Acadia Healthcare Company Inc (ACHC) 2016 Q3 法說會逐字稿

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our third quarter 2016 conference call. To the extent any non-GAAP financial measure is discussed in today's call, you'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday's news release under the Investors link.

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 2016 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 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 publicly 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 over to our Chairman and Chief Executive Officer, Joey Jacobs.

Good morning, and welcome to our third quarter conference 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 remarks about the third quarter and our outlook for Acadia. Then we'll open the line for your questions.

David is going to take us through the specific numbers this morning, so let me go right to the topic of most interest -- our adjusted earnings per diluted share of $0.58 for the third quarter. As we indicated in our pre-release, we've identified three primary reasons why these earnings did not meet our expectations. The first is lower same-facility revenue in our UK operations, which was 5.1% for the third quarter, compared with 8.5% for the third quarter last year and 6.7% for the second quarter of 2016.

We believe the third quarter was a period of distraction and concern for all our UK staff. Two weeks into the third quarter and three weeks after the surprising Brexit vote, the CMA announced that it was referring their Priory acquisition to a Phase II investigation, setting off an intensive internal wave of meetings, analyses and planning that required the involvement from our UK corporate staff and put significant pressure on the senior management of many of our UK facilities. This pressure did not subside throughout the quarter and even continues today.

In our work to understand the third quarter, we have not discovered anything that offers a more compelling explanation for the same-facility results. Although we note that the 8.5% same-facility revenue growth for the third quarter last year represented a tough comparison, we believe the UK same-facility performance should improve once the divestiture transaction closes. In that regard, we are pleased to announce our definitive agreement to sell 21 existing UK facilities and one de novo facility and fulfillment of our undertakings to the CMA. Should the CMA approve the transaction, which we fully expect to happen, we will immediately begin to integrate Priory's operation as soon as the sale is complete.

We continue to target cost efficiencies for this transaction of $20 million and we continue to believe that Priory represents an outstanding growth opportunity for Acadia. Proceeds from the sale are approximately $390 million in cash and we expect to be able to redeploy those proceeds relatively quickly into investments and new acquisitions in the US.

The second factor was same-facility revenue growth in the US of 6.5%, which increased compared to 5.9% for the third quarter last year, but which was below our expectations for the quarter. The softness in our same-facility volumes in the third quarter was affected by a handful of our facilities and was not the result of any material labor shortages. While we have a few markets that have labor challenges, this is not materially affecting our growth rate. In the US, through the nine months of 2016, we've recruited 125 psychiatrists to our facilities, which is similar to the total number recruited for all of 2015. These numbers clearly demonstrate that Acadia has the ability to recruit psychiatrists where needed. Thus far in the fourth quarter, US same-facility patient days grew 6.7% in October, 50 basis points better than our experience for the third quarter.

The third factor to affect revenues for the third quarter concerns several of the de novo facilities open since the start of 2015, which have not ramped their occupancy and revenue as quickly as we expected. We have four de novo facilities at various phases of ramp up. While each one has had unique challenges, we now have a better understanding and plan through these issues going forward for future openings. We do not have any new de novo facilities coming on line until the third quarter of 2017. The census at the existing de novos are ramping nicely.

Despite these challenges, we remain confident of our ability to generate sustained profitable growth. We are a clear leader in each of our service lines. Industry demand is growing due to strong demographics and increasing access and parity, while capacity remains constrained. We have demonstrated our ability to add beds to the existing facilities at scale across our operations. These include 688 beds added through the first nine months of 2016, 548 to existing facilities, and 140 beds through two de novo facilities through, which we leverage local supply imbalances to better serve our communities and drive same-facility revenues.

Our pipeline of potential acquisitions and joint venture transactions remains robust and we have tremendous experience in integrating and enhancing acquired facilities. In closing, we remain confident, excited and optimistic about our prospects for our continued growth and our ability to drive long-term shareholder value.

Thanks for your time this morning and interest in Acadia. Now, here is David to discuss the financials in more detail.

Thanks, Joey, and good morning. Acadia's revenue for the third quarter of 2016 increased 53.1% to $734.7 million from $479.7 million for the third quarter of 2015. Adjusted income from continuing operations attributable to Acadia's stockholders was $49.9 million, up 13.7% from $43.9 million. Adjusted EPS for the third quarter of 2016 was $0.58, down 6.5% from $0.62 for the third quarter of 2015. For the third quarter, we have provided constant currency financial information in our press release, which assumes the current period exchange rate is equal to the prior period exchange rate to present our financial results without the effect of the currency fluctuations.

For the third quarter of 2016, adjusted EPS on a constant currency basis was $0.67, which is an increase of 8.1%. For the third quarter of 2016, our adjusted EPS excludes a loss on divestiture of $174.7 million, debt extinguishment costs of $3.4 million, and transactional-related expenses of $1.1 million. For the third quarter of 2015, adjusted EPS excludes debt extinguishment costs of $10 million, transaction-related expenses of $5.8 million and a loss on foreign currency derivatives of $1 million.

