.4 million or 20.3% of revenue which was up from $11.1 million or 17.5% of revenue for the second quarter of 2011.

As Joey mentioned, we've revised our guidance for 2012 to account for the public offering of approximately 9.9 million shares of common stock in May. Which raised net proceeds of $139 million. For 2012, our guidance for adjusted earnings per diluted share is in the range of $0.59 to $0.60. Compared to the previous range of $0.65 to $0.67. Our guidance excludes transaction related expenses and does not include an impact for any future acquisitions. This concludes our prepared remarks this morning and thank you for being with us. I'll now ask the operator to open the floor with your questions.

(Operator Instructions)

We'll first go to Whit Mayo from Robert W. Baird.

Hey thanks. Good morning. Maybe if we could just spend a minute talking about the volumes in the quarter strong in the patient day growth. This day was down a little that. I know a little of that was mixed, but maybe this will sort of remind us of dynamics there.

Whit, as we stated earlier, we do expect to have industry leading patient day and admission growth and that's what you see there. A state that is (inaudible) state decline is really attributable to what's going on with the conversion at one of our facilities from residential to acute. And if you were to adjust out for that one facility our length of stay basically declined at 1% are about one tenth of a day. So the length of stay after you adjust for this one facility that we're going through this conversion with that is very stable too. It was a great second quarter. Ron Fincher and the operating team has done a good job of getting the expansions completed and filling those beds. That's why were so excited about the last six months of this year. The completion of the total of 294 beds and we expect to continue to have good patient day admission growth in the length of stay at one facility is very stable.

Got it. And maybe just one other question. I'll just throw it out there. Any updated thoughts around calling back your bonds and kind of squaring that away versus the M&A opportunities. And maybe helping us to know how you're thinking about it internally as you come across a date in the next few weeks.

Yes, well Whit, obviously we have that option available to us and we would consider it, however, our first priority and option is have this capital continue to be deployed in the M&A environment with some acquisitions we're working on. So we will reserve the right to call back that day. It would not be accretive but not as accretive as some acquisition opportunities we're pursuing.

Maybe let me squeeze just one more in. Question in. Just looking at the balance sheet once, its about 10% growth they are now. What's driving it? It may be Haven and maybe a little bit of mix. I'm just kind of curious as to what's a decent number on the run rate.

Yes David you're right. It does relate to the acquisitions and as we get further away from the acquisition date we will see that allowance to continue to increase, but then stabilize.

And bad debt was sort of 2.2% number. Is that a good number on run rate?

Yes

Thanks a lot.

Next we'll hear from Gary Taylor from Citi.

Hey. Good morning guys. On the latest stages back on that point. When do we anniversary that facility conversion so when will we see a more normal length of stay in comparison?

Gary, this is Joey. Probably the first quarter of next year. It will be a good comparison. We started the conversion at the end of last year. So it will probably be the first quarter of next year when we'll have enough data at that facility. So it would be comparable. So once again, just looking at the adjusted numbers. The length of stay was 39.6 last year and this year it is 39.2. So its very stable.

Do you happen to have at the top of your head the number of RTC beds, IPS beds being converted there?

I think the facility is like 88 beds and we're doing 42 to acute. And keeping 42 under residential.

Got it. And your large competitor I guess was talking about still having some state cost restraint issues on RTC length of stay and its actually a little bit worse length of stay performance than your adjusted number down. 0.4 numbers down. I mean anything new on the state front in terms of any new regulatory activity in terms of limiting any of these RTA days?

Gary the states we're operating in, we feel the environment is very stable. I think what our operations, Ron Fincher and Gary Goldberg has done. Randy Goldberg has done an outstanding job through our national marketing campaign. So we feel very good about the stability of our RTC business and the states we're in.

Okay. Last question. Can you update us on existing debt capacity?

Sure, Gary. We have a full revolver available to us at $75 million. Plus the cash on the balance sheet which is north of $120 million. So we have as we stand, $200 million of very liquid cash available to deploy.

Okay. Thank you.

Now we'll go next to John Ransom from Raymond James.

Good morning. A couple of things. You know with your friends and the King of Prussia thing three times revenue for them. How difficult was it to reset the market expectations following that? I know you haven't announced anything but do you think this has moved the needle in the market to hire multiples?

