Acadia Healthcare Company Inc (ACHC) 2013 Q3 法說會逐字稿

(Operator Instructions) Today's call is being recorded. Please go ahead.

Thank you. Good morning. I'm Brent Turner, President of Acadia Healthcare. And I'd like to welcome you to our third quarter 2013 conference call.

To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by following the Investor Relations link to Press Releases and viewing yesterday's news release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2013 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 "believes," "anticipates," "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 third quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publically any forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time, for opening remarks, I'll now turn the conference call over to our Chairman and Chief Executive Officer, Joey Jacobs.

Good morning, and thanks for being with us today. In addition to Brent, I'm here today with our Chief Financial Officer, David Duckworth; and other members of our executive management team. David and I each have some brief remarks about the third quarter and our outlook for Acadia. Then we'll open the line for your questions.

Acadia continued to grow at a strong pace for the third quarter of 2013. Our revenue increased nearly 80% from the third quarter last year to a new quarterly record of $185 million. Adjusted income from continuing operations grew at a triple-digit rate for the third consecutive quarter. Adjusted income from continuing operations per diluted share rose over 75%, to $0.30, on a 20% increase in weighted average shares outstanding due to our public equity offering in December last year.

The growth in revenue for the quarter primarily reflects the addition of 15 acquired facilities in the 12 months ended September 30th, 2013; as well as the addition of 263 beds to existing facilities and the opening of a 60-bed de-novo facility. These activities included the completion of our acquisition of an 87-bed facility and the addition of 43 beds to existing facilities in the third quarter of 2013. As a result, Acadia licensed beds increased to approximately 3,900 at the end of the third quarter this year from more than 2,400 at the end of the third quarter last year.

The addition of new beds to existing facilities again drove strong growth in same-facility revenues for the third quarter, which also benefited from our ongoing local and national initiatives to generate additional revenue in our existing facility base. We produced a 9.9% same-facility revenue increase with growth of 8.4% in same-facility patient days and 1.4% in revenue per patient day.

Our same-facility EBITDA margin was 25.3% for the quarter, compared to 25.8% for the third quarter last year. We also continued to produce very significant growth in consolidated adjusted EBITDA, which increased by 82.6% to $38 million for the quarter, and by 40 basis points to 20.8% as a percentage of revenue.

Looking ahead, we have already taken a number of positive steps toward continuing our stated growth thus far in the fourth quarter. On October 1st, we opened the 75-bed facility in North Tampa, Florida that was under construction when we acquired it in May 2013. And we also completed the acquisition of a 68-bed facility in Alexandria, Louisiana. On October the 15th, we opened a new 42-bed facility in Lancaster, South Carolina.

We are also continuing to add beds to existing facilities during the fourth quarter. While we expect to add new beds of at least 5% of our beginning licensed beds in any given year, we have targeted adding approximately 300 new beds for 2013 and for 2014, which is higher than our 5% expansion bed target.

To summarize -- we believe Acadia is well positioned in our markets as the leading provider of high-quality behavioral healthcare for our patients and their families. We are also well positioned as a growth company, both because of attractive industry dynamics and strong long-term record of our management team in executing our proven growth strategies. As a market leader with favorable growth prospects, we remain confident of our ability to drive further long-term expansion and shareholder value.

Thank you again for being with us today. And now, here's David Duckworth to discuss our results in greater detail.

Thanks, Joey. And good morning.

Acadia produced third quarter revenue of $184.7 million, an increase of 79.1% from $103 million for the third quarter of 2012. Adjusted income from continuing operations rose 115.3% to $15.2 million, and adjusted income from continuing operations per diluted share rose 76.5% to $0.30. Our adjusted results exclude transaction-related expenses of $984,000 for the third quarter of 2013 and $732,000 for the same quarter last year.

Acadia's weighted average shares outstanding increased 19.9% on a comparable-quarter basis, primarily due to its common stock offering in December of 2012. The Company's same-facility revenue grew 9.9% for the third quarter, with an 8.4% increase in patient days and a 1.4% increase in revenue per patient day.

Same-facility EBITDA was 25.3% of same-facility revenue, compared with 25.8% for the third quarter of 2012. This decrease is primarily attributable to the lower bad debt expense in the third quarter of 2012 of 1.4%, compared with 2% of revenue in the third quarter of 2013. Year-to-date same-facility bad debt expense is 2% for 2013, compared with 1.8% year-to-date in 2012. Adjusted consolidated EBITDA increased 82.6% for the comparable quarters to $38.5 million, which was 20.8% of revenue, compared to 20.4% of revenue for the third quarter of 2012.