Weighted average diluted shares outstanding increased 22% for the comparable quarters, primarily due to the equity that we issued in January and February of 2016 related to the acquisition of Priory.

Acadia's tax rate on adjusted income from continuing operations before income taxes was 21.8% for the third quarter of 2016, compared with 25.6% for the third quarter last year. For the third quarter of 2016, Acadia's same-facility revenue increased 6.2% from the third quarter of 2015, with a 7.3% increase in patient days, while revenue per patient day was flat with the same prior year quarter. Same-facility EBITDA margin was 26.9% for the latest quarter versus 27.4% for the third quarter of 2015.

Consolidated adjusted EBITDA increased 43.7% to $155.8 million, which was 21.2% of consolidated revenue compared with $108.5 million, or 22.6% of consolidated revenue for the third quarter of 2015. Our operating cash flow increased 42.7% to $79.4 million for the third quarter from $53 million for the third quarter of 2015.

Turning to guidance -- as announced in this morning's news release, we have revised our 2016 guidance for adjusted earnings per diluted share to a range of $2.41 to $2.42. This adjustment is primarily a result of the lower than expected adjusted EPS for the third quarter, the decline in the US dollar to British pound sterling exchange rate, and the impact of the divestiture transaction.

We also established guidance for fourth quarter adjusted EPS in a range of $0.55 to $0.56. This range includes a negative impact of $0.03 due to the change in the exchange rate from $1.30 to $1.22. Also, assuming a November 30 closing date for the divestiture transaction, our guidance includes a negative impact for December of $0.02. This reflects the decline in revenues and EBITDA from the divested facilities, offset partially by immediate synergies, reduced depreciation and interest expense savings. This guidance assumes an exchange rate of $1.22 per British pound sterling for the fourth quarter and a tax rate of 22%. Our financial guidance does not include the impact from any future acquisitions or transaction-related expenses.

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

Thank you. (Operator Instructions). We will take our first question from John Ransom with Raymond James.

Hi, good morning. Guys, I'm not used to being first in the queue, so this is a big day for me.

Joey, I was just wondering in your long history in this industry, have you ever experienced problems filling de novo beds, and would you mind please just elaborating a little more on what the specific problems were that you flagged in those four hospitals and what you guys are doing to fix that? Thanks.

Pleasure, John. Ramping up the de novo beds, what we have discovered that is maybe more cumbersome than it had been in the past is getting through the regulatory approval and in some cases getting through some regulatory approval even at the county level. And our most recent example was the -- is our San Jose facility which I think we opened up in the first quarter of this year. But we did not receive its final two -- we did not receive permission on adult and child and adolescent placements until October. We thought we would have it within the first 60 days of opening and it took six months to get there. And so -- but since we got them at the first of October, the census has more than doubled at the facility. So we were just waiting on being able to take those patients from emergency rooms in the community.

So it got kind of hung up between the county, city, and state and that's what we've learned through the other three transactions -- the other de novos, is getting the regulatory approvals as quickly as possible and doing maybe more preliminary work ahead of the opening on getting those. But you have to get open to get licensed, to get your joint commission accreditation. And because we take placements of committed patients, you have more regulatory approvals to get through.

So that's the only thing -- that's the main thing that we've seen in the ramping up of the facilities. And this week, we've had record censuses for the de novo group. And so, so it's basically just getting through the regulatory issues.

Great. And then my other -- my follow-up and I'll get back in the queue is, if we take the 4Q numbers, I think what we're trying to do at least in our case is extrapolate into next year, our 4Q. And you've talked about your FX, you talked about the M&A. But in general, how should we think about seasonality? If we kind of level-set everything back to October 1 and use, say there's $100 of EBITDA, is that -- my understanding is fourth quarter is always a little seasonally light -- the back half of December. I mean, would fourth quarter not represent a quarter of the year, if everything were kind of level set to October 1?

John, just in the general topic of seasonality, we've now seen 2015 and 2016 that the third quarter would be a little bit less than the first two quarters of the year. You are correct that once you get to about December 15 through about January 15 of the next year, that does -- because of the holidays, both Christmas and New Year's, the census does soften. And we're always anxious once we get into the new year to see how quickly it ramps back up. So that's how we see it.

And then as you're building the model, please keep in mind, if you were to go back and look at the history of Acadia, our first quarter quite frankly because we have to start over on all the payroll taxes. There's several extra million dollars of expense that will occur in the first quarter as we meet the unemployment and the FICA taxes. So sometimes people miss that expense when they're looking at the first quarter in building their model.

Great. Thanks a lot.

Thanks.

And our next participant is Brian Tanquilut with Jefferies.

Hey, good morning, guys. Joey, just a question on growth. As we think about the same-store going down to about 6.2% this quarter in the US, how should I think about bridging from 2016 with the bed adds that you're planning to put in place for 2017? And how that would translate into a growth rate?