John, its Joey. I do think it has sent some confusion in the market, but we've quickly tampered that down on that. You know, that our expectations are that its going to be a good deal for them for the seller. But its going to be a good deal for Acadia also. That we can both win on the transaction. So Steve Davidson has done a good job and myself when we go out and meet with the potential acquisitions, talking about the expectations of what we think the purchase price should be and what wins. Looking at our pipeline, I don't see that deterring.

The ability for us to grow this company through acquisitions. And quite frankly, Steve has got me out, 50% of the time these days, he has got me out on the road looking in acquisitions, so we're very busy. We think we'll make one or more acquisitions in the very near future and in 2012. But it did cause us to at any time you pay that kind of price. It was substantially higher than what we had offered for the company.

Great, secondly. Once you get your beds converted and expansions done, what do you think the proforma for the company's going to be? Either in terms of bed mix or revenue mix or whatever you want. Whatever metrics is out there. So you laid out what you're doing the third and fourth quarter. I am trying to get a sense of acute RTC mix at that point.

Let's just think about the end of 2013. I think we will be at that 50/50 mix on beds acute vs. residential. We could get there a little bit sooner. I think Medicaid has a percent of our payer mix. We'll drop 50% continue heading down there. So the payer mix will become more balanced toward the commercial Medicare side of the business. So those would be my expectations, that by the end of 2013, we would be 50/50 on the beds and that our payer mix would be more diverse than it is today.

And, that includes your M&A or your existing 220 beds?

That's both. But However, the beds that we're building are 90 plus percent acute.

Okay. Great. And speaking of Medicaid, do you have any updates on any of your acute states. I know you're spread out on a bunch of states. What are you hearing on budget talks, if anything?

Well right now, its kind of silent. John, I think everybody is still taking a deep breath from the Supreme Court ruling and we've not seen anything negative. But I haven't seen anything positive there. So its just kind of being in neutral as far as what we can see.

Okay. Thanks a lot.

Thanks.

Next will be Kevin Campbell.

Good morning. Thanks for taking my questions. I wanted to ask first on the new bed expansions. The number of beds you're doing this year. Is there any reason why that approximately 300 beds, would be a number we would use in going forward annually? Or is there some reason why its really higher now and will come down to a lower run rate going forward?

Even with just status quote, Kevin, the number of beds we would build would be in the 150 range for this group of assets. Now as we add acquisitions, we expect those acquisitions to need expansions. But if we were just stay status quo, I think it drops from the 300 back to 150 a year that we would be doing on these 32 assets. 32 facilities. But as we make acquisitions and put those in there, we could once do again, above 150 bed expansions. Because what we look at when we go through an acquisition opportunity, Camacgroid and how quickly Camacgroid and number of beds it needs.

Great. And then cash flow from ops. Can you give us an idea of what maybe we can expect for the full year in 2012 as well as your CapEx outlook there? And I was also curious about the capital spent for the real estate transaction. If you could just comment on what exactly that was in the second quarter.

All right, Kevin. We've done right at $5.3 million cash flow from ops in the second quarter and it was slightly higher than that in the first course. It think it just was normally at $5.5 million per quarter there. The CapEx will run under 2% for maintenance. But then our expansion capital is going to push that up closer to the 5% , 7% total. And then relative to the real estate purchased in the second quarter, that was three facilities that were commonly owned, previously leased through the YFC transaction. That we were able to buy real estate from that landlord and now we control those properties. So that's consistent with our strategy, preferring to own facilities vs. lease them. And now that we've acquired those three properties, almost 70% of our portfolio was owned vs. leased.

Can you give us a sense for what you're rent expense maybe should be going forward. You said $2.2 million in the quarter but later have some impact on those three facilities. Is the normal run rate close to $2 million?

The purchase of those facilities will impact our rent by approximately $1 million on an annual basis. It really didn't impact this quarter through the timing of this purchase. But going forward, we would expect approximately $1 million of rent savings.

Great and then any thoughts on how the reform has been finalized in the Supreme Court decision? I'm curious if you've changed any of your views of reform in potential means for Acadia and that's it for me. Thank you.