Acadia's effective tax rate for the third quarter of 2013 improved 140 basis points to 34.7%, compared with 36.1% for the third quarter last year. This improvement, which added $0.02 per diluted share to our earnings for the quarter, was a result of our ongoing tax-planning strategies in each of the states in which we operate. We expect that our tax rate will be approximately 38% in the fourth quarter of 2013.

As detailed in our news release, we have raised our 2013 guidance for adjusted earnings per diluted share to a range of $1.06 to $1.07, from the previous range of $1.01 to $1.03. Our financial guidance excludes transaction-related expenses, debt extinguishment costs, and the impact from any future acquisitions.

This concludes our prepared remarks this morning. And thank you for being with us. I'll now ask Rochelle to open the floor for your questions.

(Operator Instructions) Kevin Fischbeck, Bank of America Merrill Lynch.

Can you just talk a little bit more about the same-store margins? If I understood the commentary, it sounds like you view bad debt expense this quarter as being kind of the right run rate; it was just that the prior-year quarter was abnormally low? Is that the way to think about why it was down year-over-year?

Kevin, this is Joey. That's right. As with previous history with the prior company and with this company, our bad debt runs about 2% of net revenue. And last year, we did have two good quarters, the third and fourth quarters. And it was basically where we were doing some cleanup with some acquisitions that we had made in earlier part of 2012.

So we're up against last year's -- I think it was 1.4%. And normally, we run about 2%. And that was the difference in the same-store facility margin.

Okay. And then, the overall bad debt was higher than that. Is that still related to the Delta Medical Center you highlighted last quarter? And is that just going to always operate at a higher bad debt number, or will that come down over time to the 2% number?

It will operate that way, Kevin, for the next couple of years. We'll have to wait to see about -- Tennessee was not an expansion state. And we'll just have to wait to see about how the Obamacare rolls out and how the uninsured and the Medicaid get covered. Tennessee was not an expansion state.

So for the next 18 months at least, I think it's going to be what it is now. But there is a chance that it could go down in the outer years as more people are covered under insurance plans.

Okay.

And then, other operating expenses was a bit higher than we would've thought, I guess. If you look at last year, it did ramp up Q1 to Q2 to Q3; [sort of] the same progression. But this just seems like a little bit faster ramp. Is there anything going on there?

No. Once again, it is primarily -- Delta is such a large facility, and it does have roughly 30 medical/surgical beds in it. And that is continuing to move the numbers in all the categories up a little bit because of the complexity. And we have more than 100 psych beds there. And quite frankly, we're looking to find ways to put more beds in the facility. We're running about 100% occupancy on the psych side. So things are doing well there. It's just that due to the med/surg part of the business, it distorts some of those ratios from this year to last year.

Okay.

And then, last question -- I wasn't quite sure what you were referring to in the press release. And then also, I think, in your prepared comments you mentioned some revenue growth initiatives at the same-facility level. Is there something kind of unusual there, or new there, that you would kind of spike out as an initiative beyond just maybe hiring more salespeople or adding new service lines?

There's nothing new there. But I guess we were just wanting to reinforce that our same-store facility growth, our revenue initiatives, really are at that local level with the CEO adding new programs to their facilities. And then, overlaying that is that our national marketing group has had a record-breaking year this year about placing patients into our facilities. So both of those -- it's basically the CEOs adding new programs to their facilities and the national marketing group having a record year. And we just want to highlight them and what they're doing to the Company. Nothing new is there. It's just that they've had a great year, and we expect them to continue to do great things in the future.

All right, great. Thanks.

Brian Tanquilut, Jefferies.

Good morning, guys. Congratulations.

Joey, you highlighted how you guys are ahead of your typical 5% average on bed expansion. Do you mind reminding us what you're spending for these beds, just on a capital expenditure basis?

It's between $100,000 and $120,000 a bed. Some locales, we can go in and do it at $80,000; some cost $150,000. But a good average or a good modeling number would be $100,000 to --

Okay --

-- $120,000.

Got it. And then, you highlighted the 60-bed de-novo facility. Is that something that we should expect you guys to do more going forward -- starting de-novos from the ground up?

I think I'm going to be a little but more positive there. I think we would say we would do maybe one a year or whatever. It could now ramp up into maybe two a year, maybe three a year. We've also done a new one in South Carolina that we've just opened up, and we did the one in Atlanta; and really North Tampa opening up. Even though we acquired the facility, we had to finish the construction and bring it up.

So this year, it looks like we've done three facilities. So I think it's going to be more in the two to three range going forward. We are getting several inbound calls from large med/surg not-for-profit systems about inviting us to their campus and to build a psych hospital on their campus, or near their campus. So Steve Davidson is very active working those opportunities.