We're obviously -- obviously, our goal of being the best on same-facility growth exists today and will exist for 2017. And even though the third quarter was a little bit lower than our expectation, I think year-to-date, same-facility revenue is up about 8%, 7.7%. So we're having a terrific year this year and we've seen October since it's bounced back from the third quarter.

We're going to build over 800 beds this year. And right now, it looks like we'll be doing the same -- at least the same number again next year. So the demand in bed build is out there. We recently just got CON approval here in Tennessee to expand our Murfreesboro facility by 80 beds, I think. And so, would take it from 120 to nearly 200 -- to 200 beds.

So we see the demand and the need to build the beds and we're going to be building beds in Wilmington, North Carolina and throughout, and Atlanta, Georgia. So the demand is there and so we're very optimistic that again next year, we will just have strong single-digit same-facility patient day growth and strong same-facility revenue growth.

And then, Joey, you mentioned earlier in your prepared remarks that you're not going to open a de novo until Q3 of 2017. So just help us if you don't mind -- how should we think about the difference between 2017 and 2016 considering that you also built 800 beds this year and I think if you're planning 800 next year, that's like a 7% growth in US beds. So what would be the difference in terms of your ability to fill those beds quickly next year versus this year?

Based upon what we see for next year, Brian, is that more of the beds will be going to existing facilities and less to de novos because they're coming on later in the year. But it appears right now, we have pretty good visibility into the joint ventures and it appears 2018 could be a banner year for joint ventures. We have, we'll probably before the end of the year, sign two letter of intents with new joint ventures. So it is just the timing of signing and reaching an agreement with your partner and getting the beds built. And so 2017, we'll have some in the back half of that year, but 2018 could be a banner year for the joint venture de novo beds.

All right. Thank you, Joey. Thanks.

Thank you.

And we will now hear from AJ Rice with United Bank Systems.

It's actually UBS, but anyway. On the UK, obviously, I understand the distractions with management and so forth. Is there -- obviously at times, there has been a little settlement over time since Brexit, I know it's still somewhat in a state of flux on the exchange side and the implications for the economy, but is the discussion with the NHS about what they hope to do, their posture toward this space, the number of off-loading of people outside the system, is all of that still the same in the dialogue you're having with them or has there been any change?

It's still on track, AJ, and similar to what we've experienced for the past three years there. So we're very, very bullish. We just need to get this transaction done. And it looks like it's going to be done by November 30 at the latest. And that will give us all of next year. Now in the UK, I think probably 80% to 90% of bed builds -- of bed additions there are going to be beds supporting same-facility growth.

So we see that and just -- we just need to get the transactions, the noise of that away. We need to get the divestiture facilities spun out and let our operating team concentrate on running the facilities and not worried about which team they're going to be with or when the transaction's going to occur. So we're about to get a lot of clarity. But as far as NHS, we see no significant changes going in there.

Okay. And it sounds like you might have mentioned this just before I got on a couple minutes late. But when you think about taking the capital from the divested facilities in the UK, it sounds like you're primarily focused on redeploying that in the US. Is there any restriction on that, first of all? And then second, how fast do you think you could do that? You think you could, is there a potential that it could be in one transaction, is it multiple transactions? Should we think about it spreading over the year or how fast could it be redeployed?

It could be all of those. We think that by mid-year next year, we will have it deployed. There are three to five transactions that we know and that we have various stages of discussions that we could commit all the proceeds to those transactions in just one transaction, or it might be spread across two or three. So -- but right now, we have a lot of discussions going on with the larger transactions and so that we could deploy what we think is going to be about a net of $360 million that we could do it in one transaction.

Okay. All right. Great. Thanks a lot.

And our next question comes from Frank Morgan with RBC Capital Markets.

Good morning. Back on the issue of the shortfall in growth. Could you break it down, like attribute it -- maybe weighing between how much of this was just general weakness across the system versus the amount that we attributed to these de novos?

Two of the de novos are in the same-facility numbers. All four would be in total facility numbers, but two of those are in the same-facility and they did weigh on the, weigh down the growth there, but we're about to get it now that we've got all the regulatory approvals. As I mentioned earlier, it appears compared to 2015 and 2016 that the third quarter has low seasonality into it and we saw that happen even though our growth of -- our growth was still hospital facility leading growth, it was just a little bit less than what we wanted and it's a handful of facilities spread across the country and there's probably as many facilities, there's probably that many different reasons on why they didn't hit their growth targets for us, with one of those being the de novo and San Jose, they didn't have the regulatory approval.

And the other three that were the de novos, do those all have the necessary licensure? I mean, are they now at that point like San Jose is?

Yes, they are. They have all the regulatory approvals. And as I mentioned earlier, the San's census this week has been at an all-time high and ramping nicely.

Got you. And that's just San Jose or is that at all the -- the other three as well?

All -- I'm talking about all of them.