Oh Kevin, our opinion about reform has not changed since the ruling. We saw the ruling as a slight positive to us that Mental Health parities built into the exchanges that they get fed up. And so, its a slight positive to us. So it really wasn't going to be a negative for us if it was not upheld. Its neutral to us to slightly positive.

All right. Thank you very much.

Next is Kevin Fischbeck from Bank of America, Merrill Lynch.

Okay. Thank you. Good morning. Here's a couple of questions. The facility count was down and I don't know if you missed it at the beginning of the call. What was driving that?

To continue on was that we sold outpatient operation in South Florida that really didn't fit our strategy and it came to us through the YFCS transaction. So it was not in our core area. It was all outpatient. And I think the other, the decline in that one facility, I think we were just cleaning up the counts and making sure that they were right. I thought the 32 was the most appropriate number for us to report out.

I think you guys touched on that a couple of quarters ago. Are you done with that as your portfolio on where it should be or do expect little drips and drives you continue to do your portfolio?

I think those are over with Kevin. I think we've got it cleaned up. It took us about a year to do that and I think both the Pioneer and YFSC transaction, that if there's anything we wanted to move on from. So I think its all behind us.

Okay. And just to verify these guidance. You're just basically saying you're updating the guidance based upon the share count. What are you doing in the use of proceeds in the cash balance sheet earnings close to zero?

That is correct. And as we make acquisitions, we will through the announcement of the acquisition, we will be updating the guides.

Okay. And I think a question before you touched on this. I think your credit agreements require you to spend a portion of the money in the next six months, you have to pay down the leverage. How does that work if these deals come in a little bit later than you think? Do you just. Are you able to get an extension on that or do you just pay down the debt and then its easy to resolve the next round of deals?

Kevin, that's not something I'm worried about and we have plenty of opportunities in the pipeline to deploy the capital. But I think you're technically correct, that if we had not deployed it within six months or something, there was that provision in there, but I think what I see in front of us as far as the stages of the letter of intent on what we're looking on, I don't see that as an issue.

Okay. Then the missing number was a little bit weak. Could we talk about what drove that.

What David mentioned in his comments, the bad debt expense for last year was extremely low for the second quarter, which made it come back basically to flat. And then we did have two states where we knew this was coming. One, some of the stimulus money had been given to one of our facilities and that went away. And then on the other one was a state that had taken their residential revenues and did unbundling, which means you have to put in individually for the therapies. And so the impact of those two kept us from getting debt, you know those 2% increase that we're expecting. And then some mix of the patient, RTC patients, did a great job there growing this business. So those factors caused that number for this quarter, I think as we get more quarters behind us and this settles out, our expectations of having somewhere between 1% to 2% revenue per day increase, in then strong single digit patient day growth will be there.

Okay. I think that all makes sense. The one thing that I wasn't quite sure of is that you said you grew the RTC faster than it sounds like the stay was down because of some bad conversions. How does that work?

How does that work so quickly? You have to work through the average length of stay of a residential patient which is 180 days. And if you were to start and convert some of those beds to the acute, flipping that bed every 10 days, so there's going to be a temporary build up of admissions dividing into those numbers that will impact the math of those numbers just a little bit. So you have to be inside the numbers first to see that and when you convert beds you're converting them from a bed that would get two admissions a year and now its getting an admission every ten days. So initially, when those beds come on, there's that math (inaudible) there.

Okay that makes sense.

And then last question. As far as the rate goes, the numbers, the items you talked about was seamless money going away in rental rate. Those are fully accounted for in the quarters. A good number to be thinking about in terms of the basis going forward?

Yes. That is a good number. But of those things have been implemented and the only thing that would still be impacting this calculation a little bit, would be the conversion of beds.

Ok great. Thanks.

Okay next is Art Henderson from Jeffries and Company.

I have a question. Joey is there anything. I know you don't give quarterly guidance. But is there anything in the third quarter, any more seasonality that we should think about in our numbers?

Based upon what we've seen for our census for July, seasonality is going to be very small, if all. But once again, August is really the month when schools are absolutely out. But right now, we've seen the July census numbers and it looks good. It looks good. It looks similar to the trends we saw in the first six months.

Ok and then that's good. And I presume you still main pretty confident about. I know you've talked about exiting 2014 and $1 billion in run rate revenue. Is that still kind of. You feel confident in that expectations?