And Joey, to that point -- I know we've talked in the past quite a bit about how there are opportunities emerging in the nonprofit hospital space for acquisitions. And if you don't mind just giving us an update on what you're seeing there, and really just the broader view on the acquisition pipeline? I know you guys have had a good year this year. But what does 2014 look like so far?

2014, I think, is going to look a lot like 2013. We expect to close on more facilities in the fourth quarter. And the pipeline [or] visibility into next year -- we've got some [lever intents] already signed. And more than one of those are with not-for-profit systems where we will be buying their facility and partnering with them.

So 2014, I think, has the potential to be like 2013. And Steve and his department are very busy following up on leads and projects. So we feel very good today.

Joey, last question for you -- Delta -- we've talked about that on this call quite a bit. Just wondering if you can share with us how the capacity has ramped up there. Because I know you just said it's 100% capacity now. So what did that look like when you bought it? And how long did it take for you guys to ramp that up? Thank you.

Well, we bought it the first part of this year. And we renovated and spruced up some beds, and we have those beds filled. And we are looking at the next expansion there to fill more beds. And then, we're also looking at something else in that market to assist our network there. So it's turning out to be a great market, and Delta is presenting us with tremendous opportunities on expansion. And we still have over 100 beds that we can grow into on the Delta campus. So we'll take another 20 beds, get those online, and do it 20-bed -- in increments. But we have a lot of demand there for good, quality behavioral healthcare services.

Got it. Thanks, guys.

Frank Morgan, RBC Capital Markets.

You had mentioned about and called your national marketing group, Joey. I'm curious, when you talked about their help in placing patients -- where have you seen that success? Has it been acute; RTC? And what's the payer type? Is it more commercial, or government?

It is primarily residential patients. And the reimbursement is similar to what it's always been -- it's more governmental, Medicaid patients. There is a few private-pay patients also, or commercial patients. But primarily, it's Medicaid and governmental agencies. However, we have just recently started working with another partner, and we are getting some acute referrals to us that we would not have seen. So things are looking good about through our call center and our referral and our national marketing group.

Okay.

One other -- maybe just an update on pricing, from a Medicaid standpoint -- how is that looking? And then, maybe a little bit of discussion around what's happening on the exchange negotiations? And I'll hop off. Thanks.

I think pricing has not changed since our last call. I think we're going to get the 2%, 2.5% for Medicare. We're going to get 4% to 6% from commercial. And Medicaid is going to be in that 0% to 1% range there. And as you can see today, on the third quarter, we blended out a 1.4% increase for the quarter. And that's okay with us, as rapidly as we're growing our same-store patient days.

We're having limited discussions about the exchanges in the networks. Once again, we will be one of the last places where they will focus on putting us and keeping us in the networks. We're not being excluded from anything that I'm aware of. And we do have a few discussions going on with payers about new products; those sort of things going on. But nothing definitive today.

Thank you.

Mr. Morgan, were you done with your question?

Yes. I'm finished, thanks.

John Ransom, Raymond James.

How much room do you think you still have to expand and convert beds in your same-store base? And what do you think the margin opportunity is? Obviously, it's been great. I just wonder how much is left.

Okay.

Expansion -- John, we will add close to 300 beds to the same-facility base. And the base continues to get larger. So we're just kind of wrapping up our budgeting process for next year. And the projects we see on the construction list are very good, very strong; and there'll be more to come.

And then, on the margins -- the margin's going to be in the 26%, I think, maybe 27% range as we take on -- this last group of 15 facilities that we acquired had margins less than our company average. And we'll be moving those up into -- be moving those up above there. So I think our margins could get into the 26%, 27% range. But if it stayed at 26%, that would be fine for us. But there is a couple of hundred more basis points there potential for us, as we (multiple speakers) --

What about converting from residential to acute? Is there much more room there as well?

No, not really. We're doing one big project right now where we've taken a facility and converting it to acute, half of it to acute. And we just about got that done. There'll be one project next year. We don't have anything identified now. But there'll be a 20- to 40-bed project that we will do, that will probably take residential into -- convert it to acute. But at the same time, we will continue to add residential beds to the Company. Our residential facilities are doing great. And so, we will look at opportunities there, too.

And you're not seeing -- one of your large competitors is experiencing pressures on length of stay -- you're not seeing any pressures on length of stay in the residential side?

No. Nothing, no. John, there's always been utilization review and pressure there. But we have not seen any intensity or pickup in intensity on utilization review. Once again, the patients we take care of need to be with us. And I think everybody realizes that the worst thing we can do is prematurely discharge a patient in today's environment. Because something bad could happen.