Okay. And then, I guess you started touching on this. I was just curious -- is there any, when you look across the portfolio, any regional variation or regional weakness or was it attributed more to the acute versus the RTC set?

It was just general, Frank. It was both acute and RTC and it was spread from coast to coast. We spend a lot of time looking at it and going back and doing analysis on it and it was a handful of facilities across the country that had different reasons of why they didn't hit their numbers.

And then finally, I want to make up sure I've got this right. You're saying that in 2017 that of the aggregate beds to be added for the year that there's a much lower percentage of pure de novo facilities versus expansion beds and therefore, expansion beds are much less disruptive in terms of what fill-up looks like, did I get that right?

You got that right.

Thank you.

Thanks.

Our next participant is Whit Mayo with Robert Baird.

Hey, thanks. Looking at the UK results, the same-store looks pretty good with same-store EBITDA up about 10%. And when I back into the new store UK hospitals which presumably is mostly Priory, it looks like you had maybe a $5 million EBITDA slip sequentially. Revenues were down maybe $30 million sequentially. Is that where the distraction came from? The margins just look consistent, so I'm just struggling a little bit to put the puzzle together.

I think the biggest missing piece of the puzzle is that the $20 million of synergies will accrue to the Priory side. And when you look at their numbers, you need to be thinking about $12 million of expenses coming out and what that does to the margin for the Priory side. Frank, I have not looked at the revenues from the second quarter to the third quarter the way you did, but we're very bullish on what Priory has done and what they will do. So -- but I just haven't looked at that one indicator. But I do know the $20 million of synergies accrued to the Priory side.

Got it. And maybe just -- maybe you commented on this and I missed it, just the seasonality in the UK. Is there anything unusual about the third quarter? I mean, we're all sort of accustomed to how things progress over here.

Okay. Well, there is some seasonality in the UK that we found out is that -- so they like to take the whole month of August off as a holiday. So whenever everybody in the UK including government workers are on holiday, they can slow down the admission process for the patients. So that's the only thing unique that we found.

Got it. And I totally get the distraction in the UK, I think most people can understand it. Do you think that perhaps to focus, having to take your hands off the wheel in the US may have had an impact to operations here? I mean it's just a theory, but I'm just kind of curious your perspective just that that distraction may have spilled over to the US operations.

It may have a little bit, Whit. Obviously senior management here was -- we spend a lot of time, a lot of hours on the UK and probably some of those would have been spent back here on the US operations. So probably a little bit.

Okay. And maybe one last one here, just can you give us in size the headwind year-to-date from the de novos just as we think about tailwinds into 2017 and maybe just comment on the progression of earnings within a typical de novo? How much do you lose on average, for how long when you break-even and how long to sort of mature into maybe a high teens margin or something?

The four de novos that we talk about, I think, Whit, I think they lost $1.5 million in the third quarter and we'd budgeted them to be on a run rate of $2.5 million earnings. So that's what it cost us in the fourth quarter, I mean, third quarter. If we have them breakeven by the end of the year, that would be great and contributing next year. So these facilities do have the potential to get to our facility margins. So starting January 1, 2017, it probably would take 24 months to get to that high level. But now that we have all the regulatory approval and the census is ramping, we just got to execute on those four de novos and so we'll quit carrying them. So we're very positive looking of what will happen in 2017 with the de novos.

Did you have a similar level of startup cost in the second quarter or the first quarter? Again, I'm just trying to think year-to-date --

I do not have the second quarter number here.

It's okay. I can follow up with you. Okay.

Yes.

Thanks, Joey.

Yes. Thank you.

We will now hear from Gary Lieberman with Wells Fargo.

Good morning, thanks for taking the question. I think you said October bounced back to 6.7% --

Yes.

-- the 6.2% same-store patient day growth in the third quarter. That's still a little bit below, I think it was 7.5% in the first half of the year, which was quite strong. Do you think you can get back to that or do you think you're kind of where it's going to settle out?

We're working as hard as we can to get back to that other number. So with a little luck and -- you always need a little luck, the 6.7%, can we grow that into the 7%, that's our goal. But once again, we don't know how December 15 through December 31 will impact us.

Okay. But you feel that there's nothing structural that has changed...

Absolutely not. Absolutely not.

Got it. And then you've talked about in the past potentially doing a larger deal in the first half of 2017. It sounds like maybe your thinking on that has changed a little bit and I assume you wouldn't want to issue equity for any type of deal based on where the stock is. Can you just talk about that?

We do not plan on using stock to do the transaction, that we think the proceeds from the sales and any -- and our access to our revolver can make that happen. And we still hope, and it's our goal to do something in the first six months of next year, to get this money redeployed.

Got it. And can you just update us on your thoughts on leveraging kind of target leverage ratios and if you'd be more -- or less likely to use debt here?

We still want to be below 5.5 times, closer to 5 times. And as you've noticed this year, our cash from operations has grown nicely. So on the debt side, we want to be under 5.5 times leveraged and also redeploy the money that we have.

