Acadia Healthcare Company Inc (ACHC) 2014 Q2 法說會逐字稿

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I would like to welcome you to our second quarter 2014 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 2014 and beyond. For this purpose, any statements made during this 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 are 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, actual 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'll turn the conference over to our Chairman and Chief Executive Officer Joey Jacobs.

Good morning and welcome to our second quarter call. 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 second quarter and our outlook for Acadia, then we'll open the lines for your questions.

But, first, let me welcome Joy Chamberlain, the CEO of Partnerships in Care, and the rest of her team to Acadia.

As you know, since our first quarter earnings call, we have announced and completed the $662 million purchase of PiC. This transaction brings 23 inpatient facilities to Acadia that produced 2013 revenues of about $285 million, and $75 million in adjusted EBITDA. It also brings us the number two market position in the UK for independent behavioral health, which is a fragmented market that has grown 9% annually in the UK for nearly a decade.

PiC is dedicated to providing quality health care services and worked closely with the National Health Services for many years to meet the behavioral healthcare needs of patients in the UK. We are well-along in the integration of our operations, which is proceeding as scheduled. Joy and her team and all of us at Acadia believe the business is poised for expansion organically and through acquisitions. As a part of Acadia, PiC now has access to the capital and other resources to pursue these growth opportunities.

As a result, while we expect PiC to add $0.17 to $0.18 to our adjusted EPS in the second half of 2014, we also see a significant long-term growth opportunity that PiC presents us in the UK. So, to everyone at PiC, welcome. We look forward to working with you to continue providing the quality care to which your patients and their families have become accustomed and to expand our share of a growing market.

Turning to our second quarter financial results, Acadia had another strong performance with 20% growth in revenues, improved margins, and 23% growth in adjusted EPS. Our revenue growth continued to be driven primarily by the addition of licensed beds to our operations through acquisitions, and organically through new beds in existing facilities and de novo facilities.

We added 675 licensed beds since the second quarter last year. Roughly 40% of these beds came through acquisitions, and 60% through organic growth. We have added 228 beds organically during the first six months of 2014, with 106 of these added in the second quarter. We now expect to add just less than 400 beds organically for the full-year 2014. The beds we have added to the facilities in our same facility base were mainly responsible for our 11.5% increase in same facility revenue for the second quarter, which reflected double-digit growth in patient days.

Consistent with our past experience, this level of same facility revenue growth drove increased operating leverage, with same facility EBITDA margin increasing 150 basis points for the quarter. This strong, same facility performance validates our ongoing focus on adding new beds to existing facilities and reflects growing demand for high-quality inpatient behavioral healthcare.

Even as we invest to meet this demand through organic growth both domestically and the UK, we are also continuing to evaluate additional acquisitions in our highly-fragmented markets. We remain positioned to fund these growth strategies with cash flow and availability under our credit facilities. As the funding of the PiC transaction also demonstrated, we are confident of our access to additional capital for attractive acquisitions.

To summarize, after an active and successful second quarter and first half of 2014, Acadia is very well-positioned to continue to expand its market share, earnings, and shareholder value. We look forward to updating you after the third quarter. Thank you.

And now here is David Duckworth to discuss our results in greater detail.

Thanks, Joey, and good morning. Acadia's revenue increased 20.5% for the second quarter of 2014 to $213.8 million from $177.5 million for the second quarter of 2013. Adjusted income from continuing operations, per diluted share, grew 23.1% to $0.32 for the second quarter of 2014 from $0.26 for the second quarter of 2013.

Our adjusted results exclude transaction-related expenses of $3 million for the second quarter this year, and $1.4 million for the second quarter of 2013. In addition, the adjusted results exclude a gain on foreign currency derivatives of $13.7 million for the second quarter of 2014, related to the PiC acquisition.

This gain was the result of locking in to the dollar-denominated purchase price on June 3, and the corresponding increase in the value of the British pound compared to the US dollar, as of the end of the second quarter. Same facility revenues increased 11.5% for the second quarter, with a 10.6% increase in patient days, and a 0.8% increase in revenue per patient day.

Same facility EBITDA increased at 150 basis points, to 26.3% of same facility revenue for the second quarter, compared with 24.8% for the same quarter last year. Adjusted consolidated EBITDA increased 20.5% to $44.7 million, from $37.1 million, and the margin remained constant for both quarters at 20.9%.