Right.

And lastly, on M&A -- are there any large-scale opportunities out there? Is it going to be more what you've seen, which are the smaller batches in de-novos?

I think it's going to be smaller batches. But there are a couple larger things out there, opportunities out there for us. But it's going to be smaller batches, one-offs. The facilities that we partner with on the not-for-profit side -- you're going to see those facilities being much bigger, and the revenue base being much larger. So one of those hospitals might be three times the size of, say, single facilities that we've been buying. So there's some large single facilities that we're looking at.

Are you typically splitting the profits there down the middle, or do you get a majority? Or how does that work?

Right now, it looks like we will be acquiring 80%-plus of the opportunity.

Great. Thanks so much.

Kevin Campbell, Avondale Partners.

I just want to make sure I heard something correctly in your prepared remarks, Joey. Did you say you acquired a new facility in Alexandria, Virginia on October 1st?

(Multiple speakers) Alexandria, Louisiana.

Louisiana. And can you provide us with any additional details on that? I don't think there was a press release when that was done.

It's 68 beds. It's a sole community [providing] hospital. Our operations team really liked this facility. And it has opportunities to grow. And Steve and his team have been working this deal for awhile, and we were able to agree on the price. And we think we bought it right. And we think operations has a great chance to grow it and improve the operations.

And we're off to a good start there. The employees have really accepted Acadia and the way we do things. And so we've got -- we think good things are going to come out of that facility.

What's the revenue run rate there now?

We haven't disclosed that.

Okay.

And then, cash flow from ops from pretty strong for a second quarter in a row. Can you maybe give us a sense for what a normalized annual number should be there?

It is going to fluctuate during the year. But we expect to see at least the number we saw in the third quarter. We did have some AR increases and other items that we typically see in the third quarter that made that number lower than what we saw in the second quarter. $25 million or so a quarter is what we expect. We benefit from a lower cash tax rate than our effective tax rate that's been a positive to us from a cash flow from operations standpoint as well.

So we should think about it in general, and again it'll fluctuate by $25 million or so a quarter?

Yes.

Yes. With the exception in the first and third -- we have our largest interest payment semiannual on our note. So that's where you see a little volatility in the first and third.

That's helpful.

And then, the tax rate -- I know you gave a number for the fourth quarter -- as we think about modeling in for 2014, is it going to stay around that 38%? Or -- it was obviously higher in the first half of this year.

We do think that our tax rate will be lower looking out into 2014. Depending on recent acquisitions, other state tax-planning projects that we have in the works, we think it will be between 38%, 38.5%. But we will provide more guidance on that when we provide our 2014 [guidance].

Yes. And Kevin, the thing not to lose there is -- whether our provision is 38% or 38.5%, due to some of the structuring of our acquisitions over the past 12 months, our effective cash tax rate is running about 23%. So that's sort of -- the most important piece for us is we're actually paying about 23% on a cash basis.

Thank you very much.

Charles Haff, Craig-Hallum.

Thanks for taking my questions, and congratulations on another great quarter. (Technical difficulty)

Hello?

His line just disconnected.

Okay.

Whit Mayo, Robert Baird.

Joey, do you have any new thoughts on what to expect in the final parity rule that should be out in the next few weeks?

Whit, I don't have any update. Brent, you've got any current update on that?

No. We expect the final to be very similar to the interim regs that we've been operating under the last few years. Obviously, there's a few technical aspects that you always look for to be buttoned up. But we continue to believe that the administration -- there's so much support for the concept of mental health parity that we anticipate that those will be consistent and in the best interests of the patients who are benefitting from the access due to the parity legislation.

Got it.

Brent, back on the Alexandria facility -- how large is that, in terms of beds?

It's 68 beds.

Is that a psych hospital --

Yes, it's a psych acute hospital.

Got it. And the Lancaster facility in South Carolina -- what was the size of that?

It is 42 beds. And it's substance abuse and acute.

Got it.

One last question, just on the Tampa de-novo -- just wanted to get an update on how that's progressing. And do you have Medicare certification at this point? And was that a drag at all in the third quarter? Just trying to get a sense of the trajectory there.

Just a little bit of a drag. We opened it up October 1st. We will have the number of discharges for Joint Commission Medicare to come through and look at it in the next week or so. And Tom Dodd and his group do a super job for us in getting the provider numbers. And everything's on track there; no delays. And we think Tom and his group will get the number as efficiently and as soon as possible.

Got it.

So off to a good start there. Pretty good (multiple speakers) facility.

So we should expect certification in the fourth quarter?