Okay. And then maybe finally, as we get closer to 2017, can you comment on how your contracting is going and how that might help you benefit from the elimination of the IMD exclusion for the managed Medicaid population?

Contracting for us, we do not do any national contracting. We have, in the UK, locked down the 1% for the coming year. So that is done, so -- but here in the US, I think our contracting, we expect the states on the Medicaid side still to be in that 1% range. Medicare I think once again will be in that 2% -- maybe 2.25% range and then the commercial side, we're still achieving the 4% to 6% rate increases. But so, our contracting is similar to what we've been doing in the previous years.

I guess, I was referring more to having the managed Medicaid plans in networks that you need to have --

Oh, managed Medicaid?

Yes, the population, in order to get the IMD population.

Okay. We have made Brent Turner, our expert here. So he will give you the answer to that.

Yes.

Well, yes absolutely. Some of the states have deferred whereas the July 1, 2016 effect of the IMD change inside the managed Medicaid plans -- some, it was optional this year. We expect that to be more fully embraced in 2017. And so absolutely, our efforts as we, not just contracting with the payers, but also just educating and updating the referral sources to ensure that much like all the other patients, they are sending us these managed Medicaids in 2017 as well. So that's absolutely in our plans.

So should that benefit start on January 1 or is it going to phase in over the course of the year?

I think you're going to see, it's probably we got -- probably began a little bit. Again it's market-specific in 2016, but fully it's going to be a lead-in benefit. It should begin to see it in January. And certainly if there is plans at July 1 fiscal year for the state, if some of will match up with that, it will be somewhat gradual and continuous impact over 2017.

Okay. Great. Thanks a lot.

Our next question comes from Ann Hynes with Mizuho Securities.

Hi. Thanks. I just need a clarification on the US same-store revenue. I know you said part of it was to the two de novos. You did mention other facilities were having a handful of issues. Can you give us more specifics on those facilities? And also, you did say that there was overall weakness. Do you think that weakness is due to seasonality, and if it is, do you think there's maybe more seasonality in your addiction business versus your historical hospital business?

Ann, that was a lot of questions in that one question. First, the -- if you look at the third quarter this year and the third quarter last year, those two right now appear to the softest quarters of the years. So it appears that maybe there is seasonality in that quarter. So we'll just have to wait and see.

Reasons for not hitting the growth could be that we didn't get the beds on line. We had expectations that beds would be on line the first of the quarter and they came on mid-quarter or towards the end of the quarter, so we missed some patients there. It could be various, as the de novo, we were waiting on a regulatory approval there for the San Jose facility. So it's various reasons like that.

Now we do have isolated shortages. If there is anybody on the call that wants to move to Butte, Montana, we can make you a mental health tech. But -- so, there -- it was different reasons for the facilities not growing and hitting their patient day growth that we thought they would in the third quarter.

Okay. And my follow-up question, has a few questions. And I think it's an important question going into 2017 because obviously this has been a rush doc year to date. And when I look at 2017 consistent estimates, they're pretty much all over the place. And I know you don't want to provide guidance now. But any guidance you can give us to the moving parts so consistent estimates can get aligned. So it doesn't continue to be an overhang for next year, probably would be very good.

And the things that I view as, when I look at my model as the moving parts would be, how should we view as like the ramp-up of synergies going into 2017 in the UK? With the UK, you said they're still having issues. Do you expect that to improve throughout 2017? Is that maybe first half of 2017, you still expect these issues? And also the redeployment of proceeds because -- when I look at the estimates, it looks like some people will have some acquisition assumptions in your model. And obviously there is going to be a timing issue there. So should we do that more like, I think you said the second half, but any guidance you can give would be helpful.

Okay, well, we're still putting together our -- we haven't totally finalized our 2017 budget. So that makes it a little bit more difficult. We will use $1.22 as the exchange rate for next year. We do expect to have the proceeds invested by July 1 of next year and so that would be something there.

The synergies, we will -- the synergy, the $20 million of synergies --

Yes.

I think by the end of the year, we will be on a close to a $10 million run rate maybe, if everything goes well. And by the end of the third quarter this year and by the end of the first quarter next year, we should be in the mid-teen. And I think we will have them all done by the beginning of the fourth quarter next year. So the synergies will come rather rapidly once the transaction closes.

So -- and then we have internally discussed about, since there are some moving parts to this that we may find a different forum to get that communicated out to you all to help you with your models and your assumptions and the timing of acquisitions, so that's all still under discussion. But those are a couple of things on the synergies, redeployment of the capital, that sort of thing, that we can give you today, but we're still working through all that.

Okay. That's very helpful.

And we will now hear from Chris Rigg with Susquehanna Financial Group.