Absolutely, that's still the goal and once again, the acquisition opportunities before us, I see no reason why we couldn't get there.

Okay and then last question. On the, I know you mentioned this on the last, one of Gary's questions on the amount of acquittal you have. Do you still have an accordion feature out there that you can trigger and to remind us how much that is?

Yeah we do Art. Its $50 million. And again, that's just structurally in addition to our terminal, but still requires the lenders to actually commit to that borrowing capacity. So as far as the required payment of debt for use of proceeds or access the debt capital, our banks have been extremely supportive. And given the credit risk as we look at Acadia, we have plenty of money opportunities in front of us to put to use, so they're very good and very appreciative of our bank group and the relationships we have with them.

Great. Thanks very much, gentlemen. Good quarter.

Next to Darren Ericksen.

Hi. Good morning. This is [Dana Daravedien] for Darren. I apologize if this is after earlier. I just jumped on the call, but I wanted to see if you could give a little bit more color and margin in what you've really been doing to drive margins there?

We're very pleased with the progress we're making on margins and its a combination of being able to grow great same store and patient day growth. Then that's 90% of the margin that's just coming through. Growing our patient days and being better managers of our expenses. The other 10%, I would say is joining healthcare group, buying a fit for those sort of things, get us on the expense side of Ron and venture on his team and has done a good job of growing the business and managing the expenses. And in return, the margin improvement was there.

Great. Thank you.

We'll go next to Kyle Smith from Jeffries.

Good morning this is [Nick Dotracio]. Most of the questions I have been answered. Just one quick technical one is with the total facilities statistics that you put into your financials, it doesn't seem to reflect practically the size you've had. What exactly are the historical numbers representing in terms of what was there before?

I'm not sure I'm following you. Are you talking about the bed count?

No, simply the statistics for the year for total facility, rather than same store. These monthly proforma numbers must represent something. Historical ones.

No there's no proforma in historical numbers.

Okay got it. That was it. Thank you.

We'll go next to Frank Morgan from RBC Capital Markets.

Good morning. You commented about some of the new launches of some of the states you operate in, some of the [twicks] you reimburse. I'm just curious. Have you seen any heightened utilization management from many of the states as they look at ways, other than the way they rate to control spending growth at the state level?

Frank, being in this industry, starting with PSI, there has always been pretty tough utilization review here and it became tough in 1990's when the statements went from 30 days acute down to ten days on the acute. There's obviously, utilization review going on with every patient and you will have that one state that thinks they can move a lot of the patients in an outpatient setting. But we've been through that before. And we endorse, if a patient is not able to be in an outpatient setting. Then we're all for that. Usually a patient setting is a group home or Foster care or something like that.

That we absolutely endorse that concept. The patients we take care of have such issues and safety concerns that they can't do that so there's always utilization review. I don't think its any more intent than what it was. May be in one state they're trying something new, but we've been through that before. And so it doesn't seem a lot different than it has been in the past. So I think utilization review has always been with us and it will always be with us. But once again, safety of the patient. All the payers and the providers taking care of the patient is our ultimate goal here. And no one wants to see a patient discharged prematurely because unfortunately, in our industry, a catastrophic event could occur.

And it was suggested in an early call that in cases where they've seen higher utilization management is that readmissions may be they come back into your facility. Have you every noticed that?

Absolutely. We get it periodically at this rate. I haven't seen any updated stats Frank. So its basically, just like it was five years ago as far as we can tell in the utilization review. All payers have always had a pretty good utilization review and worked well with us.

Okay. That's fine. Just wanted to make sure nothing has changed. That's all. Fine. Thank you.

Good

We have no further questions at this time. I would like to turn the call over to Mr. Jacobs for any closing comments.

Sure. To all the team out there inside of Acadia, I just want to say thank you for the great second quarter. More importantly, I want to thank you for taking care of our patients as we sit around here improving lives that we touch. You all are doing a terrific job from coast to coast. And the Acadia family will be getting bigger this year as we continue to add beds and make acquisitions. So thanks to the team in the field. Thanks for your interest, the ones on the phone today and Acadia Healthcare. And if you have any additional questions, please do not hesitate to contact us directly. And I hope everyone has a good day.

And that concludes today's conference. We thank you for your patience.