Yes, absolutely.

Okay.

I personally expect it in November, maybe the first half of November.

Got it. And what's the rule on that? Is it 30 admissions before certification?

Thirty discharges. You got to have 30 charged for them to review.

Okay. Thanks, guys.

Charles Haff, Craig-Hallum.

Congratulations on another great quarter.

I had a question for you regarding Puerto Rico. I wondered if you could give us an update there on how things are going in Puerto Rico. I think when you did that deal, you thought there would be some organic bed additions. Wonder if you could give us an update on that.

Puerto Rico's doing well. I think quite frankly, we're working hard at adding beds to that facility. Because their occupancy, [many] days, is close to 100%. And we've got a great administrator there. And things are going well in Puerto Rico. We just can't get the beds built fast enough. So it's off to a good start, and we like being there.

And once again, this is a facility that that has really embraced us. And it's got good leadership at the local level and at the division level. And it's doing very well.

And I think you also said that you thought you may be able to add a new facility to Puerto Rico at the time that you did the deal. Is that still in place? Do you have plans to add another facility to the island?

We're working on that as we speak. And we do have plans that we're reviewing to put beds somewhere else on the island.

Great.

And then, my last question is -- regarding the increased public awareness for mental health -- I'm wondering if you're hearing anything from your markets with the increased public awareness, and you thought that that maybe translated to admission growth this quarter. Or is that not really having much of a material impact at this point?

It's not having a material impact at this point. Once Obamacare actually gets up and running, and if those 60 million people get enrolled, then the opportunity to have some of our bad debt covered, and to actually get more patient days those people would access mental health -- we think that's a positive. We just can't quantify.

Great. Thanks, guys.

Darren Lehrich, Deutsche Bank.

Couple things -- first, I wanted to just ask about the acute med/surg beds that you referenced, Joey, at Delta Medical Center. I'm just wondering, given that they certainly add a little bit of noise to the reported numbers -- are those beds that you expect to keep in service long term? Or can you decommission any of those med/surg beds? Just curious to hear what the long-term plan is on that.

We could decommission them, but we're not going to. They serve a need in that community. And we think they're going to be a positive to our facility. And it allows us to take more medically compromised citations than a normal freestanding psych hospital could, because of the med/surg facility being there, the services being there. So it's a positive to us, it's a positive to that community. And once it same-stores over, the numbers will be comparable.

So, no, we like Delta, we like those 30 beds, and the psych services. And they support our psych services. We have a unique opportunity to take care of a more difficult, medically complicated patient.

Got it.

And then, you referred to a number of the not-for-profit system deals you're looking at. Are any of them going to have a similar flavor to what you have in Delta? Or they're just more traditional campus-related transactions for psych hospitals with hospital partners?

They're going to be more traditional psych facilities because we have a med/surg partner that is working with us and had [it on] previously the psych hospitals. So we have someone that will support us on the medical side. So there's no need to do that.

Delta is kind of a one-off opportunity for us. And so the not-for-profits that we're looking at right now are just purely psych acute facilities.

That's helpful.

And then, just also wanted to ask you about your bed expansion program. And you're obviously giving us some flavor for 2014, at 300 new beds. Can you maybe just talk a little bit about CapEx that you think you'll need to deploy for those beds? Is there anything different about the next 300 beds in terms of how they'll be configured, or how much they'll cost relative to what you have been spending? Maybe just an update on that?

It's going to be very similar to what we've done in the past, Darren. If we build 300 beds, I would say CapEx probably around $30 million for that expansion. So might be a little bit higher, might be a little bit lower. But it's about $100,000 a bed. So looks very similar to what we've done this year and last year.

That's great.

And then, last question -- could you just give us the facility and bed count in your same-store grouping?

Yes. We have 33 facilities in our same-facility group, with almost 2,600 beds in that group.

2,600. Okay. Thanks very much.

Thanks, Darren.

That will conclude the Q&A session for today. I'd like to turn the call back over to Mr. Jacobs for any additional or closing remarks.

Thank you very much.

I just want to thank all of our facilities and the team out there on the ground that does the work, that takes care of our patients and our families. And the clinicians that practice in our facilities -- I want to thank them. Thank you all for our great 2013 for the first nine months. We got three more months to go to close out this year. So thanks for all what you're doing to finish strong here. I'll be going down soon to visit our facility in Tampa, and so look forward to getting out and visiting that facility.

So once again, thanks for your interest in Acadia. If you have any additional questions, please do not hesitate to contact us directly. Hope everyone has a great day. And thanks, and goodbye.

That will conclude today's conference. We thank you for your participation.