Good morning, guys. Hopping on late here, but hopefully you can touch on these questions. So just looking at the CapEx year-to-date, roughly $250 million, if I assume that about 2% of that is just pure maintenance CapEx and then I look at the bed additions, plus the de novo beds, that comes out to roughly $300,000 per bed. I'm just trying to get a sense for what are the current numbers in terms of adding a bed or adding beds to an existing facility versus what it costs to develop a de novo site/beds? Thanks.

Yes. Chris, this is David. We've seen a greater mix this year. We talked about the de novo beds. That certainly has a higher cost per bed. We've also seen a greater mix of acute beds this year. So you're right, maintenance CapEx is at the kind of 2.5%, to 2.5% level for this quarter. It was 2.5% of revenue or $18.5 million. The rest of the CapEx would relate to expansion CapEx. And for that, we've seen a greater mix of acute and de novo beds. So that does tend to be at a higher cost per bed. So that's -- yes, hopefully that answers your question there, Chris?

Sort of. I guess just if we spike out the de novo beds, what is the right way to think about bed additions for the acute care beds in terms of cost?

Sure.

I know, it's really hard to generalize, but...

Let me help you here, Chris. On the new beds, the de novo beds, they're going to cost between $250,000 and $300,000 per bed because you're building a --

Okay.

-- whole brand-new plant, all the ancillary services, administration, the infrastructure, the land, that's basically what is costing us today. And it varies by where in the country you're building. The bed builds to existing facilities, that's still going to be around $150,000. It may -- if it's having to go on the second floor, it can jump up to $175,000 or if it's just on the first floor, it might be $125,000. So those are the best numbers that we have today on what it's costing us per bed for our bed additions.

Okay. That's very helpful. And then to change gears and move over to the resident (44 -- 42) expert on IMD -- Brent, I don't know if you've ever looked into this, but coming from -- if I'm looking at sort of the Medicaid Managed Care from that angle, they would say that a lot that of the mentally ill individuals reside in what's known as the aged, blind and disabled population, most of whom still are not covered by Managed Care. So -- and it is growing obviously. But when we think about sort of near-term benefits from IMD, is it your view that you probably don't see a big move in profits over the short term until you have the fee-for-service population also be included in the exclusion? Thanks.

Yes, I think, Chris, I mean, your point is absolutely valid that there's a separation between in effect the dual-eligible and the expanded Medicaid population. However, the dual-eligible population, right now even under-65 would be -- we would receive Medicare reimbursement for them and we have not seen a trend for that shifting into the managed Medicaid. So net-net, the increase driven by the IMD should be a positive both on volume and consistent with our other state-by-state Medicaid rates.

Great, thanks a lot.

Yes.

Our next participant is Charles Haff from Craig-Hallum.

Hi, thanks for taking my questions. Most of them have been asked and answered. I wanted to touch on CRC a little bit, what kind of trends you saw in the third quarter for the former CRC assets. And the opioid addiction growth rate I think is trending at about 18% this year, according to the CDC. How do you see that kind of unfolding as being a tailwind for your business in 2017?

Great question. The addiction side of our business in the specialty facility area was a little soft. However, our other specialty facilities they -- they did very well during the quarter. Our CTC facilities that treat the opiates, in the states that we're in, we're seeing demand and we're going to be doing some de novos in other states where we've been able to impact the legislature so that we can do that. So we've -- we're very -- this absolutely is a very needed service. This is probably the fastest growing piece of the mental health side, addiction side and we're trying to meet that and meet our community's needs and we would look at an acquisition in this space. We've made those over the past two years, additional acquisitions in this space. So the opioid addiction is not abating and we see it as a tremendous growth opportunity for us.

Okay. And on acquisitions there, would it be in-network acquisitions or would it be out-of-network acquisitions that you would -- or it would be all the above?

It would be in-network.

Okay. And then when you think about bed additions for next year, would some of those bed additions be to the addiction side of your business?

Yes, there is. There is some bed builds to the addiction side.

Okay, great. And then just lastly, on the use of the $360 million of net proceeds -- it sounds like you can go a lot of different directions. Is it kind of coming down to price and kind of your return on invested capital model and decision making there? Or are there other factors such as geographic gaps or product gaps and so forth? And can you tell us what acquisition prices are kind of trending at in the US right now? That's my last question. Thank you.

Okay. We're not focused on trying to do geographic acquisitions or -- and we know of no new product lines that we would want to add to the company. The product lines that we have now, the service lines now are where we would be spending our money. So we would add to your list of what are we looking for is absolutely the best use, the accretive use of our money. But we would also be looking at the quality of the programs of that asset that we would be acquiring and the -- long-term growth rates for that acquisition and how we could make it a stronger facility and make it more valuable to our shareholders. So those would also be things that we would be looking at.

And on the pricing side?

Pricing is now in the -- we're pricing in the low -- I mean not low, high-single digits, that is no longer in the double-digits. It would take something pretty attractive for us to go above 10 times.

Thank you.

We will now hear from Kevin Fischbeck with Bank of America Merrill Lynch.