As Joey mentioned, we are positioned to continue funding our growth strategies. Our operating cash flows totaled $22 million for the second quarter, and after the completion of the PiC purchase, we have $175 million of availability on our revolving line of credit. Also, post-transaction, our ratio of total net debt to trailing 12-months adjusted EBITDA is approximately 4.2, consistent with where we were at the end of the first quarter of 2014. Adjusted for nondeductible transaction-related expenses, our tax rate for the second quarter was approximately 38%, and we expect that our tax rate for the remainder of the year, with PiC included in our financial results, will be approximately 32%.

As detailed in our news release, we affirm our 2014 guidance for adjusted earnings per diluted share in a range of $1.44 to $1.46, which includes $0.17 to $0.18 accretion from PiC for the second half of the year. We established this guidance on July 2 following the completion of the transaction, raising the guidance from our previous range of $1.26 to $1.29. Our financial guidance excludes the impact from any future acquisitions and transaction-related expenses, as well as the gain on foreign currency derivatives.

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

(Operator Instructions). We will go to our first question from Kevin Fischbeck with Bank of America Merrill Lynch.

Phillip Kim on for Kevin, actually.

So, a couple questions. The first question being, can you provide any more color on your ability to do deals, particularly in the US?

Sure. We have a very active -- this is Joey. We have a very active pipeline. Just this past week, I was out with Steve Davidson and Ron Fincher reviewing a potential acquisition for the Company. So, we're very busy here in the States looking at opportunities for acquisitions, and expect to continue to make acquisitions in this fragmented market, as we see us making acquisitions in the UK for that fragmented market.

Got it. And in terms of pricing, are there any changes in your projection of, kind of, the 4% to 6% commercial, and the 1% to 2% in Medicare and Medicaid?

No. We see no changes from our previous call about what we expect from the commercial payers and from the governmental payers. Those ranges still hold.

Okay. And just one final question. Are there any new updates on the impacts from the [form] at all?

Well, as you can see from our double-digit patient day growth, we think -- this is just me -- I believe it's a combination of mental health parity being more fully implemented. It is, I think, some Affordable Care Act impact; and it is just the demand and the need for our services. So, forward-looking, I think for the remaining six months of this year, on growth and demand for our services, are going to be similar to what we saw during the first two quarters.

Great. Thank you.

We'll go to our next question from Paula Torch with Avondale Partners.

Thank you. Good morning. You mentioned some meaningful organic growth and acquisition opportunities in the UK, so I just wondered if you could give us a little bit of an idea, or some more color, on timing? So, could we start to see activity this year, or in 2015; or near-term, is it really going to be more about absorbing PiC and gaining efficiencies there and improving top line near-term?

The transition with the transaction is going very, very well. Ron Fincher has done an outstanding job, and all the senior management team, interacting with this acquisition of PiC. And we're very excited to have them onboard. We have already approved a 36-bed same facility addition and construction will begin on that in the near future. And we do have a couple of smaller transactions that we're looking at. So, as in the United States, we have an active pipeline there in the UK.

Great. Where do you think you'll be putting, I guess, the majority of your capital investments? Would it be in the US? UK? Or evenly split? How should we think about that going forward?

This is just me looking out, once again, forward-looking. I think that we will still deploy the majority of our capital here, but we will be deploying sufficient capital for the UK. And over a [longer] period of time, I think you see probably 75% of our capital will be spent here in the States, and 25% will be spent there; but that's over a longer period of time, with fluctuations by quarter and by acquisition. So, both markets are opportunities for us and we're going to take advantage of them.

Great. Thank you for the color. Best of luck to you.

Okay.

We'll go to our next question from Charles Haff with Craig-Hallum.

Hi. Nice quarter, and thanks for taking my questions. I had a couple questions for you in terms of the PiC portfolio. Are there any length-of-stay differences in that portfolio, relative to your US portfolio?

Yes, there are differences. The UK model takes a more long-term patient approach to working with what I believe are the chronically mentally ill, and we take care of quite a few of those patients. So, the length of stay in the UK is longer. And the NHS, the services there are very committed to providing this level, this care, to those residents there, versus the United States model where it's kind of separated, you know. The acute side will stay ten days, but, then, in the residential side, you will stay six, seven months, possibly, in our residential.