Good morning. This is Joanna Gajuk filling for Kevin. Thanks for taking the question here. Most of them were asked, but just a follow-up of the IMD exclusion commentary, where you're saying that it's taking some time to kind of postpone this until next year. But was there any change, any traction so far this year or it's pretty much only handful maybe update, but kind of made that decision this year.

Yes, Joanne, there's definitely, we saw our managed Medicaid volumes increase Q3 of 2016 over Q3 of 2015. So we're seeing some effect. It's hard to say how much of it is just due to the IMD. There's obviously been a couple of states where we have nice concentration of facilities that have done the delayed implementation of the ACA expansion. So again there's definitely not been a full effect for the IMD. And again, we look to see more of that throughout 2017.

Right, that makes sense. And with DAAT, I know you've been saying that you're not seeing shortages of psychiatrists. Maybe there are some states, but then how would you think sort of the -- that kind of point of view which changed with IMD exclusion, would that create sort of maybe incremental pressure or not finding enough psychiatrists in some of these markets where you might have increased volumes? Are you planning sort of ahead of that, kind of secure maybe, doctors or anything you're kind of doing in preparation for those changes coming next year?

Again, I think if you go back to the data we gave around our ability to get to recruit psychiatrists across the country, we've recruited almost 150 year-to-date. So the IMD effect we do not have any concern that that driver is going to be offset by our ability to recruit physicians. We have a good team in our physician recruiting and they're doing a great job, and we don't see that as a limiting factor.

Great. And just sort of -- the last quick question and a follow-up. So I did -- did I hear right when Joey was talking about sort of next year kind of view around the organic growth. So you were saying that you sort of feel confident that can grow high single digits organically?

That is correct.

Great. Thank you so much.

Yes.

And we will now hear from Ana Gupte with Leerink Partners.

Yes. Hi. Thanks for taking my question. Good morning. On the staffing shortages again, you've been saying that you haven't seen them and I think you gave a number on how many psychiatrists you recruited, but your peer -- the pure-play peer and also the acute guys are talking about it. There's broad commentary in the country about mental health professionals being in short supply. Is there likely to be any wage pressure? There is a little bit of a pickup sequentially in your salaries line. And as you're recruiting, are you having to see any wage pressure on that that might be a bit of an offset?

We have, in our budget, a 2% to 3% merit increase of our employees next year and we think they're going to be able to attract the personnel to their facilities that they need to make sure we have the appropriate staffing in our facilities.

So as I mentioned earlier, there are some isolated markets where we would -- we could have a shortage of a mental health tech or social workers or something like that, but there is nothing companywide. And then the reason we gave the physician numbers were -- gave you the physician numbers were, we gave you those numbers because we're doing well. The recruitment team is doing an outstanding job in finding physicians for our facilities.

So we've been able to work through that. This is the only thing we do is behavioral health. And those are the companies that you mentioned, they're also focused on med/surg operations too. So we've been able to find the employees for our facilities.

So in the third quarter, the pick-up that you saw in your salaries line, is that --

Sure.

-- just kind of a -- in the third quarter of this -- yes.

It was primarily us coming in a little light on the revenue which makes that line a little bit bigger.

Okay.

And our de novos, as they're wrapping up, with a higher level of salary and wages as a percent of net revenue. Those were the two reasons, Ana.

Okay. All right. Got it. And back to the IMD exclusion, I think so you say -- you've been saying you're expecting to recover your same-store growth. So I mean, I'm understanding that for next year between that inflexion point where you saw better volumes of patients days in October, you get back to that 7.5%-ish percent range? On the IMD side, is there an upside to that number or are you kind of looking at that as an offset to any pressure that you've seen so far when we think about recovery?

Yes. I think, again, taking it in perspective, the third quarter of 2016 and the third quarter of 2015 were the only two quarters we've seen sort of the mid-single-digit growth rate, which is in the 6% range, 6% to 6.5% for this year in the US. So kind of perspective-wise, I think everybody, you've to -- the growth rates that the company has done are unbelievable and it is not just pre-determined, right. I mean there is a lot of activity in our markets where people are taking care of very ill patients.

And so, I think you can look at it either way, but it's blended in there, the IMD effect in 2017 should certainly be positive for our volume initiatives. We're not going to say the guidance is going to be double digit because of that, coming off of a softer than expected quarter, but it certainly should be supportive of our outlook for continuing higher single-digit growth rates.

And on the IMD, is this directly contracting with managed Medicaid when the states are ready or are you also doing this outsourcing kind of deals with acute facilities that don't want to deal with that population?

The IMD payer is managed Medicaid group, so there is -- that's our customer in the markets where we have managed Medicaid and now the ability to take the adults in those -- through those payers.

So you're not talking about doing this acute JVs that [indiscernible]?

Again, we have double-digit activity in our joint venture arrangements with not for profit health systems. They have been -- that activity has begun way before the IMD effect. We don't see just the IMD being a motivation for the partnership opportunities that we see going forward, but we have a lot of activity with joint venture partners for providing in-patient behavioral health in their markets.