So, they have more of an all-encompassing approach, where you have acute beds, residential beds, rehab beds, and a longer length of stay there. But once again, both types of patients need to have safe, secure, quality health care, and we believe the folks in the UK and our team here in the United States are very committed to providing that quality care and taking care of these patients.

Great. Thanks for that color. And, then, in terms of differences in revenue per bed, per day, I know it's all acute over at PiC. Are there much of a difference in revenue per bed, per day?

PiC has all ranges of services: acute, residential and rehab. Their per diems are kind of in between what we would see for our residential and acute services and so, once again, that system is a little different than the United States system, but once again, the demand for the service, reasonable reimbursement rates per diems, and we feel a very good environment for which we can operate.

Great. And my last question is regarding Puerto Rico, wondering if you could give us an update on how the Puerto Rico market is going for you; and any updates on your de novo facility that you talked about a couple of quarters ago?

Sure. The Puerto Rico facility, many times is full; 100% occupied. We've just opened up new beds there. We've got more beds working to come online there, so we are absolutely pleased with -- Dwight Willingham is our Division President for that division. And our folks over in Puerto Rico are doing a terrific job. So, Puerto Rico is doing great.

The de novos, the three that we have been talking about are Rebound, Cascade, and North Tampa, narrowed their drain on the Company for the second quarter. It was only approximately $0.005 to the Company, and we expect it to be a contributing positively in the third quarter. So, North Tampa, Rebound, and Cascade, we are progressing. And I think the division presidents there, Jon O'Shaughnessy and James Duff, are on top of what is happening there. We have great CEOs in those facilities, and these are going to be tremendous franchises for us. And it appears they will be positive contribution to us in the third quarter.

Great. Thank you. Great quarter.

And we'll go to our next question from John Ransom with Raymond James.

Hi, good morning. Just to demonstrate my mastery of international tax, you guys are obviously going to be generating a lot of profit in the UK. Is it reasonable to think that that money will probably stay there and that that will, in essence, force you, for better or worse, to keep expanding in that market? Or do you plan to bring that money back here and expand here? Or if you have even thought through that yet?

John, I'm not an expert on this either, but I can give you how we've structured it. We've structured it so that we can maximize the cash in both places, and that we have an intercompany note to the UK that we would be getting interest income and could make principal payments back to the United States and it wouldn't be bothering the tax rates. And you may know that, in the UK, the income tax, corporate income tax rate is 20%.

Right.

And so we have structured it. David Duckworth, Brent Turner, and our outside consultants that we've used to structure this, we went into it to get as much of the cash back to the United States, be as flexible as we could there, or leave it there and deploy it there. I don't think we're going to get caught into having to spend the money in the UK, but if the opportunities are there, we're more than willing to spend it there. But we have a way to bring a substantial amount of money back to the United States.

Move it through the intercompany note. Okay. That's great. I was going to ask you about Tampa in more detail. Could you just give, where are you there with census there and where do you need to be to be at break even?

That's a little bit more detail than I normally would share. North Tampa was positive for the second quarter. It's already turned the corner on profitability. The census is in the 40, 50 range, and we are very excited about where they're at and where they're going, and we think it's going to be a terrific franchise, which we, actually, gave you a tour of. So, it's positive in the second quarter.

Well, your cafeteria there is better than our cafeteria, for the record.

And then, lastly, could you just give an idea of your JV pipeline with the not-for-profits and the ramp to profitability there? How long it takes to get to a decision? Are you happy with it? Do you think it will be bigger than we think? Is it slower than you think? Just more color on that would be great.

Okay. One joint venture you would know about, if you followed us, is Memphis, Tennessee, and that is a pure de novo. We're going through the zoning right now to get the ability to start building that facility. That's something that's 18 months away from us. But we're very excited to have [Baptist] as our lead not-for-profit partner in the Memphis market. And we're very excited about that market and opportunity. That is a market that we think will really appreciate and support this facility. And it complements our Delta facility, so we feel really good about that one.

Hopefully, John, we have another one to announce in the third quarter. A joint venture with a not-for-profit. Hopefully, we'll have an announcement. Once again, that's forward-looking. We got our fingers crossed and you'll have more details about it when we announce. We have, on most days, we have two to three of these opportunities that we're working on, and so we should, maybe, have a -- I think we will have an announcement in the third quarter of another one that will be even more exciting than what we're doing in the Memphis market.

Great. Thanks a lot.

And we'll go to our next question from Matt Gilmore with Robert W. Baird.

Good morning, everyone. I was just curious with the bed growth target, I think you guys have been targeting 5%, but with the growth you have seen year to date, and the potential impact from reform and mental health parity, if you thought there was, maybe, any ability to accelerate that even higher?

By us doing 400 beds this year, that's a record for us. Now, we have got our first look into 2015, and 2015, I think, is going to be -- we know it's going to be above 300. We think it could get close to the 400, and that does not include de novos. And we'll have a couple of those next year, which will add another 150 beds, 200 beds to it. So, we're feeling really good about 2015.

And that is terrific growth; that is terrific, organic growth that Ron Fincher manages through his division presidents, and all the division presidents -- I haven't mentioned Keith Furman and Roxanne Jividen, but all of the five division presidents are doing a super job about finding opportunities and building beds. And you saw their results in the second quarter, with the double-digit patient day growth. And those five division presidents, and Ron, just absolutely a powerful team working with the CEOs in the field.

Okay. Great. Thank you. And looks like the of average length of stay declined a little bit, but I assume that was driven by the addition of the key beds, but just curious if there was anything else?

It is, once again, the ramping up; more acute patient days were treated versus previously. So, it was just the acute versus the RTC.

And, then, last one for me, it looks like there was maybe a small real estate transaction. Just curious what that was, if you had any color on that? Thanks.

We bought some land for an expansion project in Louisiana. Thanks, Matt.

We'll go to our next question from Chris Rigg with Susquehanna International Group.

Good morning, guys. I jumped on here a little late; I have three overlapping calls. I did want to come back to the US market and wanted to get your views where, sort of, expansion is -- where is the best opportunities now? Is it acquisition, joint ventures? Sort of acquisition-like. Or breaking new ground on new facilities? Where do you think you see the biggest near-term potential to grow?

Well Chris, we already have 150 de novo beds to come online next year, so we know that's already in the bag. We will have two to four, I think -- once again, this is all forward-looking -- I think we will have two to four joint venture projects. And I think that we will announce between now and then. And I think on the acquisition front, we still are looking at acquisitions of size and multi-facility opportunities. So, Steve Davidson, I think, can deliver four to eight facilities here. If we were to buy a large one, even more.

So, we feel real good about all three legs of that stool, but, once again, we have to execute and deliver them. But we know we got the de novos in the bag; the joint ventures are very close. And as I mentioned earlier, Steve had me and Ron out last week looking at an acquisition that we're, quite frankly, negotiating the Letter of Intent on. So, we're very busy.

Okay. Very good. And, then, I wanted to switch over to PiC. I know you guys have already highlighted, in various materials, the margins are running decently ahead of where you guys are in the US. Now that you got a little bit of time under your belt with the Company, do you think you can still get that margin to go even higher, compared to where it is today?

The opportunity is there, Chris, but it's not a lot higher. But by quickly approving same-store bed builds, we think we can bring the contribution margins up. So, Joey and their team are dedicated to doing the best job possible and I think with the capital we can give them, the opportunity for some margin improvement is there. But, once again, we'll have to wait and see and execute.

Okay. And, then, the only other question I have is, my lack of understanding of the UK government reimbursement market, is it prone to shocks or is it fairly stable?

This is how we got comfortable in due diligence. We believe it's fairly stable.

Okay.

And more than fairly, quite frankly. We think it's very stable.

Okay.

And that's with our due diligence, that's the conclusion we came to. But once again, you just do the best job you can today, and whatever happens in the future, happens in the future, but we think it's very stable.

Okay. Thanks a lot.

And we'll go to our next question from Gary Lieberman with Wells Fargo.

Thanks, good morning. This is Ryan Halsted on for Gary.

I guess, following up on that last question in terms of the PiC, how are you viewing their bed capacity? You mentioned, obviously, there's an opportunity to add beds, but is there a need for additional capacity, similar to what you see in the US? And can you put, I guess, some size around that?