Got it. Okay. Then, one final question on the capital deployment back to the US. There was a very large [indiscernible] that was in play this year, and is that -- is that now completely off the table or might that come back on as an opportunity for you for next year perhaps?

Are you asking about the bigger transaction, Ana?

Yes, yes. [Indiscernible].

Well, there's -- Ana, this is Joey. There is three to five of those transactions that we could do any one of those that would be large enough that we would use the $360 million on.

Okay. So there is more opportunity than, okay, than that.

Yes.

All right. Thank you. Appreciate it.

Thank you.

And our next question comes from Paula Torch with Avondale Partners.

Great. Thanks for squeezing me in. Just quickly on those three to five transactions, Joey, are those sort of all in the acute or mental health space or is there maybe combination or maybe are they substance abuse? Just trying to get an idea of where we would be growing next year perhaps with the transactions you're looking at?

They would be more heavily weighted to the acute. There might be one transaction that has 90% acute and 10% addictive services, but primarily acute transactions.

Okay, great. Thanks. And in terms of just some of the weakness that we spoke about in the US, I think what you said in your comments that it was a little bit broad in a handful of facilities that you discussed -- so wondering were trends softer in these markets in the second quarter as well? And maybe is there anything regional that's going on, or is this something that is new in the third quarter and maybe came as somewhat of a surprise?

It is not regional and it did come somewhat as a surprise. In the third quarter, you've got two major holidays, the July 4 and you've got Labor Day and you've got schools out. So obviously we have a large population of child and adolescents. So we're looking at all of those things. And coming off all the holidays, I know, Ron Fincher, our Chief Operating Officer, we're all anxious to see how the census ramps up after our major holiday and we had two of those in the quarter. And quite frankly, the numbers that we have for the third quarter are better than they were the year before for the third quarter and they're still strong numbers when you look at everybody else, so just a little soft.

Got it. Thank you.

Once again, we will hear from John Ransom with Raymond James.

Hi. Thanks for taking the follow-up. Just going back to your comments on the M&A market that you've kind of lowered your asking price a little bit. Would you say there is a bid-ask spread between what you're now willing to pay and what bankers want to get? And also what's the difference between, say, a smaller deal and a larger deal in terms of kind of multiple expectations?

John, I would think the larger transactions are going to get around that nine times. A single transaction is probably going to get closer to the seven times. I think the bankers are beginning to realize that the multiples have come down and are coming down. And if they want to engage Acadia in the process that we've set those expectations that we're going to verify the trailing EBITDA earnings and that's the multiple we put to it. And if we lose the transaction, we lose the transaction, that's okay with us. We're going to do a good transaction, so that's where the market's at right now.

And this may be a little too in the weeds, but as you know, the SEC is tougher on pro forma EBITDA adjustments. So how do you handle trying to square the circle between, okay, here is the trailing EBITDA. But if you add back these 472 things in synergies and 2,058, here is the real EBITDA, what's your tolerance for actual versus pro forma, generally speaking?

John, this is David. We present just the adjusted EBITDA with very few adjustments. We like to back out only the items that are directly related to our acquisitions. So we've always had the transaction costs as we've been acquisitive, and then for this quarter, it's just the divestiture items. So we don't believe there's anything unusual from that perspective that we are adjusting.

And we would want to keep them, John --

Sorry.

He is asking, not how we report them, but how the seller presents them.

Oh! Seller.

How do you go back and forth with sellers who want to get all kind of credit for pro forma adjustments? Which ones are you willing to give credit for and which ones are you not in general?

We're not going to pay for two beds two years out. And about the only thing we'll pay for is if it's the single owner and they're taking out management fees or an unusual salary, they might get credit for that.

Okay. And are you generally -- is the big, in other areas of healthcare, the big good guy is better managed care rates over time. Did you find that to be the case, if that's an opportunity for you? Or what's the, let's say you want to drive that multiple from nine times to seven times, is it new beds that you're going to build? Or is it managed care rates? Is it staffing? Or is it none of those or all of those?

It's 90% of it is going to be a new program that they don't have, a new service line or beds that they need to be built. Prime example is Murfreesboro, the facility we bought there. They were turning away hundreds of patients a quarter, but the venture capital company did not have the capital to do the next 80-bed expansion. So that is the most recent example.

All right. Thanks a lot.

Thanks, John. Go vote.

And with no further questions in the queue, I'd like to turn the call back over to Mr. Jacobs for closing remarks.

Once again, thanks everyone for your interest in Acadia. Future looks bright for us. We have a lot of hard work ahead for us, lot of execution for the facilities I've been out and visited with during the quarter. Thank you for your hospitality for the teams out there in the de novos. We know you have an extra hard job of ramping up your facilities and we very much appreciate all the work you're doing there. So once again, we'll see you at the end of our next quarter.

That concludes today's conference. Thank you for your participation. You may now disconnect.