I believe there's a pent up demand. Now, it's going to be new to us about how fast we can get the beds built and bring them online, but the opportunities are there for us. And we've already approved the first 36-bed addition. So, we believe we can grow, and grow those same-store facilities, and we have the capital to do that, and we think Jodi and her team are capable of doing that over there. We'll just have to wait and see how fast that happens. We've only had it now for 30 days. So, we'll just have to wait and see. But once again, we're very, very -- I am very optimistic that we can do this.

All right. Great. And then my other question is, any thoughts or views on the VA Bill that is in the works? And what kind of opportunity do you think is there for you guys?

Once again, we'll have to wait and see if it gets out. We have [close] relationships. If we have a facility that's close to a military base, we already have working relationships with those bases, so, obviously, if we can help the VA and the military while meeting the needs, we're there to do that. And our commitment is that if we need to deploy capital to build a special unit for these individuals, we will do that. But we already have very good relationships with the bases that we're close to.

All right. Great. Thanks.

And we'll go to our next question from Gary Taylor with Citi.

Good morning, guys. Could you give us an update on total beds and total percentage acute and RTC, at this point, at the end of the quarter?

Well, Gary, you finally found a question I can't answer. David is here. How many total beds do we have, David?

Gary, at the end of the quarter, before PiC, we had about 4,300 beds. And within that, 3,900 are in our same facility group.

Okay. And on the 4,300, do you have the latest breakdown, even just approximate, on acute?

Yes. 65% of those are acute beds.

Okay. And I also noted on the same-store book, the pick up in the average length of stay declined, which you're attributing to, obviously, the bulk, if not all of the de novo bed growth, is coming on the acute side. What about the slowdown on the same-store revenue per patient day? You know, given that the same-store mix is skewing more towards acute, you would think it would pressure length of stay, which it has, and sort of lift revenue per patient day. So that modest increase, is that just purely a function of what states these new beds happen to be in, and what the rates might be in those markets? Is there anything else impacting that number?

Gary, this is Joey. You're right in what states we built the beds in can have an impact on it. What we did see was, I believe -- David, you can correct me -- a slight increase in Medicaid for the quarter. And that would have a lower revenue per day. And so, I believe it was more a function of the payer mix for the quarter. We don't see anything there, really. So, once again, we're pleased that it was positive, I think, 0.8%, and year-to- date, we're at 1.5%. So, it was just a mix of where the revenue was coming from and also what payer source.

Okay. Last question, how do you think you'll report PiC? Will it be a separate segment? Will it just be in the non-same store book and just roll into the same-store book, like a typical acquisition, or have you given thought on what sort of visibility in reporting you might provide?

Gary, we are having those discussions as we speak, so we have not decided about how to report it. We're still thinking through what would be best for everybody. So, we're still working through that. Obviously, the third quarter will be here before we know it and we'll have that decision made.

Okay. Thank you.

(Operator Instructions). And we'll take our next question from Darren Lehrich with Deutsche Bank.

Hi, good morning, it's Dana Nentin in for Darren.

Just on the Partnerships in Care business, are there any revenue or earnings metrics that you could provide for Q2? And then maybe on a go-forward basis, as you add beds internally, what are your expectations for occupancy trends there and how those beds would get added in and ultimately ramp?

First, I don't even have -- well, we have numbers, somewhere for the Q2, but we're not -- we weren't running it for the quarter, so we'll be giving you plenty of data once -- now that we have it. We expect -- where we're building beds, they're actually -- last time I talked to Joey there, they were actually turning patients away. So, we think these beds will ramp up rather quickly; and rather quickly, to me, would be within 12 months to 18 months of opening, that these beds would be back to what the facility was experiencing for utilization prior to the building of the beds. But once again, we're going to build them, and we know there's a demand for them, and we'll just see how fast it ramps up.

Okay. Great. That was all I had. Thanks.

Thank you.

And that concludes today's question-and-answer session. I would like to turn the call back over to today's speakers for any closing or additional remarks.

Sure. I know a lot of our folks in the field listen in. I want the thank them for their hard work and their dedication to providing quality care to all our patients. I really want to publicly thank the senior management team here, and their execution in the second quarter of operations, plus doing the acquisition of PiC. It was truly a team effort and I'm extremely proud of the senior management team and what they did, just to get to share in their successes. I'm very, very appreciative of all their efforts.

We think the rest of the year will look a lot like the first of the year and so we look forward to talking to you at the end of the third quarter, and see you then.

And that concludes today's conference. We appreciate your participation.